Penalty under section 271(1)(c) fails where quantum additions are deleted and a claim was bona fide under the law then in force.

Penalty under section 271(1)(c) was considered unsustainable where the underlying quantum additions had already been deleted, because once the additions ceased to exist the basis for the penalty also disappeared. The same penalty could not be sustained on the deferred tax provision under section 115JB, as the claim was made on the basis of the law in force at the time of filing and the adverse adjustment arose only because of a later retrospective amendment. The penalty order was therefore deleted on all surviving grounds.

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Issues: (i) Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 could be sustained in respect of additions which did not survive in quantum proceedings; (ii) whether penalty could be imposed on the addition relating to provision for deferred tax under section 115JB of the Income-tax Act, 1961 when the disallowance arose from a retrospective amendment.

Issue (i): Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 could be sustained in respect of additions which did not survive in quantum proceedings.

Analysis: The penalty was founded on multiple disallowances, including transfer pricing adjustments and other additions. The related quantum additions, except the deferred tax item, had already been deleted in the quantum appeals. Once the underlying additions ceased to exist, the foundation for penalty under section 271(1)(c) also disappeared.

Conclusion: Penalty on the surviving quantum-deleted items was not sustainable and was deleted.

Issue (ii): Whether penalty could be imposed on the addition relating to provision for deferred tax under section 115JB of the Income-tax Act, 1961 when the disallowance arose from a retrospective amendment.

Analysis: The addition on account of deferred tax provision was confirmed only because of a subsequent retrospective amendment. On the date of filing of the return, the assessee's claim was supported by the law then in force and the assessee could not have anticipated the later legislative change. In such circumstances, the claim could not be treated as attracting penal consequences under section 271(1)(c).

Conclusion: Penalty on the deferred tax addition was not sustainable and was deleted.

Final Conclusion: The penalty order did not survive on any of the issues considered, and the assessee succeeded in resisting the levy while the revenue's challenge failed.

Ratio Decidendi: Penalty under section 271(1)(c) cannot be levied where the related quantum addition is deleted, and it also cannot be sustained for a claim made bona fide under the law as it stood at the time of filing merely because of a later retrospective amendment.

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