Question before the Full Bench was whether for delay in paying whole or part of tax deducted at source, penalty can be waived or reduced. Court held that, S. 271C (1) of the Income-tax Act, 1961 deals with penalty in cases of deduction of tax at source. Under the first clause, i. e., clause (a), penalty is for failure to deduct tax at source, as required by or under the provisions of Chapter XVII-B and under no other circumstances. Under the second clause, i. e., clause (b), penalty is for failure to pay the whole or any part of the tax, as further clarified by the words which follow the said stipulation, i. e., “as required by or under, (i) sub-section (2) of section 115-O; or (ii) second proviso to section 194B.” Except for the failure with respect to the above two instances, no other instance is mentioned under clause (b) to attract payment of penalty.

Section 115-O is part of Chapter XII-D and it does not come within the purview of any deduction under Chapter XVII-B envisaged under clause (a) of section 271C(1). Section 194B, on the other hand, definitely comes under Chapter XVII-B. The Chapter contains various instances of deduction of tax at source. In so far as the law makers have taken a conscious decision to identify only section 194B of Chapter XVII-B of the Act (leaving the payment of tax deducted in respect of other instances in the very same Chapter) to be liable to penalty, the instances covered by clause (a) of section 271C(1) cannot be read into clause (b) of section 271C(1). In other words, it is not for the court to rewrite the law or question the legislative wisdom of the law makers in this regard. However, a doubt may arise as to whether there was any intent on the part of the law makers to let the defaulters go scot free, if penalty cannot be levied upon them for non-payment even after deduction of tax, which is a more serious lapse than the failure to deduct tax. The situation has been taken care of by Parliament, in section 276B of the Act, providing for prosecution in specific circumstances. Even in a case where there is some delay in effecting payment of tax, if proper and sufficient reasons are shown for the delay involved, the mitigating circumstances can very well be considered by the competent authority, who can waive the penalty (wherever penalty can be legally imposed) or reduce it to an appropriate extent. This is the mandate of section 273B. Once the burden is discharged by the person or assessee as to the existence of good and sufficient reason for not complying with the stipulation under section271C, it is for the authorities to consider with proper application of mind, whether the penalty is to be waived or reduced, based on the facts and circumstances. Section 271C of the Income-tax Act is quite categorical. Its scope and extent of application is discernible from the provision itself, in unambiguous terms.

Circular No. 551 dt. 23-01-1990 (1990) 183 ITR 7 (St)deals with the circumstances under which section 271C was introduced in the statute book, for levy of penalty. On deduction of tax, if there is delay in remitting the amount to the Revenue, it has to be satisfied with interest as payable under section 201(1A) of the Act, besides the liability to face the prosecution proceedings, if launched in appropriate cases, in terms of section 276B of the Act. This alone has been sought to be explained in the Circular issued by the CBDT. Even according to the CBDT, no penalty is envisaged under section 271C of the Act for non-payment of the tax deducted at source. Court  also  observed that, it is settled law that if the interpretation  of a fiscal enactment is in doubt, the construction most beneficial to the subject or assessee should be adopted, even if it results in obtaining an advantages  to the subject or assessee.

Note : U. S. Technologies International Pvt. Ltd. v. CIT (2010) KHC 6118;   and Classic Concepts Home India Pvt. Ltd. v. CIT ( 2016) 383 ITR 626 (Ker) (HC) is  overruled.