Timing of tax deduction on interest credits and reasonable cause protected the assessee from penalty

Penalty for failure to deduct tax at source was held unsustainable where interest was deducted and paid on actual payment, and the dispute concerned only the timing of deduction at the credit stage. The analysis treated the issue as debatable under the mercantile system because the right to receive interest arose on maturity under the deposit schemes, and the assessee's view that immediate deduction was not required was found bona fide. With no dispute about actual deduction and remittance of tax, the explanation constituted reasonable cause and took the case outside penal consequences.

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Issues: Whether penalty under section 271C was leviable for not deducting tax at source under section 194A at the time interest was credited to an interest provision account, and whether the assessee had reasonable cause within section 273B.

Analysis: The assessee deducted tax at source on actual payment of interest and the tax was paid to the Government. The dispute was confined to the timing of deduction, namely, whether tax had to be deducted when interest was credited to the interest suspense account under the mercantile system. The governing provisions of section 194A and its Explanation were considered along with section 271C and the protective provision in section 273B. The conclusion applied was that, even assuming a technical lapse in timing, the issue was debatable because the right to receive interest arose on maturity under the deposit schemes and the assessee's explanation that no immediate deduction was required was bona fide. The absence of any dispute about actual deduction and payment of tax, together with the existence of reasonable cause, took the case outside penal consequences.

Conclusion: Penalty under section 271C was not sustainable, as the assessee was protected by reasonable cause under section 273B.

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