The Chhattisgarh High Court, in Collector Mining, Kanker (Deputy Director Mineral Administration) v. Deputy Commissioner of Income Tax (TDS), Raipur (Tax Case No. 111 of 2025), examined whether the provisions of Section 206C(1C) of the Income-tax Act, 1961, mandate collection of tax at source on compounding fee/fine recovered from persons engaged in illegal mining or illegal transportation/storage of minerals without holding any mining lease, licence, or contractual right.

A TDS survey under Section 133A(2A) was conducted in the office of the Mining Department, Government of Chhattisgarh, during which the Revenue alleged failure on the part of the appellant to collect TCS on compounding fees recovered from offenders involved in illegal mining activities. Orders were passed treating the appellant as an assessee-in-default under Sections 206C(1C), 206C(6) and 206C(7), which were upheld by the CIT(A) and the ITAT.

Before the High Court, the core contention of the appellant was that Section 206C(1C) applies only where a lease, licence, contract, or transfer of any right or interest in a mine or quarry exists, resulting in payment of royalty, and that offenders involved in illegal mining do not fall within the statutory description of “licensee or lessee”. It was further contended that compounding fee is a penal charge levied 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 is distinct from royalty.

The High Court undertook a detailed examination of Section 206C(1C) of the Income-tax Act, Section 9 and Section 23A of the MMDR Act, and Rule 71 of the 2015 Rules. Applying the settled principles of strict interpretation of fiscal statutes, as laid down in Cape Brandy Syndicate v. IRC, CST v. Modi Sugar Mills Ltd., CIT v. Calcutta Knitwears, and CIT v. Vatika Township (P.) Ltd., the Court held that tax liability cannot be extended by implication or equity.

The Court held that Section 206C(1C) obliges collection of TCS only from persons to whom a lawful right or interest in a mine or quarry has been granted and who are liable to pay royalty. Persons engaged in illegal mining neither hold a lease nor a licence nor derive any contractual right from the State, and compounding fee/fine paid by them is a penal exaction to avoid prosecution. The Court further held that “royalty” and “compounding fee/fine” are conceptually and legally distinct and mutually exclusive.

It was accordingly held that there is no legislative mandate to collect TCS on compounding fee/fine recovered under Section 23A of the MMDR Act read with Rule 71(5) of the 2015 Rules. The High Court set aside the order of the ITAT, answered the substantial question of law in favour of the assessee, and held that the appellant could not be treated as an assessee-in-default for non-collection of TCS on such compounding amounts.
The tax appeal was allowed.

Source- https://www.mytaxexpert.co.in/uploads/1768382497_CollectorMiningKankerv.DeputyCommissionerofIncometax.pdf

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