Penalty for non-payment of tax demand survives appellate reduction, but recovery is limited to the reduced dues.

Penalty for non-payment of a valid tax demand under section 46(1) arose independently of the assessment proceedings, so a later appellate reduction of the assessed tax did not extinguish the penalty altogether. The assessee remained liable because default occurred after a valid notice of demand, but the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 prevented recovery of any excess over the reduced Government dues. The penalty demand was therefore restricted to the amount legally recoverable after the appeal, and the excess could not be enforced.

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Issues: Whether penalty levied for default in payment of tax demand under section 46(1) could be recovered in full after the assessed tax demand was reduced in appeal.

Analysis: A valid notice of demand creates an obligation to pay within the stipulated time, and failure to comply renders the assessee a defaulter. The liability to penalty under section 46(1) arises from that default and is distinct from the assessment proceedings. Once the default has resulted in an order levying penalty, the assessee cannot rely on a later appellate reduction of the assessment demand to extinguish the penalty altogether. At the same time, the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 validates recovery proceedings after reduction of Government dues and expressly provides that, where the penalty exceeds the reduced dues, the excess shall not be recovered.

Conclusion: The penalty was not wiped out entirely by the appellate reduction of tax demand, but recovery could not be made beyond the reduced amount of tax.

Final Conclusion: The assessee obtained relief only to the extent of the excess over the reduced tax liability, and the demand for penalty was restricted accordingly.

Ratio Decidendi: Liability for penalty for non-payment of a valid demand is independent of the later success of the assessee in appeal against assessment, but recovery cannot exceed the reduced Government dues where a validating statute so provides.

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