2016 (12) TMI 506 - HC - Income Tax

TCS (Tax Collection at Source) - whether cotton waste is scrap within the meaning of the term under Section 206C? - Held that - The issue would require consideration by the authorities concerned. It would not be a pure question of law. It would be a mixed question of law and fact. There is no warrant for entertaining a writ petition when the petitioners can avail the remedy under the Act itself. Respondents No. 1 and 2 confirms that it is always open to the petitioners to seek a refund by filing appropriate returns under the provisions of the Act itself. This was also an appeal under Section 260A of the Act. The issue has not attained finality. We see no reason in that case to entertain this writ petition. The petitioner ought to be relegated to the remedy under the Act.

Issues:
1. Applicability of Section 206C of the Income Tax Act to cotton waste.
2. Interpretation of the term "scrap" under Section 206C(1) of the Act.
3. Discrepancy in the clarification issued by the Deputy Commissioner of Income Tax.
4. Jurisdiction of High Courts in deciding the issue.
5. Availability of remedy under the Act for seeking a refund.

Analysis:
1. The petitioners sought a writ to quash a clarification stating that cotton waste falls under the definition of scrap under Section 206C of the Income Tax Act, thereby subjecting it to Tax Collection at Source (TCS). They also requested to restrain private respondents from collecting TCS on cotton waste purchases and to direct mill owners not to collect tax at source from the petitioners. The High Court found uncertainty regarding the applicability of Section 206C to cotton waste, emphasizing the need for authorities to consider the issue, which involves a mixed question of law and fact. The court held that the petitioners should seek remedy under the Act itself rather than through a writ petition.

2. The definition of "scrap" under Section 206C(1) was crucial in determining the applicability of TCS to cotton waste. The court noted the definition as waste and scrap from the manufacture or mechanical working of materials not usable due to breakage, cutting up, wear, or other reasons. The petitioners argued that Madras and Gujarat High Courts ruled in their favor on similar issues involving other parties. The court highlighted a discrepancy in the clarifications issued by the tax authorities regarding the status of cotton waste as scrap under Section 206C.

3. The court observed that while a previous communication indicated that cotton waste is not covered under the definition of scrap in Section 206C(1), a subsequent communication stated otherwise, asserting that cotton waste is indeed scrap subject to TCS. The court pointed out that the latest communication contradicted earlier indications and referred to a judgment not directly relevant to the issue. The court emphasized that the matter required consideration by the concerned authorities and was not a pure legal question.

4. Regarding the jurisdiction of High Courts in deciding such tax-related issues, the court highlighted that the issue of whether cotton waste qualifies as scrap under Section 206C involved a mixed question of law and fact. The court dismissed the writ petition, suggesting that the petitioners pursue appropriate proceedings under the Act and avail themselves of the remedy available.

5. The court acknowledged that the petitioners could seek a refund by filing appropriate returns under the provisions of the Act itself. It also referenced a judgment of the Gujarat High Court on a similar issue, emphasizing that the matter had not attained finality. The court concluded by dismissing the writ petition but granting liberty to the petitioners to adopt suitable proceedings under the Act for resolution.

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