Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) by invoking legal fiction:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia). Hon’ble ITAT observed that the assessee had debited expenses in respect of payments made to C & F agents. However, tax was not deducted at source while making such payments since the assessee was under a bona fide belief that no TDS was required to be made on the same because such payment was in the nature of reimbursement and no element of income was involved in the same. It wasn’t towards any services rendered by such agents. It was further observed that such expenses were duly debited in P&L a/c. The concerned disallowance was made on account of difference in opinion as to applicability of TDS. AO had not alleged that the said payment was non-genuine, bogus, excessive or unreasonable. Disallowance u/s 40(a)(ia) was made by merely invoking the legal fiction. It was thus held that disallowance u/s 40(a)(ia) will not attract penalty for furnishing inaccurate particulars of income. Accordingly, the penalty was deleted. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of “CIT vs. Mother India Refrigeration Pvt. Ltd. – 155 ITR 711 (SC)” wherein in was held that legal fictions are created for some definite purpose and the same must be limited to that purpose and should not be extended beyond that legitimate filed.

[M/S. ELECTRO POWER ENGINEERS Vs. ACIT – ITA No.2153/Ahd/2010]