Penalty computation for non-compliance with notice must ignore pre-return tax credits and treat a firm as unregistered for tax difference.

Penalty under Section 271(1)(b) for failure to comply with a Section 143(2) notice was to be computed by reference to the tax that would have been avoided if the returned income had been accepted as correct. Credit was not to be given for tax paid before filing the return. For a firm, however, the statutory scheme required the tax difference to be computed by treating the assessee as an unregistered firm, and where two interpretations were possible, the construction favourable to the assessee was preferred. The penalty was therefore revised on that basis.

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Issues: Whether, while computing penalty for failure to comply with notice under Section 143(2) of the Income-tax Act, 1961, credit ought to be given for tax already paid before filing of the return and whether the difference in tax should be calculated by treating the assessee as an unregistered firm.

Analysis: The penalty under Section 271(1)(b) was to be worked out on the basis of the amount of tax that would have been avoided if the returned income had been accepted as correct. The provision did not contemplate allowing credit for tax paid before filing of the return. However, in the case of a firm, the statutory scheme required the penalty to be computed as if the assessee were an unregistered firm. Where two interpretations were possible, the interpretation favourable to the assessee was preferred.

Conclusion: The penalty was to be revised by computing the difference between tax on the assessed income and tax on the returned income, treating the assessee as an unregistered firm, and the appeal was partly allowed.

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