Compounding Fees for Illegal Mining Not Liable to TCS u/s 206C(1C): Supreme Court upholds Chattisgarh HC order [Read Order]

In a recent ruling, the Supreme Court of India dismissed the Special Leave Petition challenging the Chhattisgarh High Court’s decision that upheld the applicability of Section206C(1C) of the Income Tax Act, 1961, to compounding fees collected from illegal mining offenders.

The case stemmed from a batch of 28 tax appeals filed by various District Mining Officers and Deputy Directors of Mineral Administration across Chhattisgarh, contesting the Income Tax Appellate Tribunal’s (ITAT) affirmation of TCS liability on compounding fines levied under Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015.

The controversy began with a TDS survey conducted on 24 September 2018 at the Bemetara Mining Office, where the Income Tax Department flagged non-collection of TCS on compounding fees from illegal miners and transporters. The department treated the mining officers as “assessees-in-default” under Sections 206C(1C), 206C(6), and 206C(7), triggering appeals that eventually reached the High Court.

Appearing for the petitioner, Government Advocate Rahul Tamaskar argued that Section 206C(1C) applies only to lease or license holders or those with contractual rights in mines or quarries—not to offenders who pay compounding fines to avoid prosecution. He contended that such payments are penal in nature and not royalty or consideration for the transfer of rights.

On the other hand, the Revenue, represented by Amit Chaudhari, maintained that the provision’s scope includes any transfer of rights or interests, even if partial or unauthorized, and that compounding fees reflect economic activity warranting TCS collection.

The Chhattisgarh High Court rejected the State’s argument, holding that the statutory language of Section 206C(1C) encompasses transfers of rights “otherwise” and does not exclude illegal transactions. The Court emphasized that the compounding mechanism under Section 23A of the MMDR Act and Rule 71(5) of the 2015 Rules results in a form of economic benefit derived from mining activity, thereby attracting TCS.

After considering the matter, the Supreme Court, led by Justices Dipankar Datta and Satish Chandra Sharma, declined to interfere with the High Court’s reasoning and dismissed the SLP on 6 April 2026, sealing the interpretation that compounding fees from illegal mining are subject to tax collection at source.

The bench observed that “we are not inclined to interfere with the impugned judgment and order of the High Court; hence, the special leave petition is dismissed.”

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