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In order to get-away from penalties it is desirable for an assessee to prove a reasonable cause of any failure to discharge the statutory obligation. In the case of Woodward Governors India (P.) Ltd. v. CIT (2001) 118TAX433 penalty proceedings were initiated for failure to deduct tax on payments to an expatriate. The assessee, the Indian Company made the following two perfect arguments and claimed: –

a) that since the non-resident company made the payment of remuneration therefore it was prevented by sufficient cause to deduct tax; &
b) that the deeming provisions in section 9(1) (ii) cannot be extended to have any nexus with an obligation to deduct tax u/s 192.

Upholding in favour of the assessee the Delhi High Court held that levy of penalty is not automatic. In explaining the meaning of the word ‘reasonable’ it held that:

“ ‘Reasonable cause’ as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. It can be described as a probable cause. It means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which, assuming them to be true, would reasonably lead any ordinary prudent and cautious man, placed in the position of the person concerned, to come to the conclusion that the same was the right thing to do. The cause shown has to be considered and only if it is found to be frivolous, without substance or foundation, the prescribed consequences will follow.”

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