Bona fide legal claim and full disclosure defeat penalty where depreciation is disallowed on interpretation of law.

Penalty under section 271(1)(c) is not attracted where the assessee disclosed the depreciation claim and all primary facts, including the government capital contribution, and made the claim under a bona fide legal belief. Although depreciation was disallowed on merits under section 43(1) read with Explanation 10, the mere rejection of the claim did not establish concealment of income or furnishing of inaccurate particulars. The decision treats assessment and penalty proceedings as distinct and holds that a wrong legal claim, without suppression of facts or dishonest particulars, does not justify penalty.

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Issues: Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 was leviable for claiming depreciation on assets funded by Government capital contribution, and whether the assessee had concealed income or furnished inaccurate particulars.

Analysis: The assessee had disclosed the depreciation claim in the computation of income and the relevant government contribution was shown in the record as capital contribution. The disallowance of depreciation on merits arose from the application of section 43(1) read with Explanation 10, but the claim itself was found to have been made under a bona fide belief that capital contribution was outside the mischief of subsidy, grant or reimbursement. The assessment proceedings and penalty proceedings are distinct, and mere rejection of a claim on merits does not by itself establish concealment or furnishing of inaccurate particulars. The case was governed by the principle that a wrong legal claim, without dishonest particulars or suppression of facts, does not attract penalty.

Conclusion: Penalty under section 271(1)(c) was not leviable and the deletion of penalty was upheld in favour of the assessee.

Ratio Decidendi: Where all primary facts are disclosed and the claim is made under a bona fide legal belief, rejection of that claim on interpretation of law does not by itself justify penalty for concealment or furnishing inaccurate particulars.

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