Penalty for disallowed claims is not automatic when full disclosure is made and the dispute is only legal interpretation.

Penalty for concealment is not attracted merely because a claim is disallowed in assessment where the return fully discloses the relevant facts. The text explains that section 271(1)(c) applies only to concealment of income or furnishing of inaccurate particulars, and that a bona fide claim based on legal interpretation, RBI norms, debatable issues, or even wrong legal advice does not by itself establish penalty exposure. Where the dispute concerns the legal admissibility of the claim rather than false facts, disallowance on merits cannot automatically justify penalty. On those principles, the penalty was held unsustainable and liable to be deleted.

---

---

Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was sustainable where the assessees had made full disclosure of the relevant facts and the disallowances arose from claims made on the basis of legal interpretation and regulatory norms.

Analysis: The penalty provision applies only where there is concealment of income or furnishing of inaccurate particulars. A mere claim which is not accepted in assessment does not, by itself, establish concealment or inaccurate particulars when the return discloses the material facts and the dispute is only on the legal admissibility of the claim. The claims in question were found to have been made with disclosure of the underlying particulars, and the controversy concerned the legal effect of the RBI norms and the assessee's understanding of the applicable law. In such circumstances, disallowance of the claims on merits could not automatically justify penalty. The Court also relied on the principles that where a claim is bona fide, made on a debatable issue, or based on wrong legal advice or misinterpretation, penalty is not attracted in the absence of material showing deliberate concealment or false particulars.

Conclusion: Penalty under section 271(1)(c) was not justified and was liable to be deleted.

---