Penalty under section 271C fails when the underlying tax default under section 201(1) is set aside and no default remains.

Penalty under section 271C cannot survive where the foundational order under section 201(1) and 201(1A) has been set aside as time-barred, because the assessee is no longer treated as being in default. The liability to deduct or pay tax under section 201(1) is the necessary prerequisite for levy of penalty under section 271C, and the quantum of penalty is linked to the amount of tax not deducted or paid. Once that default finding ceases to operate, the statutory basis for penalty disappears, so deletion of the penalty was justified.

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Issues: Whether penalty under section 271C could survive after the order under section 201(1) and section 201(1A) was set aside as time-barred and the assessee was no longer treated as being in default.

Analysis: Penalty under section 271C is attracted only where there is a failure to deduct or pay tax as required by law, and the quantum of penalty is linked to the amount of tax not deducted or paid. The liability under section 201(1) is therefore the foundational condition for penalty proceedings under section 271C. Once the order under section 201(1) ceases to operate on account of limitation, the assessee cannot be treated as an assessee in default for the relevant tax, and the statutory basis for levy of penalty disappears.

Conclusion: Penalty under section 271C could not be sustained and its deletion was justified.

Ratio Decidendi: Where the order creating liability under section 201(1) is set aside and the assessee is no longer in default, penalty under section 271C cannot be imposed because the default under section 201(1) is a necessary prerequisite for such penalty.

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