Reasonable cause defeats TDS penalty where bona fide belief explains non-deduction and subsequent compliance follows.

Penalty for failure to deduct tax at source under section 271C of the Income-tax Act, 1961 is not automatic and can be avoided where the assessee proves reasonable cause under section 273B, including a bona fide belief that tax was not deductible. On the facts, the assessee did not deduct tax on payments to a non-banking financial institution, later accepted the related tax consequence, and began deducting tax thereafter. These circumstances were treated as sufficient reasonable cause, so the penalty was cancelled.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for failure to deduct tax at source when the assessee claimed bona fide belief and reasonable cause under section 273B of the Income-tax Act, 1961.

Analysis: The assessee had not deducted tax on payments made to a non-banking financial institution on the stated belief that tax was not deductible. The record showed that the related disallowance and demand were ed and paid, and the assessee subsequently began deducting tax. In these circumstances, the failure was treated as supported by reasonable cause within the meaning of section 273B of the Income-tax Act, 1961. Penalty under section 271C is not automatic and must yield where reasonable cause is proved.

Conclusion: The penalty under section 271C of the Income-tax Act, 1961 was not exigible and was cancelled, in favour of the assessee.

Ratio Decidendi: Penalty for failure to deduct tax at source under section 271C of the Income-tax Act, 1961 is not imposable where the assessee proves reasonable cause, including a bona fide belief, under section 273B of the Income-tax Act, 1961.

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