Gondia Beedi Leaves Contractors Association Vs Union of India (Bombay High Court)
It is admitted that the re-sale of Tendu leaves, as it is without any process, after purchase from the Forest Department would amount to trading which does not qualify for exemption under sub-section (1A) of Section 206C of the Income Tax Act. It is the submission that the unprocessed Tendu leaves cannot be utilized for the purposes of manufacture or production of bidis and in such a case, the character of Tendu leaves is not changed. According to Shri Kaptan, the processed Tendu leaves sold are actually utilized for manufacture of bidi, a distinct product, which comes into existence, and hence qualify for exemption under sub-section (1A) of Section 206C of the said Act.
Relying upon the decision of the Apex Court in the case of Chowgule & Co. Pvt. Ltd. and another v. Union of India and others, reported in (1981) 1 SCC 653, it is urged that what is necessary in order to characterize an operation as processing is that the commodity must, as a result of operation, experience a change, which does not necessarily bring into existence a different product like bidi. The nature and extent of change is not material. From the said decision, a distinction is pointed out between manufacture and processing to urge that it is not necessary that the processing of commodity or goods should result in bringing into some different product so as to qualify for grant of exemption under sub-section (1A) of Section 206C of the Income Tax Act.
Now we proceed to deal with the contentions advanced. The first contention being that the Tendu leaves purchased from the Forest Department of the State of Maharashtra are processed so that it can be utilized for manufacture of bidi, it is covered by the word ‘processing’ employed under sub-section (1A) of Section 206C of the Income Tax Act. Shri Kaptan does not dispute that the identical process carried on the Tendu leaves was considered in decisions of several High Courts deciding the question as to whether the exemption under Section 206C of the said Act can be made available.
Even assuming that it is the processing of Tendu leaves, which is involved in terms of sub-section (1A), we are unable to understand the argument as to how the purchase and sale of processed Tendu leaves would not constitute ‘trading’ within the meaning of sub-section (1A). There is no restriction that the sale of processed or unprocessed Tendu leaves should only be to the manufacturer or producer of bidis, and Section 206C of the Income Tax Act does not provide for exemption from the collection of tax at source, if such Tendu leaves are sold to the manufacturer or producer of bidis therefrom. As a matter of fact, the members of the petitioner-association are collecting such tax at source from such manufacturers of bidi, at the time of sale of processed leaves and there is no grievance in respect of it. In view of this, even if the members of the petitioner-association are engaged in the sale of such Tendu leaves to the manufacturer or producer of bidis, it would be the trading, which would not qualify for exemption under sub-section (1A) of Section 206C of the Income Tax Act.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
The question involved in this petition is 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 of the Income Tax Act, 1961 from the collection of tax at source from them by the seller, namely, the Forest Department of the State of Maharashtra?
2. Notice for final disposal of the matter was issued by this Court on 6-2-2019 and the parties were heard finally by consent. Rule. The petition is being disposed of finally.
3. The petitioner-association is registered under the Societies Registration Act, 1860. The members of the petitioner-association are registered Tendu contractors having separate registrations under the Maharashtra Forest Produce (Regulation of Trade) Act, 1969 (for short, “the Regulation of Trade Act”) and the Maharashtra Forest Produce (Regulation of Trade in Tendu Leaves) Rules, 1969. The Tendu leaf is a “forest produce” within the meaning of the Indian Forest Act, 1927 and it is grown naturally in the forest areas. The Tendu leaves are used for manufacture of bidi.
4. Section 3 of the Regulation of Trade Act empowers the State Government to divide every area into such number of units as it may deem fit in respect of each forest produce. Section 4 thereof empowers the State Government to appoint agents in different units for the purpose of purchase and trade in forest produce on its behalf. It also empowers the State Government to prescribe procedure for appointment of agents and terms and conditions for such appointment. The State Government adopts procedure for public auction to sell or appoint agents for collection of Tendu leaves. The agent or the purchaser has to pay the amount offered by him in the auction as per the terms and conditions contained in the agreement of licence executed, which include the taxes as are leviable from time to time.
5. The contractor appointed as agent or licensee pursuant to the auction conducted is required to process the Tendu leaves. Several steps in the process are stated as under :
(a) The first step is of the pruning, which is the process of cutting of small Tendu bushes of medium girth from the ground level to have healthy Tendu plant, which would provide good quality leaves.
(b) After 50 to 60 days of pruning, the process of plucking of leaves starts and the plucked leaves are bundled into 70 leaves each and are tied with the strings in the roots of Palash Tree (Butea Monosperma).
(c) The next step is of drying of leaves and then sprinkling of water on the bundles.
(d) Then the bundles of Tendu leaves are carried to the collection centre where the process of drying and weathering of Tendu leaves takes place in a particular manner.
(e) The bundles are then kept at the distance of 1 – 2 inches for drying and the insecticides are sprinkled on the bundles to save them from insects or termites.
(f) Then the bundles are exposed to sun and kept there as it is for 4 to 5 days in upside down position for drying and weathering from both the sides and this process requires regular supervision.
(g) Thereafter every Tendu bundle is to be rinsed properly and the entire stock is shifted to another dry place where the bundles are arranged vertically so that the water is not retained in the bundles.
(h) Then the bundles are covered by tarpaulin for 4 to 5 days and after opening of tarpaulin, the bundles are put in a jute bag containing 500 to 1000 bundles, depending upon the size of the leaves.
(i) Thereafter the bundles are stacked tightly in the jute bag and it is packed. The packed bag is exposed to sun from both the sides for three days.
(j) The Tendu leaves then become ready for transportation to main godown approved by the Forest Department.
(k) It is only after completion of this entire process in the prescribed manner the leaves are ready for sale to the manufacturer of bidi.
The activities involved are of drying, sprinkling of water for maintaining requisite moisture, sorting out and screening of leaves, bundling it, keeping in the godown, preserving quality and colour of leaves, avoiding breaking and brittleness to maintain softness.
6. After introduction of the provision of Section 206C under the Income Tax Act, the Department of Revenue, Central Board of Director Taxes, communicated its decision in writing on 23-1-1989 to the Maharashtra Tendu Leaves Merchants’ Association that the question of collection of tax at source at the time of sale of Tendu leaves was examined and the operation of drying and sprinkling of water, etc., on the Tendu leaves purchased by the traders is held to constitute ‘processing’. It was the decision that the traders of Tendu leaves conducting the process would not fall within the ambit of Section 206 of the said Act and, therefore, no tax could be collected at source from the purchases made by the traders.
7. The aforesaid decision was changed by the Government of India, Ministry of Finance, Department of Revenue, on 10-1-1996, communicating that the operations carried out by the Tendu leaves’ traders do not change the nature and character of the leaves and those are performed only to maintain the leaves in a saleable and marketable condition. Further such operations do not result in any change in the product and, therefore, merely drying, sprinkling of water, bundling of the Tendu leaves, etc., cannot be equated with processing. As a result, it is clarified that the provisions of Section 206C of the Income Tax Act shall be applicable to the case of the Tendu leaves’ traders, as the exception carved out in the proviso to sub-section (1) of Section 206C is not applicable. The earlier letter dated 23-1-1989 was withdrawn.
8. The petition, therefore, challenges the circular dated 10-1-1996 and further the communications dated 29-11-2018 and 27-12-2018 issued by the Joint Commissioner of Income Tax and the Deputy Conservators of Forests, Bramhapuri and Gadchiroli Divisions, reiterating the same position. The petitioner claims that the contractors of the Tendu leaves, who are the members of the petitioner-association, are entitled to exemption under sub-section (1A) of Section 206C of the said Act while purchasing the Tendu leaves from the Forest Department of the State of Maharashtra.
9. Section 206C of the Income-Tax Act, 1961 is under Part BB of Collection at source under Chapter XVII of the said Act regarding collection and recovery of tax. The provisions of sub-section (1) and (1A) therein being relevant, are reproduced below :
“Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc.
206C. (1) Every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of any goods of the nature specified in column (2) of the Table below, a sum equal to the percentage, specified in the corresponding entry in column (3) of the said Table, of such amount as income-tax:
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