TCS u/s 206C(1C) Not Applicable on Compounding Fees from Illegal Miners: Chhattisgarh HC Quashes ITAT Order against Mining Dept [Read Order]

The Chhattisgarh High Court has held that Tax Collected at Source ( TCS ) under Section 206C(1C) of the Income Tax Act, 1961 cannot be levied on compounding fees collected from illegal miners, setting aside the Income Tax Appellate Tribunal’s ( ITAT ) order against the State Mining Department.

The Division Bench of Justice Rajani Dubey and Justice Amitendra Kishore Prasad clarified that TCS applies only to payments made by lawful leaseholders or license holders engaged in mining operations, and not to offenders who commit illegal extraction or transportation of minerals and subsequently pay compounding fees under the MMDR Act and Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015.

The facts of the case is that, a TDS survey was conducted in 2018 in the department of mining, where the Income Tax Department alleged that the Department had failed to collect TCS on compounding amounts paid by individuals engaged in unauthorized mining.

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The Department treated the Mining Officer as an “assessee in default” and imposed tax, interest, and penalty. Both the CIT(A) and ITAT upheld this view, prompting the State to file an appeal under Section 260A.

The High Court rejected the Revenue’s contention that TCS obligations extend to offenders involved in illegal mining. It was stated that Section 206C(1C) requires TCS only from persons who have been granted a lease, license, or contractual right to operate a mine or quarry.

Compounding fees paid by illegal miners do not arise from any transfer of rights or lawful mining activity, rather, they are penal in nature, intended solely to settle criminal liability under Section 23A of the MMDR Act.

The bench observed that royalty and compounding fees are “mutually exclusive” and cannot be mixed to artificially expand the scope of Section 206C(1C). The payment of compounding fees results in the closure of criminal proceedings and cannot be treated as consideration for mining rights.

Therefore, no legislative mandate exists to collect TCS on such penal payments, and the ITAT’s approach of treating compounding fee as a taxable receipt under Section 206C(1C) was held to be legally unsustainable.

It was noted that “As such, compounding fee/fine cannot be subjected to proceeding under Section 206C(10) 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.”

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“ITAT is completely unjustified in holding that compounding fee/fine (TCS) would be chargeable under Section 206C(IC) 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” ruled the court.

Accordingly, the High Court quashed the ITAT’s order dated 21 July 2023, set aside the disputed TCS demand, interest, and penalty, and allowed the appeals filed by the Deputy Director (Geology and Mining).

SECTION 206C(1C)

Section 206C(1C) reads that “Every person, who grants a lease or a licence or enters into a contract or otherwise transfers any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry, to another person, other than a public sector company (hereinafter in this section referred to as the ‘licensee or lessee’) for the use of such parking lot or toll plaza or mine or quarry for the purposes of business shall, at the time of debiting of the amount payable by the licensee or lessee to the account of the licensee or lessee or at the time of receipt of such amount from the licensee or lessee in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the licensee or lessee of any such licence, contract or lease of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax.”

Explanation 1: “For the purposes of this sub-section, ‘mining and quarrying’ shall not include mining and quarrying of mineral oil.”

Explanation 2.: “For the purposes of Explanation 1, ‘mineral oil’ includes petroleum and natural gas.”

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