Penalty for wrong deduction claim fails absent false particulars or a non-bona fide explanation under income-tax law.

Penalty under Section 271(1)(c) could not be sustained merely because a deduction claim was disallowed on merits; Explanation 1 requires the Revenue to show that the assessee furnished false particulars, advanced a false or not bona fide explanation, or failed to substantiate the claim despite full disclosure of material facts. Here, the assessee had disclosed the relevant facts and the claim rested on a legal contention, with no finding of mala fides. The penalty was therefore unjustified, and the Tribunal's deletion of the penalty was upheld.

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Issues: Whether penalty under Section 271(1)(c) of the Income-tax Act, 1961 was exigible where the assessee had made a wrong claim of deduction but had offered an explanation and disclosed the relevant facts.

Analysis: The claim for deduction was rejected on merits, but the material did not show that the assessee had furnished false particulars or that the explanation offered was mala fide. The statutory scheme under Explanation 1 to Section 271(1)(c) requires more than a mere disallowance of a claim: penalty can be sustained only where the explanation is found to be false or not bona fide, or the assessee fails to substantiate it without having disclosed all material facts. In the present case, the assessee's stand was based on legal contention and there was no finding that the explanation lacked bona fides.

Conclusion: Penalty was not justified and the Tribunal was right in setting aside the penalty order, in favour of the assessee.

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