Reasonable cause shields TDS penalty where harvesting charges were treated under a bona fide, debatable view.

Penalty under section 271C for failure to deduct tax at source under section 194C was held unsustainable where the assessee's non-deduction on harvesting charges arose from a bona fide view on a highly debatable issue. The record showed judicial divergence on the nature of the payments and the applicability of TDS, supporting the assessee's claim of reasonable cause. As section 273B exempts penalty when reasonable cause is proved, the assessee was found protected and no penalty could be imposed.

---

---

Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for failure to deduct tax at source under section 194C of the Income-tax Act, 1961 on harvesting charges, and whether the assessee was protected by section 273B of the Income-tax Act, 1961 on account of reasonable cause.

Analysis: Penalty under section 271C is attracted for failure to deduct tax at source, but section 273B provides that no penalty shall be imposed if the assessee proves reasonable cause for the failure. The dispute concerned whether payments made towards harvesting charges were subject to TDS and whether the assessee's non-deduction arose from a bona fide and reasonable view on a highly debatable issue. The record showed that the assessee had proceeded on the basis of judicial divergence and a bona fide belief regarding the nature of the payments and the applicability of TDS.

Conclusion: The assessee had shown reasonable cause within the meaning of section 273B of the Income-tax Act, 1961, and the penalty under section 271C of the Income-tax Act, 1961 was not sustainable.

---