Compounding Fee Recovered from Illegal Miners without Lease or Licence Not Liable for TCS u/s 206: SC upholds Chhattisgarh HC Decision [Read Order]

The Supreme Court has dismissed the Special Leave Petition (SLP) filed by the Revenue against the judgment of the Chhattisgarh High Court which held that TaxCollected at Source (TCS) under Section 206C(1C) of the Income Tax Act, 1961 cannot be levied on compounding fees or fines recovered from persons engaged in illegal mining without any lease, licence or contractual rights.

The dispute arose after the Income Tax Department conducted a TDS survey under Section 133A(2A) at various District Mining Offices in Chhattisgarh. The Department alleged that the mining authorities failed to collect TCS on compounding fees recovered from persons involved in illegal mining and transportation of minerals.

Consequently, the authorities were treated as assessee in default under Sections 206C(6) and 206C(7) of the Income Tax Act.The Revenue argued that Section 206C(1C) applies even in cases involving illegal mining activities contending that any transfer or use connected with mines or quarries would attract TCS liability.

Further it was stated that compounding charges collected from offenders should also fall within the ambit of the provision.

On the other hand, the State authorities contended that persons involved in illegal mining are neither leaseholders nor licensees and have no contractual or legal rights over the mines or quarries. They argued that the amount collected was merely 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 and not royalty.

The Chhattisgarh High Court accepted the assessee’s contention and held that Section 206C(1C) specifically applies only to leaseholders, licensees or persons to whom mining rights or interests are lawfully transferred. The Court observed that compounding fees recovered from illegal miners are penal in nature and cannot be equated with royalty payments.

Relying on settled principles of strict interpretation of taxing statutes the High Court held that there was no legislative mandate to levy TCS on compounding fines.

The Division Bench comprising Justice Dipankar Datta and Justice Satish Chandra Sharma dismissed the Revenue’s SLP and upheld the relief granted to the mining authorities.

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