Statutory fiction in penalty computation cannot extend to partners' advance tax credit for a registered firm.

For penalty computation under section 271(1) read with section 271(2), a registered firm treated as unregistered for penalty purposes cannot reduce its tax liability by advance tax paid by the partners on their individual shares of profits. The statutory fiction in section 271(2) extends only to treating the firm as unregistered for determining penalty, and does not convert partners' advance tax payments into tax paid by the firm. Credit for advance tax belongs only to the assessee who actually paid it, and the firm and its partners remain separate assessees. The reference was answered against the assessee and in favour of the Revenue.

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Issues: Whether, for computing penalty under section 271(1) read with section 271(2) of the Income-tax Act, 1961 in the case of a registered firm treated as unregistered for penalty purposes, the tax payable by the firm is to be reduced by advance tax paid by the partners under section 18A of the Income-tax Act, 1922 in respect of their individual shares of profits.

Analysis: Section 271(2) creates a limited statutory fiction by requiring the registered firm to be treated as an unregistered firm only for determining the amount of penalty. That fiction carries the computation to the point of assessing tax on the firm's total income, but it does not justify treating advance tax paid by the partners in their individual assessments as if it were advance tax paid by the firm. Credit for advance tax is available to the assessee who paid it, and the firm and the partners remain separate assessees for income-tax purposes. Extending the fiction further would amount to creating a second fiction, which is not permissible.

Conclusion: The advance tax paid by the partners could not be deducted while determining the tax payable by the registered firm for penalty computation. The answer to the reference was against the assessee and in favour of the Revenue.

Ratio Decidendi: A statutory fiction must be carried to its logical limit but cannot be extended beyond the language creating it or by importing a further fiction; credit for advance tax can be allowed only to the assessee who paid it.

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