The Deputy Director vs The Deputy Commissioner Of Income Tax ...
2026 Latest Caselaw 73 Chatt

Chattisgarh High Court

The Deputy Director vs The Deputy Commissioner Of Income Tax ... on 26 February, 2026

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                                                           2026:CGHC:9993-DB
Digitally
signed                                                                 NAFR
by
SHAYNA
KADRI

                     HIGH COURT OF CHHATTISGARH AT BILASPUR

                                   TAXC No. 189 of 2025

            1 - The Deputy Director (Geology And Mining) 1st Floor, Collectorate
            Parisar, Kutcheri Chowk, Raipur, C.G. 492001

                                                                   --- Appellant

                                          versus

            1 - The Deputy Commissioner Of Income Tax (Tds) Raipur, C.G.

                                                              --- Respondent(s)

TAXC No. 203 of 2025

1 - The Deputy Director (Geology And Mining) 1st Floor, Collectorate Parisar, Kutcheri Chowk, Raipur Chhattisgarh 492001

---Appellant

Versus

1 - The Deputy Commissioner Of Income Tax (Tds) Raipur Chhattisgarh

--- Respondent(s)

1 - The Deputy Director (Geology And Mining) 1st Floor, Collectorate Parisar Kutcheri Chowk, Raipur (C.G.) 492001

--- Appellant

Versus

1 - The Deputy Commissioner Of Income Tax (Tds) Raipur (C.G.)

--- Respondent(s)

1 - The Deputy Director (Geology And Mining) 1st Floor, Collectorate Parisar Kutcheri, Chowk Raipur (C.G.) 492001

---Appellant

Versus

1 - The Deputy Commissioner Of Income Tax (Tds) Raipur (C.G.)

--- Respondent(s)

1 - The Deputy Director (Geology And Mining) 1st Floor, Collectorate Parisar, Kutcheri Chowk, Raipur (C.G.) 492001

---Appellant

Versus

1 - The Deputy Commissioner Of Income Tax (Tds) Raipur (C.G.)

--- Respondent(s)

1 - The Deputy Director (Geology And Mining) 1st Floor, Collectorate Parisar, Kutcheri Chowk, Raipur, C.G. 492001

---Appellant

Versus

1 - The Deputy Commissioner Of Income Tax (Tds) Raipur, C.G.

--- Respondent(s)

(Cause-title is taken from Case Information System)

For Appellant : Mr. D. R. Minj, Dy. Advocate General

For Respondent : Mr. Amit Chaudhari, Advocate along with Mr. Vijay Chawla, Advocate

(Division Bench)

(Hon'ble Shri Justice Sanjay S. Agrawal Hon'ble Shri Justice Amitendra Kishore Prasad)

Order On Board

26.02.2026

Per; Amitendra Kishore Prasad, Judge

1. Since identical questions of fact and law arise for consideration in

all these tax cases and the substantial questions of law framed

therein are common, all the matters were clubbed together, heard

analogously with the consent of learned counsel appearing for the

respective parties, and are being disposed of by this common

judgment in order to maintain consistency and avoid conflicting

findings.

2. At the outset, it is noticed that all these appeals were filed beyond

the prescribed period of limitation. In certain cases, separate

interlocutory applications have been filed seeking condonation of

delay, which in all matters is of 667 days. Upon due consideration

of the averments made in the applications and the reasons

assigned for the delay, and being satisfied that sufficient cause

has been shown preventing the appellants from preferring the

appeals within time, the delay of 667 days in filing these appeals

is hereby condoned. The interlocutory applications stand allowed

accordingly.

3. In view of the identical nature of the controversy, Tax Case No.

189 of 2025 is treated as the lead case, and the facts are being

referred to therefrom for the sake of convenience.

4. These appeals under Section 260A of the Income Tax Act, 1961

are directed against the common order dated 21.07.2023 passed

by the Income Tax Appellate Tribunal, Raipur Bench, Raipur, in

learned Tribunal, while partly allowing the appeals of the

assessee on certain aspects, upheld the action of the Department

in treating the assessee as an "assessee in default" under

Sections 206C(1C), 206C(6) and 206C(7) of the Income Tax Act,

1961 in respect of compounding fees received from persons

involved in illegal mining and transportation of minor minerals.

5. The factual matrix reveals that a survey under Section 133A(2A)

of the Income Tax Act, 1961 was conducted on 24.09.2018 at the

office of the Deputy Director (Geology & Mining), situated at the

1st Floor, Collectorate Parisar, Kutcheri Chowk, Raipur

(Chhattisgarh). In furtherance of the said proceedings, a summon

was also issued on 17.01.2018 calling upon the concerned

authority to produce relevant documents, books of accounts, and

other records for verification. During the course of survey and

subsequent proceedings, the department initiated verification of

statutory records, registers, TDS/TCS-related documents, TDS

returns, and details of expenditures liable to deduction or

collection of tax for the financial years 2010-11 to 2018-19. It is

the case of the department that show cause notices dated

16.06.2018 and 17.07.2018 were issued requiring the assessee to

furnish necessary evidence and explanations before passing any

adverse or ex-parte order. In response, the assessee submitted

written explanations on 02.05.2019 and 16.05.2019 along with

supporting documents. Upon examination of the material

produced, the department observed that the Mining Office, acting

through its Principal Officer, had allegedly failed to collect and

deposit Tax Collected at Source (TCS) on amounts received on

account of illegal mining and transportation. It was further alleged

that complete and accurate particulars were not furnished in the

TCS returns filed for the relevant assessment years. The

assessee, being the Principal Officer and Mining Officer,

Bemetara, regularly filed quarterly TCS returns in Form No. 27EQ

in accordance with the prescribed procedure under the Income

Tax Act, 1961, and maintained books of account and statutory

records as required under the Mining laws, in consonance with

Section 44AA of the Income Tax Act. However, upon verification of

records for the financial years 2011-12 to 2018-19, the

department concluded that the Mining Office had not collected

TCS on amounts payable on account of illegal mining and

transportation activities. According to the department, such failure

constituted a violation of the provisions of Section 206C(1C) as

well as sub-sections (6) and (7) of the Act. Consequently, a notice

under Section 206C(1C) read with sub-sections (6) and (7) of the

Income Tax Act, 1961 was issued and served for the assessment

years 2011-12 to 2019-20, culminating in an order dated

30.11.2018 passed by the Deputy Commissioner of Income Tax

(TDS), Raipur. Aggrieved by the said order, the assessee

preferred an appeal before the Commissioner of Income Tax

(Appeals). The Commissioner of Income Tax (Appeals), however,

dismissed the appeal vide order dated 06.09.2022. Being

dissatisfied with the appellate order, the assessee carried the

matter further in appeal before the Income Tax Appellate Tribunal.

The learned Tribunal, by its common order dated 21.07.2023

passed in as many as 38 appeals involving similar issues, partly

allowed the appeals of the assessee. The Tribunal identified three

principal issues common to all the cases, namely, whether TCS

under Section 206C was required to be collected on (i)

compounding fees received by the District Mining Officer from

offenders involved in illegal mining and transportation, and (ii)

contributions made by leaseholders towards the District Mineral

Foundation (DMF) and the National Mineral Exploration Trust

(NMET). In its findings, the Tribunal dismissed the first ground of

the assessee and held that the compounding fees collected by the

District Mining Officer in cases of illegal mining and transportation

were in the nature of royalty and, therefore, attracted the

provisions of Section 206C(1C) of the Act. However, with regard

to the issue of TCS on contributions received towards DMF and

NMET, the Tribunal decided the matter in favour of the assessee

subject to certain conditions and remanded the issue to the

Deputy Commissioner of Income Tax for verification, particularly

to examine whether such contributions were in fact received by

the District Mining Office in the case of Bemetara and similarly

placed offices. The controversy in the present case is also

intertwined with the statutory framework governing mining

activities. Section 4 of the Mines and Minerals (Development and

Regulation) Act, 1957 prohibits any person from undertaking

reconnaissance, prospecting, or mining operations except under

and in accordance with a valid licence or lease granted under the

Act and the rules framed thereunder. Further, Rule 71(5) of the

Chhattisgarh Minor Mineral Rules, 2015 provides for penalty and

compounding of offences in cases of unauthorized extraction,

transportation, or storage of minerals. The said rule authorizes the

competent authority to compound such offences upon payment of

the market value of the mineral and a prescribed fine, which may

extend to double the market value, subject to a minimum

threshold. It is in the context of such statutory compounding

provisions that the department treated the compounding fees as

akin to royalty and consequently subjected them to TCS under

Section 206C(1C) of the Income Tax Act, 1961. Thus, the dispute

essentially revolves around the characterization of amounts

received by the Mining Department in cases of illegal mining and

transportation, and whether such receipts attract the obligation to

collect TCS under Section 206C(1C) read with sub-sections (6)

and (7) of the Income Tax Act, 1961, along with the consequential

liabilities arising therefrom.

6. Learned counsel for the appellant assailed the order dated

21.07.2023 passed by the Income Tax Appellate Tribunal as being

wholly unsustainable in law and contrary to the facts and

circumstances of the case. It was contended that the impugned

order suffers from perversity, misinterpretation of statutory

provisions, and erroneous appreciation of the nature of receipts in

question. According to the learned counsel, the Tribunal failed to

correctly construe the scope and applicability of Section 206C(1C)

of the Income Tax Act, 1961, and wrongly equated compounding

fees with royalty. It was emphatically submitted that the appellant

has neither granted any lease nor issued any licence, nor entered

into any contract, nor otherwise transferred any right or interest in

a mine or quarry to persons engaged in illegal mining, illegal

transportation, or illegal storage of minerals. The very foundation

for invoking Section 206C(1C) is the existence of a lease, licence,

contract, or transfer of rights in respect of a mine or quarry. In the

present case, the offenders from whom compounding fees were

received were neither licensees nor lessees, and no legal

relationship of grant or transfer ever came into existence between

the appellant and such offenders. Therefore, the essential pre-

condition for collection of TCS under Section 206C(1C) was

completely absent. Learned counsel further argued that the

Tribunal failed to appreciate that the provisions of Section

206C(1C) do not apply in cases of illegal mining or illegal

transportation where penalty or compounding fees are recovered.

In cases of illegal extraction or transportation, no account is

maintained in the name of the offender as a lessee or licensee,

nor is any amount debited as payable by such offender towards

any lease or contractual obligation. The compounding fee is not

an amount arising out of any contractual or commercial

arrangement, but is a penal levy imposed upon detection of an

offence. It was further submitted that the appellant does not

collect royalty from illegal miners or transporters. Royalty is

collected only from lawful lessees or licensees operating under

valid mining leases granted in accordance with statutory

provisions. In contrast, compounding fees are levied strictly under

Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015 and

Section 21 of the Mines and Minerals (Development and

Regulation) Act, 1957, as a consequence of an offence. These

provisions deal with penal consequences for unauthorized

extraction, transportation, or storage of minerals, and provide a

mechanism for compounding such offences upon payment of

prescribed amounts. Such payment does not validate or

regularize the illegal act, nor does it create any legal right in

favour of the offender. Learned counsel elaborated upon the

procedure followed in cases of illegal mining. Upon detection of

an offence, a panchnama is prepared in respect of the seized

vehicle, equipment, and mineral. The seized property is kept in

custody of the concerned police station. An inspection report is

prepared detailing the nature of the offence, date, name of the

offender, vehicle number, and other relevant particulars.

Statements of the driver, transporter, and other concerned

persons are recorded, and a seizure memo is prepared.

Thereafter, if the offender submits an application for

compounding, the compounding fee is calculated in accordance

with Rule 71(5). Upon payment of the prescribed compounding

amount, the offence is compounded and instructions are issued to

release the seized vehicle and mineral. This entire process, it was

argued, clearly demonstrates that the payment is penal in nature

and not consideration for any transfer of rights. It was further

contended that Section 206C(1C) specifically mandates collection

of TCS by a person who grants a lease or licence or enters into a

contract or otherwise transfers any right or interest in a mine or

quarry. The definition of "lessee" under Clause 2(1)(x) of the

Chhattisgarh Minor Mineral Rules, 2015 makes it clear that a

lessee is a person granted a prospecting licence, mining lease,

quarry lease, or permit under the Rules. An offender engaged in

illegal mining without any lease or licence does not fall within this

definition. Therefore, placing such offenders at par with lawful

lessees for the purpose of TCS is legally untenable.

7. Learned counsel also submitted that the Tribunal erred in relying

upon the definition of "transfer" under Section 2(47) of the Income

Tax Act, which pertains to transfer of capital assets for the

purpose of charging capital gains. The said definition, it was

argued, has no application to the facts of the present case, which

concern penal compounding of offences. The Tribunal wrongly

expanded the scope of "transfer" to treat receipt of compounding

fees as a transfer of right or interest in a mine or quarry, even

though no such right was ever granted or recognized in favour of

the offender. It was further submitted that the Tribunal was

misguided in relying upon the methodology for computation of

compounding fees under Rule 71(5), which refers to market value

of illegally extracted minerals and multiples of royalty. The mere

fact that royalty forms one of the components in determining the

quantum of compounding fine does not convert the compounding

fee into royalty. The reference to "ten times of royalty" or "double

the market value" is only a measure or yardstick for calculating

penalty. The nature of the levy remains penal and cannot be

equated with royalty payable under a lawful mining lease.

Learned counsel also pointed out that Rule 71(1) provides for

punishment including imprisonment up to one year or fine up to

Rs. 25,000/- for illegal mining. Compounding is merely a statutory

concession granted to offenders to avoid criminal prosecution.

The voluntary payment of compounding fees to escape criminal

proceedings cannot be construed as payment of consideration for

transfer of mining rights. Therefore, treating compounding fees as

royalty and subjecting them to TCS under Section 206C(1C) is

legally erroneous. On the aforesaid grounds, learned counsel

submitted that substantial questions of law arise for consideration,

including whether compounding fees under Rule 71(5) can be

equated with royalty; whether Section 206C(1C) applies to

offenders who have neither lease nor licence; whether receipt of

compounding fees amounts to transfer of right or interest in a

mine or quarry; and whether the Tribunal was justified in invoking

the definition of "transfer" under Section 2(47) in the present

context. It was thus prayed that the impugned order dated

21.07.2023 be set aside and the appeal under Section 260A of

the Act be allowed.

8. Learned counsel for the respondent submits that the issue is

squarely covered by the earlier judgment of the Division Bench of

this Court rendered in Tax Case No. 81 of 2025 and 27 other

connected matters, wherein an identical substantial question of

law was framed, namely, whether Section 206C(1C) of the

Income Tax Act, 1961 is applicable for collecting TCS from

offenders engaged in illegal mining or transportation without lease

or licence and from whom compounding fine is collected under

Rule 71(5) of the Chhattisgarh Minor Mineral Rules, 2015.

9. We have considered the rival submissions and perused the

record. The controversy involved in the present batch of appeals

is identical to the one decided by the Division Bench in the

aforesaid case. The substantial questions of law raised herein are

squarely covered by the ratio laid down therein.

10. After an elaborate consideration of the statutory scheme, including

Section 206C(1C) of the Income Tax Act, Section 23A of the

Mines and Minerals (Development and Regulation) Act, 1957, and

Rule 71(5) of the Rules of 2015, the Division Bench held that the

obligation to collect TCS under Section 206C(1C) arises only

where a person grants a lease or licence or enters into a contract

or otherwise transfers any right or interest in a mine or quarry. It

was categorically observed that persons engaged in illegal mining

without any valid lease or licence do not fall within the ambit of

lease holders or licence holders contemplated under Section

206C(1C). The compounding fee recovered from such offenders

is penal in character, being a consequence of an offence, and is

fundamentally distinct from royalty payable by a lawful lessee.

11. The Division Bench further held that there is no legislative

mandate to collect TCS on compounding fee/fine collected under

Section 23A of the MMDR Act read with Rule 71(5) of the Rules of

2015, and that royalty and compounding fee are mutually

exclusive concepts. Accordingly, the impugned orders of the

Tribunal in that batch were set aside and the substantial questions

of law were answered in favour of the assessee and against the

Revenue.

12. It has also been brought to our notice that the Revenue

challenged the aforesaid judgment of the Division Bench by filing

Special Leave Petition (Civil) Diary No. 2792 of 2026 before the

Hon'ble Supreme Court. The said Special Leave Petition came to

be dismissed, thereby affirming the judgment dated 16.06.2025

rendered by the Division Bench of this Court in Tax Case No. 81

of 2025 and connected matters.

13. The controversy involved in the present appeals is identical in all

material particulars to that which fell for consideration before the

Division Bench in the aforesaid batch of cases. The statutory

provisions are the same, the nature of receipts is identical, and

the substantial questions of law framed herein are substantially

similar. In such circumstances, the principle of judicial discipline

and consistency requires that we follow the decision of the

Coordinate Bench, particularly when the same has attained finality

upon dismissal of the Special Leave Petition by the Hon'ble

Supreme Court.

14. In view of the authoritative pronouncement rendered in Tax Case

No. 81 of 2025 and 27 other connected matters, as affirmed by

the Hon'ble Supreme Court, we hold that compounding fee/fine

collected 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 cannot be equated

with royalty and does not attract the provisions of Section

206C(1C) of the Income Tax Act, 1961. The learned Tribunal was,

therefore, not justified in treating the assessee as liable to collect

TCS on such compounding fees and in sustaining the

consequential demand, interest and penalty.

15. Accordingly, the common order dated 21.07.2023 passed by the

Income Tax Appellate Tribunal, Raipur Bench, Raipur, to the

extent it upholds the levy of TCS, interest and consequential

liability on compounding fees, is set aside. The substantial

questions of law are answered in favour of the assessee and

against the Revenue.

16. All these tax appeals are allowed in terms of the judgment

rendered in Tax Case No. 81 of 2025 and connected matters.

There shall be no order as to costs.

                    Sd/-                             Sd/-
           (Sanjay S. Agrawal)              (Amitendra Kishore Prasad)
                 Judge                              Judge
Shayna