If you do manual save for C drive, do you see the same.  If yes, run it again from client, but this time with debug option and you should see what is going on.

When we add vss*=off in save operation of client configuration then getting backed up properly but VSS system backup failing.

Did you try debug mode from client?

Does the C:\ drive have any data on it, is this a full or incremental backup; do you have any skip directives applied?