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2025 (6) TMI 2041 - HC - Income TaxTCS u/s 206C - compounding fees received from illegal miners/transporters of minerals - Scope of Mines and Minerals (Development and Regulation) Act 1957/ the MMDR Act - offenders who do illegal mining or transportation/storage without having lease or license or have not entered into the contract for transfer of right in Mines or Quarry and from whom Compounding Fine is collected as per provisions under Rule 71(5) of the Chhattisgarh Minor Mineral Rules 2015 - HELD THAT - Tax at the rate of 2% has to be collected by the assessee from the lease holder or license holder or with whom the assessee has entered into contract or otherwise transferred any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry on the amount of payment made by them to the appellant herein. The person must be lease holder or license holder or with whom the assessee has entered into contract or otherwise transferred any right or interest in the mines or fields meaning thereby the person from whom the TCS is collectable must be the person to whom the lease or license or otherwise any express contract right or interest has been transferred by the assessee to any mine or quarry and royalty is payable by them to the State Government through the District Mining Officer. In the instant case mining lease must be granted in terms of Section 9 of the MMDR Act. 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. 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 u/s 206C(1C) cannot be extended to the person involved in illegal mining or transporting illegal minerals. Section 206C(1C) of the IT Act specifically obliges to collect tax by the assessee from the lease holder or license holder or with whom the assessee has entered into contract or otherwise transferred any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry. Similarly 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. 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 under Section 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 under Section 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. Impugned judgment order passed by the ITAT making demand and levying interest penalty for non-compliance of Section 206C(1C) of the IT Act cannot be sustained and accordingly it is set aside. The substantial question of law is answered in favour of the assessee and against the Revenue.
1. ISSUES PRESENTED and CONSIDERED
The core legal question considered in this batch of connected tax appeals is whether the provisions of Section 206C(1C) of the Income Tax Act, 1961 (IT Act) are applicable for collecting Tax Collected at Source (TCS) from offenders engaged in illegal mining or transportation/storage of minerals without holding a lease or license, or without having entered into any contract for transfer of rights in mines or quarries, and from whom compounding fines are collected under Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015. 2. ISSUE-WISE DETAILED ANALYSIS Issue: Applicability of Section 206C(1C) of the IT Act for collection of TCS on compounding fees/fines recovered from illegal miners or transporters who do not hold leases or licenses or contracts for transfer of rights in mines or quarries. Relevant Legal Framework and Precedents: - Section 206C(1C) of the IT Act mandates collection of TCS at 2% on amounts payable by licensees or lessees or persons with whom a contract or transfer of right or interest in parking lots, toll plazas, mines, or quarries has been entered into. - Section 9 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act) governs payment of royalty by holders of mining leases. - Section 23A of the MMDR Act provides for compounding of offences punishable under the Act or rules, allowing payment of specified sums to compound offences and thereby precluding further prosecution. - Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015 authorizes the compounding of offences related to unauthorized extraction and transportation of minerals on payment of market value plus fines, with minimum thresholds related to royalty multiples. - Judicial precedents emphasize strict and literal construction of fiscal statutes, including taxing statutes, as laid down in decisions such as 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 analyzed the language of Section 206C(1C) and observed that the obligation to collect TCS is expressly cast upon a person who grants a lease or license or enters into a contract or otherwise transfers any right or interest in whole or in part in a mine or quarry to another person, who is thereby a licensee or lessee. The person from whom TCS is to be collected must be a lease holder or license holder or a party to a contract transferring rights or interests in mines or quarries. Illegal miners or transporters, who operate without any lease, license, or contract, do not fall within the scope of Section 206C(1C). The compounding fees/fines collected under Section 23A of the MMDR Act read with Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015, are distinct from royalty payments and represent penalties for offences rather than payments for rights or interests in mines. The Court further emphasized that compounding of offences under Section 23A(1) results in the cessation of prosecution and further proceedings, akin to an acquittal, as supported by analogous provisions in Section 320 of the Code of Criminal Procedure, 1973. Thus, compounding fees/fines cannot be subjected to TCS under Section 206C(1C) since there is no legislative mandate to that effect. Applying the principle of strict construction of taxing statutes, the Court held that no presumption or implication can extend the scope of Section 206C(1C) beyond its clear language. The terms "royalty" and "compounding fee/fine" are mutually exclusive and should not be conflated. Key Evidence and Findings: - The factual matrix established that the appellants did not have leases, licenses, or contracts with the illegal miners or transporters; hence, no contractual or statutory right or interest was transferred to such persons. - The amounts collected were compounding fines under the MMDR Act and Rules, not royalty or payments for rights. - The ITAT had relied on the definition of "royalty" under Section 2(47) of the IT Act to hold that compounding fees attract TCS under Section 206C(1C), a view rejected by the Court. Application of Law to Facts: The Court applied the statutory provisions and judicial principles to conclude that Section 206C(1C) does not apply to compounding fees collected from illegal miners or transporters who are not lease or license holders or parties to contracts transferring rights or interests in mines or quarries. Consequently, the demand of TCS, interest, and penalty on such compounding fees was held to be without legislative backing and unsustainable. Treatment of Competing Arguments: The appellant argued that the TCS provisions apply only to lease or license holders or contractual transferees and not to illegal miners, and that compounding fees are distinct from royalty and not taxable under Section 206C(1C). The Revenue contended that Section 206C(1C) imposes TCS obligations even on illegal miners or transporters, regardless of lease or license status, relying on a broad interpretation including transfer of any right or interest. The Court rejected the Revenue's expansive interpretation, underscoring the necessity of strict and literal interpretation of taxing statutes and the absence of any express legislative mandate to impose TCS on compounding fees collected from illegal mining offenders. 3. SIGNIFICANT HOLDINGS "Section 206C(1C) of the Income Tax 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 to be 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." "The impugned judgment & order passed by the ITAT making demand and levying interest & penalty for non-compliance of Section 206C(1C) of the IT Act cannot be sustained and accordingly, it is set aside." The Court answered the substantial question of law in favour of the assessee and against the Revenue, setting aside the orders demanding TCS, interest, and penalty on compounding fees collected from illegal mining offenders who do not hold leases, licenses, or contracts transferring rights or interests in mines or quarries.
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