Mere opening, breaking or uncorking of liquor bottle by twisting seal not amounts to “Scrap” from “Mechanical Working of Material” u/s 206C of Income Tax Act: Madras HC [Read Order]

In a recent decision the Madras High Court observed that mere opening, breaking or uncorking of liquor bottle by twisting seal not amounts to “scrap” from “mechanical working of material” under Section 206C of the Income Tax Act, 1961.

By the impugned orders dated 30.05.2023, the respondent has treated the petitioner as an “assessee in default” for failure to collect tax at source under Section 206C of the Income Tax Act, 1961 and has thus demanded tax for the aforesaid period in dispute together with interest under Section 206C(7) of the Income Tax Act, 1961. The tax has also been imposed under Section 206CC and Section 206CCA of the Income Tax Act, 1961 and further interest under Section 206C(7) of the Income Tax Act, 1961.

The impugned orders have held that the petitioner, TASMAC, ought to have collected “Tax Collected at Source” (TCS) u/s 206C(1) of the Income Tax Act, 1961 on the amounts tendered by the successful bar licensee, inter alia, towards tax from sale of empty bottles by treating the sale of bottles as scrap.

Section 206C seeks to prevent evasion of taxes and therefore shifts the burden to pay tax on the seller. Section 206C was enacted in the year 1988 to ensure collection of taxes from persons carrying on particular trades in view of peculiar difficulties experienced by the Revenue in the past in collecting taxes from the buyer. It therefore needs to be construed strictly to achieve the purpose for which it was inserted in the year 1988 in the Income Tax Act, 1961.

A Single Bench of Justice C Saravanan observed that “Mere opening, breaking or uncorking of a liquor bottle by mere twisting the seal in a liquor bottle will not amount to generation of “scrap” from “mechanical working of material” for the purpose of explanation to Section 206C of the Income Tax Act.”

There is neither a “manufacture” nor a generation of “scrap” from “mechanical working of materials”, the liability under Section 206C of the Income Tax Act, 1961 is not attracted. Suffice to state that the petitioner is neither the owner of the bottle nor generates scrap as is contemplated under the Income Tax Act, 1961. The activity of opening and uncorking is not a “mechanical working of material” the Court concluded.

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