M.M. Punchhi, J.
1. The Income-tax Appellate Tribunal, Amritsar Bench, has referred the following question of law for our opinion :
' Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing that while working out the penalty imposable under Section 271(1)(c) for the assessment year 1965-66 the annuity deposit payable by the assessee-firm should be deducted and the quantum of penalty should be determined accordingly as per provisions of Section 271(2) of the I.T. Act, 1961 ?'
2. The assessee is a registered firm, deriving income from sale of woollen goods and wool-tops as also from manufacture and sale of woollen cloth. For the assessment year 1965-66, the assessee filed its return of income of Rs. 66,013. During the course of assessment proceedings, the ITO made substantial additions thereto, and assessed the assessee at an income of Rs. 1,63,977. The assessee went up in appeal against the assessment framed by the ITO. The AAC upheld some of the additions and kept the assessment at the level of Rs. 1,13,997. The assessee went up in appeal before the Income-tax Appellate Tribunal, but without any success.
3. The ITO had also initiated penalty proceedings under Section 271(1)(c) of the I.T. Act, 1961. And since the minimum penalty imposable exceeded a sum of Rs. 1,000 he referred the case to the IAC under Section 274(2). The IAC, after the decision of the Tribunal in the quantum case, imposed a penalty of Rs. 1,10,000 on the assessee under Section 271(1)(c) as against the maximum imposable penalty of Rs. 1,13,160. Aggrieved by the said order, the assessee filed an appeal before the Tribunal. The Tribunal upheld the imposition of penalty but reduced the quantum of penalty to 60% of the tax sought to be avoided. The Tribunal further directed that while calculating the amount of penalty, regard be had to Section 271(2) which required the assessee to be treated as an unregistered dealer and the annuity deposit payable by it be deducted and the quantum of penalty thus be determined accordingly. Reliance was placed by the Tribunal on a decision of the Gujarat High Court in CIT v. Gujarat Automobiles : 105ITR588(Guj) . It was held therein that since the amount of penalty was co-related under Clause (i) of Section 271(1) to the amount of tax, the amount of tax payable by thefirm, if it were an unregistered firm, would certainly arise, and in ascertaining that figure, the question of what was the total income of the firm, if unregistered, had also to be taken into account. And in assessing that total income the amount of annuity deposit under Section 280-0 had to be deducted, and that such a deduction should be allowed in computing the amount of penalty payable by the firm, as if unregistered. And that view of the Tribunal is now the subject of scrutiny on the question posed. Section 271(2) of the Act is in the following terms :
'(2) When the person liable to penalty is a registered firm or an unregistered firm which has been assessed under Clause (b) of Section 183, then, notwithstanding anything contained in the other provisions of this Act, the penalty imposable under Sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm.'
4. As is plain from the language of the aforequoted provision, a fiction has been introduced to treat a registered firm as an unregistered firm in that situation. A perusal of Section 280A shows that an unregistered firm is liable to make payment of annuity deposits, but not a registered firm. Section 280-0, as it stood prior to April I, 1966, permitted the annuity deposit required to be made under Chap. XXII-A to be deducted in computing the total income assessable for the assessment year in respect of which the annuity deposit was required to be made. In Gujarat Automobiles' case : 105ITR588(Guj) , relied upon by the Tribunal, the court had relied upon a passage of the House of Lords cited by the Supreme Court in CIT v. S. Teja Singh : 35ITR408(SC) , which is to the following effect (p. 413):
' If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it.'
5. Relying on that passage, the Gujarat High Court carried the fiction to its logical end, taking the view that since the amount of penalty is co-related under Clause (i) of Section 271(1) to the amount of tax, the amount of tax payable by the firm, if it were an unregistered firm, would certainly arise, and in ascertaining that figure, the question of what is the total income of the firm, if unregistered, has also to be taken into account and in assessing that total income, the amount of annuity deposit under Section 280-O has to be deducted. In other words, in computing the amount of penalty payable by the firm, if unregistered, such deduction had'to be reckoned.
6. It seems that after the order of the Tribunal, other High Courts have taken a similar view. In Addl. CIT v. Khemchand Thakurdas : 114ITR223(KAR) , the Karnataka High Court took a similar view in conformity with the view expressed in Gujarat Automobiles' case : 105ITR588(Guj) . The Madras High Court, too, in P. Subramanian & Bros. v. CIT : 106ITR508(Mad) , and in CIT v. Palaniappa Transports : 124ITR634(Mad) , took the same view as taken in Gujarat Automobiles' case : 105ITR588(Guj) , And, lastly, the Bombay High Court in CIT v. India Automobiles : 143ITR774(Bom) , took a similar view. Learned counsel for the Revenue could not cite before us any contrary decision. He had to barely shrug his shoulders.
7. In view of the aforesaid, the question referred to us is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. In the circumstances, there shall be no order as to costs.
R.N. Mittal, J.
8. I agree.