Reasonable cause for TDS default requires more than financial difficulty; prolonged non-remittance can justify penalty with moderated quantum.

Financial difficulty alone does not constitute reasonable cause for failure to remit tax deducted at source where the assessee cannot show even inability to meet the underlying salary obligations. Prolonged retention of deducted tax, especially over several years, is treated as a serious default because the amounts belong to the Government after deduction from employees. Penalty under section 221 is therefore leviable in such cases, although the quantum may be moderated where the circumstances justify reduction. The commentary further notes that sustained default may attract penalty even if a single lapse might not.

---

---

Issues: (i) whether the assessee had shown good and sufficient reasons constituting reasonable cause for failure to remit tax deducted at source within time under section 221 of the Income-tax Act, 1961; (ii) whether penalty was leviable for prolonged default in remitting tax deducted at source; and (iii) what should be the proper quantum of penalty.

Issue (i): whether the assessee had shown good and sufficient reasons constituting reasonable cause for failure to remit tax deducted at source within time under section 221 of the Income-tax Act, 1961.

Analysis: The default related to tax deducted from employees' salaries and retained instead of being remitted to the Government. Financial difficulty, without proof that salary obligations themselves could not be met, was held insufficient to excuse the failure. The conduct was not a short or isolated lapse but continued over several years, weakening the plea of reasonable cause.

Conclusion: The assessee did not establish reasonable cause for the delay in remitting tax deducted at source.

Issue (ii): whether penalty was leviable for prolonged default in remitting tax deducted at source.

Analysis: A mere default may not always justify penalty, but the sustained non-payment of deducted tax for a long period was treated seriously. The reasoning distinguished defaults involving the assessee's own tax liability from failure to deposit amounts belonging to the Government after deduction from third parties.

Conclusion: Penalty under section 221 was leviable and the assessee was liable as a defaulter.

Issue (iii): what should be the proper quantum of penalty.

Analysis: Although liability to penalty was upheld, the circumstances justified moderation in the amount imposed. A reduced penalty was considered sufficient to meet the ends of justice.

Conclusion: The penalty was reduced to Rs. 300 for each year.

Final Conclusion: The appeals succeeded only to the extent of reduction of penalty, while the finding of default and liability to penalty was maintained.

Ratio Decidendi: In cases of failure to remit tax deducted at source, financial difficulty alone does not constitute reasonable cause unless it is shown that the assessee was unable even to pay the underlying wages, and prolonged default justifies penalty though the quantum may be moderated.

---