Penalty under section 271C was not attracted where tax deduction on External Development Charges was unclear and reasonable cause was shown.

Penalty under section 271C was held not leviable for alleged non-deduction of tax at source on payment of External Development Charges to HUDA. The Tribunal followed its earlier coordinate bench rulings on identical facts and noted that the payments were made through the governmental licensing framework, with no settled clarity at the relevant time on whether tax was deductible. It accepted that the assessee acted under a bona fide belief and that the surrounding circumstances constituted reasonable cause under section 273B. Even if a deduction dispute under section 194C arose, the penal consequence under section 271C did not apply, and the penalty deletion was upheld.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for non-deduction of tax at source on payment of External Development Charges to HUDA.

Analysis: The Tribunal followed its earlier coordinate bench decisions on identical facts and noted that the payments of EDC were made to HUDA through the governmental licensing framework and that, prior to the later administrative clarification, there was no settled clarity on whether tax was deductible on such payments. It accepted the view that the assessee acted under a bona fide belief and that the surrounding circumstances furnished reasonable cause within the meaning of section 273B. In that situation, even assuming a deductibility dispute under section 194C, the penal consequence under section 271C was not attracted.

Conclusion: The penalty under section 271C was not leviable and the deletion of penalty was upheld in favour of the assessee.

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