Bona fide belief and reasonable cause defeated TDS penalty where no substantial question of law arose.

Penalty under section 271C was held unsustainable where the Tribunal found that the assessee held a bona fide belief that retention or continuation pay paid in Japan was not taxable in India, and that this belief constituted reasonable cause under section 273B. The High Court treated the existence of reasonable cause for non-deduction of tax at source as a primarily factual , and held that such a finding does not ordinarily raise a substantial question of law unless perverse. As the factual finding on bona fides was supported, the Revenue's appeal failed and the penalty was not leviable.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was exigible for failure to deduct tax at source from expatriate employees' salary paid outside India, and whether the Tribunal's finding of reasonable cause and bona fide belief gave rise to any substantial question of law.

Analysis: The Tribunal had recorded a factual finding that the assessee entertained a bona fide belief that the retention or continuation pay paid in Japan was not taxable in India and that this constituted reasonable cause within the meaning of section 273B of the Income-tax Act, 1961. The Court noted that the question whether there was reasonable cause for non-deduction of tax at source is essentially one of fact, and that a Tribunal's finding on bona fides would not ordinarily generate a substantial question of law unless shown to be perverse. The Court followed the view that, where the factual finding of bona fide conduct is supported, penalty under section 271C cannot be sustained.

Conclusion: The penalty was not leviable and the Revenue's appeal was rejected for want of any substantial question of law.

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