Reasonable cause defeats tax deduction penalty where bona fide belief and supporting advice explain non-deduction abroad.

Penalty under section 271C is not sustainable where the assessee shows reasonable cause for non-deduction of tax at source. The Tribunal found that the assessee had deducted tax on salary paid in India, paid interest on delayed tax payments, and acted on a bona fide belief supported by internal legal advice that the payments made in Japan were not taxable in India. It also noted that the Revenue did not establish knowledge of the exact salary payments in Japan or any prior adverse determination in the expatriate employees' cases. The cancellation of penalty was upheld because no perversity was shown in the factual finding on reasonable cause.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for non-deduction of tax at source from payments made to expatriate employees in Japan, or whether the assessee had established reasonable cause within the meaning of section 273B.

Analysis: The Tribunal examined the evidence at length and found that the assessee had deducted tax on salary paid in India, had paid interest on delayed tax payments, and had proceeded on a bona fide belief, supported by internal legal advice, that the payments made in Japan were not taxable in India. It further found that the Revenue had not shown that the assessee had knowledge of the exact salary payments made in Japan or that the matter had been investigated and decided against the assessee in the individual cases of the expatriate employees. On that basis, the Tribunal concluded that the explanation offered constituted reasonable cause and that the lower authorities had not properly appreciated the explanation while imposing penalty.

Conclusion: The penalty under section 271C was not exigible, and the finding cancelling the penalty was upheld as no perversity was shown.

Ratio Decidendi: Penalty under section 271C is not sustainable where the assessee establishes reasonable cause for non-deduction of tax at source, and a factual finding to that effect cannot be disturbed in appeal unless it is shown to be perverse.

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