Penalty under section 271(1)(c) deleted where bona fide explanation for cash payments was accepted despite sustained quantum addition.

Penalty under section 271(1)(c) was not sustainable where the assessee gave a bona fide and satisfactory explanation for cash payments made in the course of business. Although the corresponding quantum addition under section 40A(3) had already been sustained, the penalty proceedings required a separate evaluation of the explanation. On the facts, cash payments for urgent machinery repairs and employee payments in the assessee's business setting were accepted as adequate to negate concealment or furnishing of inaccurate particulars. The penalty was therefore deleted in favour of the assessee.

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Issues: Whether penalty imposed under section 271(1)(c) of the Income-tax Act, 1961 was sustainable where the assessee offered an explanation for cash payments made in the course of business.

Analysis: The quantum addition based on disallowance under section 40A(3) had already been sustained, but the present proceedings concerned penalty. In the penalty context, the explanation that cash payments were made for urgent machinery repairs and employee payments in the peculiar business setting was accepted as satisfactory. The explanation, though not sufficient to overturn the addition in quantum, was held adequate to negate penalty consequences in the facts of the case.

Conclusion: The penalty was not sustainable and was deleted in favour of the assessee.

Ratio Decidendi: An explanation that may fail in quantum proceedings can still be sufficient to defeat penalty under section 271(1)(c) if, on the peculiar facts, it is bona fide and satisfactory for the purpose of the penalty provisions.

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