Penalty cannot be imposed on a Hindu undivided family after recognised partition defeats the section 25A(3) deeming fiction.

A penalty under the Indian Income-tax Act could not be sustained against a Hindu undivided family that had already ceased to exist by partition when the penalty order was passed. The Court held that the deeming fiction in section 25A(3), under which the family is treated as continuing, applies only where no order recognising partition has been made; once partition is recognised in appellate proceedings, that fiction no longer supports penalty proceedings. The Court preferred the view that penalty cannot be imposed on a non-existent assessable entity and rejected the contrary approach as an improper extension of assessment principles to penalty matters. The Tribunal was therefore justified in cancelling the penalty.

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Issues: Whether the Appellate Tribunal was justified in cancelling the penalty imposed under section 28(1)(c) of the Indian Income-tax Act, 1922, when the Hindu undivided family had already been partitioned before the penalty order was passed.

Analysis: The penalty could be sustained only if the assessable entity against whom the penalty was imposed existed on the date of the penalty order. The fiction in section 25A(3) that the family shall be deemed to continue as a Hindu undivided family operates only where no order under section 25A has been passed; once partition is recognised in appellate proceedings, the foundation for applying that fiction disappears. The reasoning of decisions holding that penalty cannot be imposed on a family that had ceased to exist was preferred, while the contrary view was rejected as resting on an inapposite extension of assessment principles to penalty proceedings. The Court also held that applying the legal fiction to sustain penalty after recognition of partition would work hardship and injustice and was not warranted by the statutory language.

Conclusion: The Tribunal was justified in cancelling the penalty, and the answer to the referred question was in the affirmative in favour of the assessee.

Ratio Decidendi: A penalty under the Income-tax Act cannot be validly imposed on a Hindu undivided family that had already ceased to exist by partition on the date of the penalty order, and the deeming fiction in section 25A(3) does not survive once an order recognising partition has been passed.

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