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2025 (6) TMI 2019 - HC - Income TaxTCS u/s 206C(1C) - compounding fees/fine that was recovered from illegal miners and transporters of minerals - Section 320 of the Code of Criminal Procedure 1973 - Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) - scope of terms royalty and compounding fee HELD THAT - By virtue of Section 9(1) of the MMDR Act the holder of a mining lease is obliged to pay royalty in respect of any mineral removed or consumed by him or by his agent manager employee contractor or sub-lessee from the leased area at the rate for the time being specified in the Second Schedule in respect of that mineral and the Central Government is empowered to amend the Second Schedule so as to enhance or reduce the rate at which royalty shall be payable in respect of any mineral with effect from such date as may be specified in the notification. The State Government in exercise of the powers conferred by Section 15 of the MMDR Act has framed the rules known as the Chhattisgarh Minor Mineral Rules 2015 (for short the Rules of 2015 ) which shall apply to the grant and regulation of Quarry Leases and other mineral concessions in respect of Minor Minerals and for purposes connected therewith in the State of Chhattisgarh only. There is no legislative mandate to collect tax at source from the person who is involved in illegal mining or illegal transportation of minerals and similarly compounding fees/fine is collectable in terms of Section 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015 and the effect of compounding would be that on being compounded u/s 23A(1) no proceeding or further proceeding shall be taken and the offender if in custody shall be released forthwith. Similar provision has been laid down in Section 320 of the Code of Criminal Procedure 1973 which deals with compounding of offences and sub-section (8) of Section 320 clearly mandates that the compounding of an offence under Section 320 shall have the effect of an acquittal of the accused with whom the offence has been compounded. As such compounding fee/ fine cannot be subjected to proceeding under Section 206C(1C) of the IT Act as there is no legislative mandate to collect tax at source (TCS) on compounding fee/fine collected u/s 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015. As such by virtue of the provisions contained in Section 206C(1C) of the IT Act there is legislative command to collect TCS from the amount of royalty and simultaneously there is no legislative command to recover TCS from the amount of compounding fee/fine u/s 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015 as the royalty does not include the compounding fee/fine and the terms royalty and compounding fee both are mutually exclusive. Therefore the ITAT is completely unjustified in holding that compounding fee/fine (TCS) would be chargeable under Section 206C(1C) of the IT Act by relying upon the definition contained in Section 2(47) of the IT Act. Accordingly we are unable to uphold the judgment order passed by the ITAT relying on Section 2(47) of the IT Act. Decided in favour of assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal question considered by the Court is whether the provisions of Section 206C(1C) of the Income Tax Act, 1961 (IT Act) apply to the collection of Tax Collected at Source (TCS) from offenders engaged in illegal mining, transportation, or storage of minerals without holding a lease or license, or without entering into a contract for transfer of rights in mines or quarries, from whom compounding fines are collected under Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015. In essence, the issue is whether TCS under Section 206C(1C) is collectible on compounding fees/fines paid by illegal miners and transporters, who do not possess a lease, license, or contractual rights in the mining activity. 2. ISSUE-WISE DETAILED ANALYSIS Issue: Applicability of Section 206C(1C) of the IT Act for collection of TCS on compounding fees/fines paid by illegal miners or transporters who lack lease, license, or contractual rights. Relevant Legal Framework and Precedents: The Court examined Section 206C(1C) of the IT Act, which mandates TCS collection by any person who grants a lease, license, or enters into a contract or otherwise transfers any right or interest, wholly or partly, in parking lots, toll plazas, mines, or quarries. The tax rate specified is 2% on the amount payable by the licensee or lessee. Further, Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) governs the payment of royalty by holders of mining leases. Section 23A of the MMDR Act provides for compounding of offences related to illegal mining, allowing the authorized person to compound the offence on payment of a specified sum, which acts as a fine, thereby precluding further prosecution. Rule 71 of the Chhattisgarh Minor Mineral Rules, 2015, prescribes penalties for unauthorized extraction and transportation of minerals, including compounding of offences by payment of fines or market value of minerals extracted illegally. The Court also relied on established principles of strict construction of fiscal statutes, citing precedents that emphasize interpreting taxing statutes based solely on the clear language used, without implying or reading in provisions beyond the express words. Key precedents include Cape Brandy Syndicate v. IRC, CST v. Modi Sugar Mills Ltd., CIT v. Calcutta Knitwears, and CIT v. Vatika Township Pvt. Ltd. Court's Interpretation and Reasoning: The Court noted that Section 206C(1C) explicitly requires TCS collection only from persons who are lease holders, license holders, or those with whom the assessee has entered into a contract or otherwise transferred any right or interest in a mine or quarry. The person liable to pay TCS must be one who holds a legal right or interest in the mining activity, typically a lease or license holder, and who pays royalty to the State Government. Illegal miners or transporters, by definition, do not hold any lease, license, or contractual rights. They pay compounding fees/fines under Section 23A of the MMDR Act read with Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015, which are distinct from royalty payments. The compounding fee is a penalty to compound the offence and is not a payment for transfer of rights or interest in the mine or quarry. The Court emphasized that compounding under Section 23A(1) of the MMDR Act results in the offence being extinguished, with no further proceedings against the offender as per Section 23A(2). This is analogous to the effect of compounding under Section 320 of the Code of Criminal Procedure, which effectively amounts to acquittal. Therefore, compounding fees/fines cannot be equated with payments on which TCS is collectible under Section 206C(1C). Applying the doctrine of strict construction, the Court held that the taxing provision cannot be extended by implication to cover compounding fees paid by illegal miners or transporters. The terms "royalty" and "compounding fee" are mutually exclusive, and the legislative mandate for TCS collection applies only to royalty or payments related to legal rights in mines or quarries. Key Evidence and Findings: The factual matrix revealed that the appellant (assessee) failed to collect TCS on compounding fees recovered from illegal miners and transporters. The Income Tax Department treated the appellant as an assessee-in-default and demanded TCS, interest, and penalty under Section 206C(1C). The CIT (Appeals) and ITAT upheld this demand, which was challenged before the High Court. The Court scrutinized the statutory provisions, the nature of compounding fees under MMDR Act and Rules, and the absence of any lease, license, or contract with the illegal miners/transporters. The Court found no legislative provision mandating TCS collection on compounding fees. Application of Law to Facts: The Court applied the literal interpretation of Section 206C(1C), holding that it applies only to persons who have legal rights in mines or quarries, i.e., lease or license holders or contractual transferees. Since illegal miners or transporters lack such rights and pay compounding fines as penalties, they do not fall within the scope of Section 206C(1C). Therefore, the appellant was not liable to collect TCS on compounding fees/fines paid by illegal miners or transporters, and the demand for TCS, interest, and penalty was unsustainable. Treatment of Competing Arguments: The Revenue argued that Section 206C(1C) does not require the existence of a lease or license and applies to any person transferring rights or interests in mines or quarries, including illegal miners or transporters. The Revenue contended that the ITAT was justified in upholding the TCS demand. The Court rejected this argument, emphasizing the express language of the statute, the nature of compounding fees as penalties distinct from royalty, and the settled principle that taxing statutes must be strictly construed without implying obligations beyond the clear legislative mandate. Conclusions: The Court concluded that Section 206C(1C) of the IT Act does not apply to compounding fees/fines collected from illegal miners or transporters who do not hold leases, licenses, or contractual rights in mines or quarries. Consequently, the appellant was not liable to collect TCS on such compounding fees, and the demand raised by the Income Tax authorities was invalid. 3. SIGNIFICANT HOLDINGS "Section 206C(1C) of the IT Act only obliges the assessee to collect tax at source from the person to whom such right has been conferred and by whom royalty is payable to the State Government through the District Mining Officer and obligation to collect tax under Section 206C(1C) cannot be extended to the person involved in illegal mining or transporting illegal minerals." "There is no legislative mandate to collect tax at source from the person who is involved in illegal mining or illegal transportation of minerals and similarly, compounding fees/fine is collectable in terms of Section 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015 and the effect of compounding would be that on being compounded under Section 23A(1), no proceeding or further proceeding shall be taken and the offender, if in custody, shall be released forthwith." "Compounding fee/fine cannot be subjected to proceeding under Section 206C(1C) of the IT Act, as there is no legislative mandate to collect tax at source (TCS) on compounding fee/fine collected under Section 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015." "The terms 'royalty' and 'compounding fee', both, are mutually exclusive." "Fiscal statutes are strictly construed. Nothing is to be read in, nothing is to be implied; one can only look fairly at the language used and nothing more and nothing less." Final determination: The impugned orders of the ITAT and CIT (Appeals) upholding the demand of TCS, interest, and penalty under Section 206C(1C) on compounding fees/fines paid by illegal miners and transporters are set aside. The substantial question of law is answered in favour of the assessee and against the Revenue.
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