Penalty under section 271(1)(c) fails when third-party statements lack effective cross-examination and the assessee's explanation is not mala fide.

Penalty under section 271(1)(c) was held unsustainable where the assessee supported its commission expenditure claim with correspondence, bank records, account payee payments and receipts, and the Revenue relied mainly on third-party statements without effective cross-examination. The Tribunal noted that the assessee's explanation was not shown to be false or mala fide, and that the underlying quantum controversy was itself debatable. On that basis, the deletion of penalty was upheld and the Revenue's appeals were dismissed.

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Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was exigible for the assessee's claim of commission expenditure, in the circumstances where the additions were founded largely on third-party statements and the assessee was not afforded effective opportunity to cross-examine those persons.

Analysis: The penalty was sustained by the Revenue on the basis of statements of third parties alleging bogus commission payments. However, the assessee had produced supporting material such as correspondence, bank records, account payee payments and receipts. The Tribunal noted that, in the penalty proceedings, the assessee sought cross-examination of the persons whose statements were relied upon, but the opportunity was not effectively provided. The Tribunal also noted that the explanation offered by the assessee was not shown to be false or mala fide. Further, the underlying quantum dispute had already been held to involve a debatable issue, including by admission of a substantial question of law by the High Court.

Conclusion: The penalty was not leviable and the deletion of penalty was upheld. The Revenue's appeals were dismissed.

Ratio Decidendi: Penalty under section 271(1)(c) is not sustainable where the assessee's explanation is not proved to be mala fide, the adverse material consists substantially of third-party statements without effective cross-examination, and the underlying issue is debatable.

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