Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) for failure to deduct tax at source u/s 194C:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia) on account of failure to deduct tax at source on certain payments covered u/s 194C. Such penalty came to be deleted by CIT(A) as well as ITAT. On Revenue’s appeal, Hon’ble High Court found that ITAT applied decision in the case of Reliance Petroproducts Pvt. Ltd. – 322 ITR 158 (SC) and observed that merely on account of disallowance of certain claim, penalty cannot be imposed. ITAT had also recorded that the question of disallowance u/s 40(a)(ia) in respect of transporters had given rise of diversified opinion. Further, genuineness of expenditure was not in question. Disallowance was made on the count that tax was not deducted at source. In light of the above, Hon’ble High Court dismissed Revenue’s appeal.

[CIT Vs. Dahyabhai Veljibhai Patel – Tax Appeal No.793 of 2013]