Penalty for failure to deduct tax at source depends on reasonable cause; bona fide labour-payment default was excused, but short deduction remained liable.

Penalty under section 271C for failure to deduct tax at source is not automatic and depends on whether the default occurred without reasonable cause under section 273C. On labour charges paid through a group leader, the assessee's bona fide belief and surrounding site circumstances supported a reasonable-cause explanation, so the penalty was not justified and was deleted. By contrast, short deduction on job work, transportation and similar payments was treated as an admitted default not covered by that explanation, so the penalty was sustained for those items.

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Issues: (i) Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for non-deduction of tax at source on labour charges paid under section 194C; (ii) Whether the penalty was sustainable for short deduction of tax at source on job work, transportation and related payments.

Issue (i): Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for non-deduction of tax at source on labour charges paid under section 194C.

Analysis: Penalty under section 271C is not automatic. The authority must first examine whether the failure occurred without reasonable cause within the meaning of section 273C. The assessee explained that the payments were made to its own labourers through a group leader on a bona fide belief that no tax was deductible, and the explanation was supported by the surrounding circumstances of the work site and the manner in which labour was engaged. On these facts, the non-deduction could not be said to be without reasonable cause.

Conclusion: The penalty under section 271C for non-deduction of tax on labour charges was not justified and was deleted in favour of the assessee.

Issue (ii): Whether the penalty was sustainable for short deduction of tax at source on job work, transportation and related payments.

Analysis: The assessee did not contest the short deduction to the same extent and accepted the lapse in respect of certain payments. The short deduction was therefore treated as an admitted default and was not covered by the reasonable-cause explanation accepted for labour charges.

Conclusion: The penalty relating to short deduction of tax on job work, transportation and similar payments was sustained against the assessee.

Final Conclusion: The appeals succeeded only to the extent of deletion of penalty on labour charges, while the penalty attributable to short deduction of tax was upheld.

Ratio Decidendi: Penalty for failure to deduct tax at source is not automatic and cannot be sustained where the assessee establishes a bona fide and reasonable cause for the default; however, admitted short deduction of tax remains exigible to penalty.

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