No TCS on Compounding Fee for Illegal Mining: Supreme Court

The Supreme Court has refused to interfere with the Chhattisgarh High Court Judgement by which it was held that Tax Collected at Source (TCS) under Section 206C(1C) of the Income Tax Act cannot be levied on compounding fees or fines collected from offenders involved in illegal mining. The bench of Justice Dipankar Datta and Justice Satish Chandra Sharma said, “We are not inclined to interfere with the impugned judgments and orders of the High Court; hence, the special leave petitions are dismissed.” BackgroundChhattisgarh High Court JudgementCase Details Background The case arose after the Income Tax Department conducted a survey and treated several District Mining Officers as “assessees in default” for failing to collect TCS on amounts recovered as compounding fees from illegal miners and transporters. The tax authorities argued that such payments attracted TCS applicable to mining and quarrying activities. Chhattisgarh High Court Judgement However, the High Court clarified that Section 206C(1C) applies only when a lease, licence, or contractual right in a mine or quarry is granted, where the lessee or licensee pays royalty to the government. In cases of illegal mining, offenders neither hold a lease nor a licence, and the payment made is not royalty but a compounding fee collected to settle the offence under the Mines and Minerals (Development and Regulation) Act and state rules. Section 206C(1C) of the Income Tax Act only obliges the assessee to collect tax at source from the person to whom such right has been conferred and by whom royalty is payable to the State Government through the District Mining Officer and obligation to collect tax under Section 206C(1C) cannot be extended to the person involved in illegal mining or transporting illegal minerals. Section 206C(1C) of the Income Tax Act specifically obliges to collect tax by the assessee from the lease holder or license holder or with whom the assessee has entered into contract or otherwise transferred any right or interest either in whole or in part in any parking lot or toll plaza or mine or quarry. Similarly, there is no legislative mandate to collect tax at source from the person who is involved in illegal mining or illegal transportation of minerals and similarly, compounding fees/fine is collectable in terms of Section 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015 and the effect of compounding would be that on being compounded under Section 23A(1), no proceeding or further proceeding shall be taken and the offender, if in custody, shall be released forthwith. Similar provision has been laid down in Section 320 of the Code of Criminal Procedure, 1973, which deals with compounding of offences and sub-section (8) of Section 320 clearly mandates that the compounding of an offence under Section 320 shall have the effect of an acquittal of the accused with whom the offence has been compounded. As such, compounding fee/fine cannot be subjected to proceeding under Section 206C(1C) 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. The court held that by virtue of the provisions contained in Section 206C(1C) of the IT Act, there is legislative command to collect TCS from the amount of royalty and simultaneously, there is no legislative command to recover TCS from the amount of compounding fee/fine under Section 23A of the MMDR Act read with Rule 71(5) of the Rules of 2015, as the royalty does not include the compounding fee/fine and the terms “royalty” and “compounding fee”, both, are mutually exclusive. Therefore, the ITAT is completely unjustified in holding that compounding fee/fine (TCS) would be chargeable under Section 206C(1C) of the IT Act by relying upon the definition contained in Section 2(47) of the Income Tax Act. Applying the principle of strict interpretation of taxing statutes, the Court ruled that since the law does not expressly mandate TCS on compounding fines, such liability cannot be imposed by implication. The Court set aside the ITAT order and the demands for TCS, interest, and penalty, allowing all the connected tax appeals filed by the mining authorities. Case Details Case Title: The Deputy Commissioner Of Income Tax (Tds) Versus District Mining Officer Citation: JURISHOUR-339-SC-2026 Case No.: SPECIAL LEAVE PETITION (CIVIL) Diary No(s).8956/2026 Date: 12-03-2026 Click Here To Read Order Read More: Electricity Regulatory Commissions Are Not Liable For GST On Regulatory Fees Collected: Supreme Court

No TCS on Compounding Fee for Illegal Mining: Supreme Court

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