Section 206C of the Income-tax Act, 1961 - Collection of tax at source - Whether State Government comes within purview of ‘person’ as contemplated under section 206C and is liable to collect tax at source from persons, who have been granted mining and quarry lease by it and deposit such tax with Central Government in accordance with provisions of sub-section (3) of section 206C (1C) - Held, yes
Words and Phrases : ‘every person’ as appearing in section 206C of the Income-tax Act, 1961.
FACTS
The petitioner-State Government had granted various mining and quarry lease to private persons for the purpose of carrying out mining and quarry operation for extraction of minerals. The Tax Recovery Officer (TRO) initiated the proceedings against the State Government on the ground that after introduction of section 206, sub-section (1c) - 206C(1C)] with effect from 1-10-2004 by Finance Act, 2004 every person, who grants lease or license in respect of any mine or quarry to another person for the purpose of business is required to debit an amount equal to 2 per cent of the total amount payable by the licensee by way of tax and deposit the same with the department, and since tax from lease holders had not been collected by the State Government, action was taken against it.
The State Government filed instant petition challenging the action and demand notices issued and the coercive steps initiated for recovery of Income-tax contending (1) that under Article 289 of the Constitution of India, income of State is exempt from any taxation by the Union and, therefore, the process initiated for collection of income-tax from the State Government was unsustainable; (2) that under section 206C(1C), the liability to deduct tax at source and credit it to the Central Government is imposed on every person, who grants a lease or a license or enters into a contract and the State Government does not fall within the purview of definition of ‘person’ contained in section 2(31); and (3) that under section 206C(1) only a seller is liable to collect tax at source and as the State Government was not a seller in the instant case, the action initiated by the respondents was unsustainable.
HELD
From the record, it was seen that the State Government had issued various mining lease to persons for the purpose of carrying out mining and quarry operation for extraction of minerals. Royalty was charged in accordance with the statutory provisions i.e., Mines and Minerals (Development and Regulation) Act, 1957 and M.P. Mining Mineral Rules, 1996. Provision of section 206C was incorporated vide Finance Act of 2004 with effect from 1-10-2004. Under this section, provision is made for collection of tax at source. Section 206C(1) pertains to collection of tax with regard to profit and gains from the business of trading in alcoholic liquor, forest produce and scrap etc. and section 206C(1C) pertains to collection of tax at the rate of 2 per cent from contractors, licence holders or lease holders who have been granted work of parking lot, toll plaza or mining and quarrying operation. Aforesaid provision of section 206C(1C) contemplates 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, which is not a public sector company, is liable to collect an amount indicated in sub-section (1) as per table in the prescribed manner and credit it to the Central Government or the Board of Direct Taxes. In the instant case, it was an admitted fact that the mining lease was granted for the purpose of carrying out mining and quarrying operations and under the aforesaid provision tax at the rate of 2 per cent was to be collected and credited to the Central Government. [Para 9]
The first argument of the State Government was related to exemption from payment of tax on income earned by the State Government as contemplated under article 289 of the Constitution of India. This article exempts property and income of the State Government from taxation by the Union of India. In the instant case, the proposed action of the Department or the Union of India was not to tax property or income of the State Government. What was being taxed in the instant case was income accrued by the lease holders to whom lease was granted by the State Government. It was, therefore, taxing of the income earned by the lease holders on the basis of grant made by the State Government. Accordingly, the provision of article 289 would not apply in the facts and circumstances of the instant case as income or property of the State Government was not being taxed by the impugned action. [Para 10]
As far as the second ground was concerned, ‘person’ is defined in section 2(31) and it includes an individual, an HUF, a company, a firm, an AOP or a BOI, whether incorporated or not, a local authority and every artificial juridical person, not falling within any of the preceding sub-clauses. [Para 11]
If the entire scheme of section 206C is evaluated and the process of deducting tax at source, its accounting and submission of return is evaluated, it would be seen that a person collecting tax is required to submit a return with regard to the tax deducted at source under these provisions. Sub-section (5A) contemplates that every person collecting tax as per the section is required to prepare return and deliver the tax collected to the prescribed IT authority. Sub-section (5B) contemplates a provision for submission of returns. The proviso to the said section clearly indicates that where the person collecting tax as per the provisions of sub-section (1C) for section 206C is a company or the Central Government or the State Government, such person is required to deliver or cause to be delivered, within the prescribed time returns as contemplated there. A complete reading of those provisions indicates that the person collecting tax under section 206C would include not only company but also the Central Government and the State Government and, therefore, the word, ‘every person’ appearing in section 206C would include both the Central Government and the Sate Government as these authorities are required to submit returns in accordance with this provision. A complete reading of this section along with definition of ‘person’ clearly indicates that the State Government comes within the purview of ‘person’ as contemplated under section 206C and is liable to deduct tax at source from lease holders and deposit it with the Central Government in accordance with the provisions of sub-section (3) of section 206C(1C). That being so, the argument advanced by the State Government ran contrary to the legislative intent which is clear from a reading of the proviso to sub-section (5B) of section 206C. [Para 12]
A complete reading of the principles laid down by the Supreme Court in these judgements State of Punjab v. Okara Gain Buyers Syndicate Ltd. AIR 1964 SC 669 and Chief Conservator of Forests, Government of A.P. v. Collector [2003] 3 SCC 472 would indicate that the State Government would be a juristic person when it comes to right of the State to institute proceedings or for instituting proceedings against the State. Similarly, when the legislative intents for providing Scheme for deducting income-tax at source as contemplated under section 206C is evaluated, it would be clear that every person including the State Government, which is granting lease, is liable to deduct tax from income earned by any person under the lease and deposit it with the Central Government. That being so, the contentions advanced by the State Government had to be rejected. The words ‘seller’and ‘every person’ under sections 206C(1) and 206C(1C) are used with regard to different purposes. Mere absence of the word ‘every person’ in the definition of ‘seller’ as contained in Explanation clause (c) to section 206C cannot be construed to mean that the provisions of section 206C do not apply to the State Government. The arguments advanced in that regard were misconceived. That apart, once it had been found that the State Government was required to deduct tax at source on income earned by lease holders as per the Scheme of the Act, it was not necessary to go into other question that had been canvassed at the time of hearing. [Para 15]
Accordingly, there was no error in the action initiated by the department warranting interference in the petition. Thus, the petition stood dismissed. [Para 16]
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