Penalty for non-deduction of tax was unsustainable where the sale-versus-works-contract issue was genuinely debatable and bona fide.

Penalty for failure to deduct tax was held unsustainable where the underlying transaction was genuinely debatable and the dealer acted under a bona fide belief that it was a sale, not a works contract. The Tribunal found that the body had been purchased and mounted on the chassis, and treated the nature of the transaction as highly contentious. In the absence of deliberate or wilful defiance, and given the quasi-criminal character of penalty proceedings, mens rea-like culpability was not established. The penalty deletion was therefore affirmed and the revisions were rejected.

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Issues: Whether penalty under section 8D(6) of the U.P. Trade Tax Act, 1948 was leviable for non-deduction of tax under section 8D(1) when the transaction was claimed to be a sale of body and not a works contract.

Analysis: The Tribunal found, on facts, that the dealer had purchased the body and got it mounted on the chassis, and that the transaction was not a works contract. The question whether the arrangement amounted to a works contract or a sale was treated as highly debatable. In such a situation, where the dealer proceeded under a bona fide belief that the transaction was a sale and not a works contract, the failure to deduct tax did not amount to deliberate or wilful defiance. Penalty proceedings being quasi-criminal in nature, penalty is not justified in the absence of mens rea-like culpability or conscious breach.

Conclusion: Penalty under section 8D(6) was not leviable; the finding of the Tribunal deleting the penalty was and was not liable to interference.

Final Conclusion: The revisions were rejected, and the Tribunal's order deleting the penalty was affirmed.

Ratio Decidendi: Penalty for failure to deduct tax is not sustainable where the underlying liability is itself debatable and the assessee acts under a bona fide belief without deliberate or wilful defiance.

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