Compounding Fee for Illegal Mining and Transportation Not Liable to TCS: Supreme Court Upholds HC Ruling [Read Order]

The Supreme Court recently dismissed a challenge raised by the Income Tax Department, and upheld a Chhattisgarh High Court ruling that compounding fees collected from persons involved in illegal mining and transportation of minerals are not liable to Tax Collected at Source (TCS).

The Chhattisgarh High Court delivered a common ruling for numerous cases, with the facts on the case instituted by the Revenue against the respondent District Mining Officer Dantewada Mining Office taken up as the base for the common order.

A TDS survey was conducted under Section 133A(2A) of the Income Tax Act at the office of the respondent District Mining Officer Dantewada Mining Office in Chhattisgarh. During the survey, the Income Tax authorities alleged that the Mining Department had failed to collect TCS on the amount of compounding fees recovered from persons engaged in illegal mining or transportation of minerals.

The assessing authority accordingly regarded the Mining Officer as an “assessee in default” under Sections 206C(1C), 206C(6), and 206C(7) of the Income Tax Act, 1961 and raised tax demand with interest and penalty.

Following unsuccessful attempts before the CIT(A) and ITAT, the State authorities approached the Chhattisgarh High Court, contending that the obligation to collect TCS under Section 206C(1C) arises only when a person grants a lease, licence, or contract or otherwise transfers rights in respect of a mine or quarry to another person.

The present case constituted an illegal activity of mining and transportation, and the offenders did not hold a mining lease nor a licence nor did they enter into any contractual arrangement with the State Government to conduct such activity.

Thus the State submitted that the amount recovered from such offenders is not royalty but a compounding fee imposed under Section 23A of the Mines and Minerals (Development and Regulation) Act, 1957 read with Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015, to settle offences relating to illegal mining or transportation.

Justice Sanjay K. Agrawal and Justice Deepak Kumar Tiwari noted that Section 206C(1C) obliges collection of TCS only from leaseholders, licensees, or persons to whom rights in mines or quarries are transferred and who pay royalty to the State Government.

The High Court held that the offenders engaged in illegal mining or transportation do not fall within this category and thus the compounding fee paid by them cannot be equated with royalty, and set aside the orders of the Income Tax authorities and the orders passed by the ITAT.

The present SLP before the Apex Court was filed by the Revenue. The Bench of Justice Dipankar Datta and Justice Satish Chandra Sharma declined to interfere with the ruling of the High Court and dismissed the Special Leave Petition, thus affirming that compounding fees recovered from persons involved in illegal mining and transportation of minerals are not subject to TCS under Section 206C(1C) of the Income Tax Act.

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