Penalty for treaty-based non-taxation fails where the assessee disclosed facts and raised a bona fide, debatable claim.

Penalty under section 271(1)(c) is leviable only where concealment of income or furnishing of inaccurate particulars is established; an assessment addition by itself does not automatically justify penalty because assessment and penalty proceedings are independent. The assessee disclosed its treaty-based stand that, as a UK tax resident, income from supply of network equipment was business profits not taxable in India absent a permanent establishment. As the issue was debatable and there was no finding of withheld material facts or a false explanation, Explanation 1B to section 271(1)(c) did not apply. Penalty was therefore not leviable and its deletion was upheld.

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Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable where the assessee, acting under a bona fide belief based on the India-UK Double Taxation Avoidance Agreement, did not offer the relevant income to tax in India.

Analysis: Penalty under section 271(1)(c) is attracted only where concealment of particulars of income or furnishing of inaccurate particulars is established. An addition in assessment does not automatically justify penalty, since assessment proceedings and penalty proceedings are independent. The assessee had disclosed its stand that, as a UK tax resident, the income from supply of network equipment constituted business profits and was not taxable in India in the absence of a permanent establishment. The issue was debatable, and the record did not show that material facts were withheld or that the explanation was false. In such circumstances, Explanation 1B to section 271(1)(c) was not attracted.

Conclusion: Penalty was not leviable and the deletion of penalty was ly upheld; the appeal by the Revenue failed.

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