Strict interpretation of penalty provisions led to cancellation where disclosure was substantial and delay was minimal.

Section 158BFA(2) was treated as a penal provision requiring strict construction, and ambiguity in the charging language was resolved in favour of the taxpayer. The proviso was held to state only when penalty shall not be imposed, not to create automatic liability whenever its conditions were unmet. On the facts, the assessee had filed the return, substantially disclosed the undisclosed income, accepted the additions, and the delay was short, so the penalty was found not sustainable and was cancelled.

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Issues: Whether the penalty levied under section 158BFA(2) of the Income-tax Act, 1961 for the block period was sustainable in the facts of the case.

Analysis: The provision was construed as a penal enactment requiring strict interpretation. The clause empowered the Assessing Officer or the Commissioner (Appeals) to direct penalty, but the language did not define the nature of the default or the charge that would attract penalty. The proviso was held to describe only the circumstances in which no penalty shall be imposed and could not be treated as creating an automatic liability whenever its conditions were not satisfied. As the assessee had filed the return, substantially disclosed the undisclosed income, accepted the additions, and had only delayed filing by a short period, the discretion was expected to be exercised in favour of the assessee. Ambiguity in the provision was resolved in favour of the taxpayer.

Conclusion: The penalty under section 158BFA(2) was not sustainable and was cancelled in favour of the assessee.

Ratio Decidendi: A penal provision must clearly define the charge and cannot be treated as automatically attracting penalty merely because the exception clause is not satisfied; where the provision is ambiguous, the interpretation favourable to the assessee must be adopted.

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