Penalty for unsustainable deduction claim upheld where cancelled banking licence made banking-income exemption unavailable and explanation lacked bona fides.

Penalty under section 271(1)(c) was sustained where an assessee, after cancellation of its banking licence, still claimed deduction under section 80P(2)(a)(i) on receipts said to be banking income. The Tribunal treated the claim as made in conscious disregard of the legal position because the assessee knew it could no longer carry on banking business and its auditors had recorded that the banking regime was no longer applicable. Section 176(3A) was held inapplicable because there was no discontinuance of business in the statutory sense. Full disclosure of the claim in the return did not establish a bona fide explanation, and the explanation remained unsubstantiated.

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Issues: Whether penalty under section 271(1)(c) was leviable where the assessee claimed deduction under section 80P(2)(a)(i) on income earned after cancellation of its banking licence, and whether the explanation based on section 176(3A) and full disclosure in the return constituted a bona fide explanation.

Analysis: The Tribunal held that the assessee was aware that its banking licence had been cancelled and that it was prohibited from carrying on banking business. The statutory auditors had also recorded that the banking regime was no longer applicable. In that background, the claim that the impugned receipts were banking income eligible for deduction under section 80P(2)(a)(i) was found to be made in conscious disregard of the legal position. The Tribunal further held that section 176(3A) did not apply because there was no discontinuance of business in the statutory sense, and the assessee's explanation was neither substantiated nor shown to be bona fide. Mere disclosure of the claim in the return did not save the assessee from penalty when the claim itself was knowingly unsustainable.

Conclusion: Penalty under section 271(1)(c) was rightly sustained and the assessee's appeal was rejected.

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