Penalty for Disallowed Deduction Claim Not Levied Where Full Disclosure and Debatable Legal Issue Were Shown

Penalty under section 271(1)(c) was held not leviable where the assessee had fully disclosed its deduction claim under section 80-IA in the return and audit forms, and the issue turned on an arguable legal interpretation. The deduction had been accepted by the first appellate authority before being disallowed in quantum proceedings, and the claim related to debatable questions on use of windmills and the nature of the lease. Rejection of the claim in quantum did not, by itself, establish concealment of income or furnishing of inaccurate particulars. The deletion of penalty was therefore upheld in favour of the assessee.

---

---

Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable when the assessee's claim for deduction under section 80-IA was disallowed in quantum proceedings.

Analysis: The assessee had disclosed the deduction claim in the return and supporting audit forms, and the claim had been accepted by the first appellate authority before being reversed in quantum by the Tribunal. The reasoning on eligibility turned on debatable questions as to whether the windmills were first put to use by the assessee and whether the lease amounted to a transfer. Admission of the assessee's further appeals by the jurisdictional High Court supported the bona fide nature of the claim. A claim does not become false merely because it is rejected or found unsustainable in law, so long as the relevant particulars are fully disclosed and the issue is arguable.

Conclusion: Penalty under section 271(1)(c) was not leviable, and the deletion of penalty was upheld in favour of the assessee.

Ratio Decidendi: A fully disclosed deduction claim based on an arguable interpretation of law, even if ultimately disallowed in quantum, does not by itself establish concealment of income or furnishing of inaccurate particulars.

---