Bona fide belief of tax exemption can constitute reasonable cause, defeating penalty for failure to pay advance tax.

Penalty for failure to pay advance tax under section 273(b) is attracted only where the default occurs without reasonable cause. On the facts noted, the assessee did not pay advance tax because it bona fide believed its income was exempt from tax, and the Tribunal treated that belief as sufficient cause for the non-payment. As that finding was one of fact and was not shown to be open to challenge, the cancellation of the penalty was justified. The principle stated is that a bona fide and reasonable belief about tax exemption can prevent sustainment of penalty for advance-tax default.

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Issues: Whether the cancellation of penalty levied under section 273(b) of the Income-tax Act, 1961, for failure to pay advance tax was justified when the assessee had not paid tax under a bona fide belief that its income was exempt.

Analysis: Penalty under section 273(b) is leviable only where the assessee fails to pay advance tax without reasonable cause. The Tribunal found that the assessee's non-payment flowed from a bona fide belief that its income was exempt from tax, and that this constituted sufficient cause for the default. That finding was one of fact and was not shown to be open to challenge.

Conclusion: The cancellation of penalty was justified. The question referred was answered in the affirmative, in favour of the assessee and against the department.

Ratio Decidendi: Where an assessee's failure to pay advance tax is supported by reasonable cause, including a bona fide belief that the income was exempt, penalty under section 273(b) cannot be sustained.

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