Under-reporting penalty fails where leave-encashment deductibility is debatable and the Revenue does not establish taxpayer mens rea.

Penalty for under-reporting of income cannot be imposed merely because a leave-encashment expenditure claim is disallowed where its allowability on provision versus actual payment is debatable. The notes state that, despite the tax auditor's reporting and disallowance of the claim, penal liability requires proof of mens rea. As the Revenue did not establish mens rea attributable to the assessee in making the claim, the penalty order for under-reporting of income was quashed.

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Issues: Whether penalty for under-reporting of income could be levied on disallowance of a claim for leave-encashment expenditure where the claim involved a debatable question regarding provision versus actual payment.

Analysis: The leave-encashment claim was disallowed notwithstanding the tax auditor's reporting, but the question whether the expenditure was allowable on provision or only on payment was debatable. Penal liability requires establishment of mens rea. The Revenue did not establish mens rea attributable to the assessee in making the claim.

Conclusion: Penalty for under-reporting of income was not leviable; the penalty order was quashed in favour of the assessee.

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