2019 (9) TMI 924 - HC - Income Tax

Collection of tax at source (TCS) - Exemption under sub-section (1A) of Section 206C - Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc. - whether the members of the petitioner-association, who are the contractors of Tendu leaves (a forest produce), are entitled to claim exemption under sub-section (1A) of Section 206C from the collection of tax at source from them by the seller, namely, the Forest Department of the State of Maharashtra? - HELD THAT - It is an integrated process of manufacture or producing bidi in this case, from the processed Tendu leaves, which qualifies for exemption. The placement of the word processing in between manufacturing and or producing articles or things under sub-section (1A) is also significantly indicate such intention of the Legislature. The processing of Tendu leaves in this case may qualify for the purposes of trading or sale, but not for the utilization for the purposes of manufacture of bidis. Section 11 of the Regulation of Trade Act deals with the registration of the manufacturer of finished goods using the forest produce, who has to get himself registered with the concerned Department of the State Government in a manner provided under Rule 9 of the Rules framed under the Regulation of Trade Act. It is not the claim of the petitioner-association that they are also the manufacturers of bidi and the Tendu leaves purchased by them from the Forest Department of the State Government are processed for utilization in the process of manufacture of bidi. It is not an integral part of the process of manufacture of bidi. It is thus clear that unless the members of the petitioner-association get themselves registered as the manufacturers of bidi under Section 11 of the Regulation of Trade Act, it cannot be said that they are utilizing the processed Tendu leaves for the purposes of manufacture of bidi. The expression processing under sub-section (1A) will have, therefore, to be necessarily understood as an intermediary process in the manufacture of bidi. No substance in the challenge raised in this petition, which is dismissed.

Issues Involved:
1. Entitlement to exemption under sub-section (1A) of Section 206C of the Income Tax Act, 1961 for Tendu leaf contractors.
2. Interpretation of "processing" under sub-section (1A) of Section 206C.
3. Applicability of tax collection at source for Tendu leaves.
4. Validity of the circular dated 10-1-1996 and subsequent communications regarding tax collection at source.
5. Distinction between trading and processing of Tendu leaves.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption under Sub-section (1A) of Section 206C of the Income Tax Act, 1961:
The primary question was whether the members of the petitioner-association, who are contractors of Tendu leaves, are entitled to claim exemption from tax collection at source under sub-section (1A) of Section 206C of the Income Tax Act, 1961. The court ruled that the exemption under sub-section (1A) is not applicable to the members of the petitioner-association because the activities they perform on Tendu leaves do not qualify as "processing" within the meaning of the Act. The court emphasized that the provision of sub-section (1A) operates as an exception to sub-section (1) and must be construed strictly.

2. Interpretation of "Processing" under Sub-section (1A) of Section 206C:
The court examined whether the activities performed on Tendu leaves, such as drying, sprinkling water, and bundling, constitute "processing." Relying on previous judgments, the court held that these activities do not amount to "processing" as they do not change the nature and character of the Tendu leaves. The court cited several High Court decisions, including CIT v. Ashwin Kumar Gordhanbhai and Bros. Pvt. Ltd., North Koel Kendu Leaves & Mahulam Leaves v. Union of India, and others, which held that such activities do not qualify as "processing."

3. Applicability of Tax Collection at Source for Tendu Leaves:
Section 206C(1) of the Income Tax Act mandates the collection of tax at source for the sale of Tendu leaves. The court noted that this provision applies to all transactions involving the sale of Tendu leaves, whether for processing or manufacturing. The members of the petitioner-association are required to collect tax at source from the manufacturers of bidi at the time of sale of processed Tendu leaves. The court clarified that the exemption under sub-section (1A) is not applicable to transactions involving trading of Tendu leaves.

4. Validity of the Circular Dated 10-1-1996 and Subsequent Communications:
The petitioner challenged the circular dated 10-1-1996 and subsequent communications that reiterated the applicability of tax collection at source for Tendu leaves. The court upheld the validity of the circular and communications, stating that the operations carried out by Tendu leaves' traders do not change the nature and character of the leaves and, therefore, do not qualify for exemption under sub-section (1A). The court found no reason to deviate from the established view that such activities do not constitute "processing."

5. Distinction between Trading and Processing of Tendu Leaves:
The court distinguished between trading and processing of Tendu leaves. It held that the sale of processed Tendu leaves to manufacturers of bidi constitutes trading and does not qualify for exemption under sub-section (1A). The court emphasized that the members of the petitioner-association are engaged in the business of trading Tendu leaves, which is regulated by the Maharashtra Forest Produce (Regulation of Trade) Act, 1969. The court further noted that unless the members of the petitioner-association are registered as manufacturers of bidi, they cannot claim that the processed Tendu leaves are utilized for manufacturing purposes.

Conclusion:
The court dismissed the petition, ruling that the members of the petitioner-association are not entitled to exemption under sub-section (1A) of Section 206C of the Income Tax Act, 1961. The activities performed on Tendu leaves do not qualify as "processing," and the sale of processed Tendu leaves constitutes trading, which attracts tax collection at source. The circular dated 10-1-1996 and subsequent communications were upheld as valid. The court emphasized the strict interpretation of exemption provisions under the taxing statute.

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