Bona fide debatable TDS controversy can constitute reasonable cause, defeating penalty for non-deduction under section 271C.

Penalty under section 271C for failure to deduct tax at source on discount allowed to distributors of prepaid SIM cards and recharge vouchers was held unsustainable because the applicability of section 194H was debatable. Divergent High Court and Tribunal views showed that the assessee's non-deduction was based on a bona fide legal position, and that controversy constituted reasonable cause within section 273B. On that footing, the penalty was not attracted and was deleted.

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Issues: Whether penalty under section 271C was leviable for non-deduction of tax at source on discount allowed to distributors on prepaid SIM cards and recharge vouchers, in the light of the assessee's plea of reasonable cause under section 273B.

Analysis: The dispute turned on the applicability of section 194H to the discount allowed to distributors. The issue had been the subject of conflicting decisions of different High Courts and Tribunals, showing that the legal position was debatable and not settled. On that footing, the assessee's non-deduction of tax was held to have been based on a bona fide view that no TDS obligation arose. A debatable controversy, supported by divergent judicial views, constituted reasonable cause for the failure to deduct tax, bringing the case within the protection of section 273B. Penalty under section 271C is not attracted where the assessee shows such reasonable cause.

Conclusion: Penalty under section 271C was not leviable and was deleted.

Final Conclusion: The appeals succeeded because the assessee's failure to deduct tax was held to be protected by reasonable cause, so the penalty orders could not be sustained.

Ratio Decidendi: Where non-deduction of tax at source arises from a bona fide and debatable legal controversy, and the assessee establishes reasonable cause, penalty under section 271C cannot be imposed by virtue of section 273B.

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