Reasonable cause defeats tax deduction penalty where bona fide legal advice and supporting circumstances credibly explain the default.

A challenge under section 260A based only on the Tribunal's factual finding of reasonable cause did not raise a substantial question of law, because such a challenge must show a legal issue or perversity in the finding. On the penalty issue, section 271C was held inapplicable where the assessee established reasonable cause under section 273B through bona fide legal advice, supporting professional opinions, and the pending advance-ruling process. Those circumstances were accepted as credible and showed the default was not wilful. The penalty relief was therefore upheld and the Revenue's appeal was rejected.

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Issues: (i) Whether the Revenue's challenge to the Tribunal's finding on reasonable cause disclosed a substantial question of law under section 260A of the Income-tax Act, 1961. (ii) Whether the assessee had established reasonable cause so as to avoid penalty under section 271C of the Income-tax Act, 1961 in the light of section 273B of the Income-tax Act, 1961.

Issue (i): Whether the Revenue's challenge to the Tribunal's finding on reasonable cause disclosed a substantial question of law under section 260A of the Income-tax Act, 1961.

Analysis: The appeal turned on the Tribunal's factual conclusion that the assessee had reasonable cause for not deducting tax at source. A substantial question of law arises only where the issue is one of legal principle, or where the factual finding is perverse, unsupported by evidence, or contrary to law. A challenge directed only against the factual appreciation of reasonable cause does not ordinarily satisfy the threshold under section 260A.

Conclusion: The question proposed by the Revenue did not disclose a substantial question of law.

Issue (ii): Whether the assessee had established reasonable cause so as to avoid penalty under section 271C of the Income-tax Act, 1961 in the light of section 273B of the Income-tax Act, 1961.

Analysis: Section 271C fastens penalty for failure to deduct tax at source, but section 273B protects an assessee who proves reasonable cause. The assessee relied on bona fide legal advice, supporting professional opinions, and the pending advance-ruling process. These circumstances were accepted as sufficient to show that the default was not wilful and that the explanation was credible and reasonable. The Tribunal's view was consistent with the settled principle that reasonable cause is a factual matter, and that bona fide belief supported by professional advice may constitute such cause.

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

Final Conclusion: The penalty relief granted below was upheld and the Revenue's appeal was rejected.

Ratio Decidendi: A factual finding that an assessee had reasonable cause for failure to deduct tax at source, particularly when supported by bona fide legal advice and other credible circumstances, does not by itself give rise to a substantial question of law under section 260A, and such reasonable cause defeats penalty under section 271C by virtue of section 273B.

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