Legal fiction in penalty computation requires annuity deposit deduction when a registered firm is treated as unregistered.

For penalty computation under section 271(1)(a) read with section 271(2) of the Income-tax Act, a registered firm must be treated as an unregistered firm, and the statutory fiction must be carried through to its necessary consequences. The computation therefore requires the tax payable by the firm in the hypothetical character of an unregistered firm, not merely its assessed income as a registered firm. Where the annuity deposit scheme would apply to such an unregistered firm, the corresponding annuity deposit deduction under section 280-O cannot be ignored in working out the penalty base. The penalty is accordingly computed on the balance total income after allowing that deduction.

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Issues: Whether, for computing penalty under section 271(1)(a) read with section 271(2) of the Income-tax Act, 1961, a registered firm is entitled to have the annuity deposit deduction allowed while determining the tax payable as if it were an unregistered firm.

Analysis: Section 271(1)(a) fixes the quantum of penalty by reference to the tax payable, and section 271(2) creates a fiction that the penalty on a registered firm shall be the same as would be imposable if it were an unregistered firm. That fiction requires the authorities to work out not merely the assessed total income of the registered firm, but the tax that would have been payable by the firm in the character of an unregistered firm. In that computation, the incidents that would inevitably attach to the hypothetical unregistered firm must also be taken as real. Since section 280A subjects an unregistered firm to the annuity deposit scheme and section 280-O allows the annuity deposit as a deduction in computing total income, the deduction cannot be ignored merely because the exercise is undertaken for penalty purposes.

Conclusion: The annuity deposit deduction had to be allowed, and the penalty was to be computed on the balance of the total income after such deduction.

Ratio Decidendi: When a statute requires a legal fiction to be carried into effect for penalty computation, the necessary consequences of the hypothetical status must also be given full effect unless expressly excluded.

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