Reasonable cause defeats TDS penalty where non-deduction arose from bona fide belief and no contumacious conduct was shown.

Failure to deduct tax at source can still escape penalty under section 271C where the assessee proves reasonable cause under section 273B. On the facts, the payment arrangement was understood as an agency relationship, tax deduction had not earlier been indicated as necessary, and the explanation was not rebutted by the authorities. The non-deduction was therefore treated as a bona fide mistake, not contumacious conduct. As penalty proceedings are quasi-criminal, penalty is not imposed merely because it is legally permissible; the assessee was found to have established reasonable cause and the penalty was not leviable.

---

---

Issues: Whether the assessee's failure to deduct tax at source from payments made to the contractor was supported by reasonable cause so as to avoid penalty under section 271C.

Analysis: Penalty for failure to deduct tax at source is attracted under section 271C, but section 273B carves out an exception where the assessee proves reasonable cause. The explanation was that the agreement was understood as an agency arrangement and that tax deduction had never earlier been pointed out as necessary despite long-standing payments. That explanation was not rebutted by the lower authorities. On the facts, the failure was found to have arisen from a bona fide belief and not from contumacious conduct. Penalty proceedings are quasi-criminal in nature and penalty is not to be imposed merely because it is lawful to do so.

Conclusion: The assessee established reasonable cause, and penalty under section 271C was not leviable.

---