The main legal point established in the judgment is that the State Government is liable to deduct tax at source on income earned by lease holders as per the provisions of Section 206C(1C) of the Income Tax Act.

JUDGMENT :

1. Shri V.K. Shukla, learned Dy. Advocate General for the petitioner/State.

2. Shri Rohit Arya, learned senior counsel with Shri S. Lal for the respondents.

3. Challenging the orders passed by the ITO and the action taken for recovery of tax, which was to be deducted at source by the State Government from persons who have been granted mining and quarry lease, this petition is filed by the State Government.

4. State Government had granted various quarry leases to private persons. The quarry leases have been granted in accordance to the Mines and Minerals (Development and Regulation) Act, 1957 and the M.P. Mining Mineral Rules, 1996, royalty as per statutory provision has been collected and in some cases the lease period has expired. Proceedings have been initiated by the IT Department on the ground that after introduction of Section 206, Sub-section (l)(c) [sic-s. 206C(1C)] in the IT Act, w.e.f. 1st Oct., 2004 by Finance Act, 2004 every person who grants lease or licence 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 IT Department, on the ground that tax from lease holders in accordance to the aforesaid provisions has not been collected, action is taken by the IT Department and therefore, the State Government has filed this petition challenging the action and demand notices issued and the coercive steps initiated for recovery of income-tax.

5. Even though the case is listed today for consideration of IA No. 2212/2008, application for dismissal of the petition filed by the respondent Department and IA No. 1027/2008 application for vacating stay, this petition is being finally heard and disposed of with consent of the parties.

6. Shri V.K. Shukla, learned Dy. Advocate General for the State made four submissions in support of the petition.

7. The first argument advanced by Shri Shukla, learned Dy. Advocate General for the State is that under Article 289 of the Constitution of India, income of State is exempt from any taxation by the Union and therefore, it is argued that the process initiated for collection of income-tax from the State Government is unsustainable in view of the aforesaid constitutional provision and on this ground action initiated is prayed to be quashed. Second argument advanced is 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 licence or enters into a contract. Referring to definition of "person" as contained in Section 2(31) of the IT Act, 1961, Shri V.K. Shukla, learned Dy. Advocate General argued that the State Government does not fall within the purview of this definition and therefore, process initiated is unsustainable. The third limb of argument is that under Section 206C(1) only a seller is liable to collect tax at source and as the State Government is not a seller in the present case, it is argued that the action initiated by the respondents is unsustainable. It is finally argued that under the definition of "seller" which is appearing in conjunction and after the word "every person" in Section 206C(1) has been clearly defined to include the State Government and since the word seller is absent in Section 206C(1C), it is said that the word "person" in Section 206C(1C) does not include the State Government. These four contentions were advanced by the counsel for the State Government at the time of arguments.

8. Refuting the aforesaid contentions Shri Rohit Arya, learned senior counsel appearing for the Revenue argued that Article 289 exempts the State Government from paying any tax to the Union of India from the income earned by the State Government. In the present case the respondent Department is not taxing the income of the State Government but is only taking action for failure on the part of the State Go