TCS provisions are not applicable to timber being sized, sawn into logs of different dimensions and shapes in activities carried on saw mills authorised by the Government.
In a recent order, the Hon’ble Supreme Court dismissed the SLP of the Income Tax Department against the judgment of the Kolkata High Court which held that TCS provisions are not applicable to timber being sized, sawn into logs of different dimensions and shapes in activities carried on saw mills authorised by the Government.
ABCAUS Case Law Citation:
4508 (2025) (04) abcaus.in ITAT
A show cause notice was issued calling upon the assessee to state as to why he should not be deemed to be an assessee in default for non-collection of tax on sale of timber as per provision of Section 206C(1) of the Income Tax Act, 1961 (the Act).
The first objection raised by the assessee was that the tax collected at source is applicable on raw timber which mean timber logs that is obtained from the forest produce. The assessee stated that they were trading in processed wood which are imported from countries like Indonesia, Malaysia and Burma. Further it was stated that ‘sawn timber’ or in other words ‘processed timber’ is derived from timber logs which are cut in different sizes and then planned by a process involving labour and power and the saw mills which undertake such exercise are recognised by the Government of India and they are extended various concessions from various Governmental departments.
The reply given by the assessee was not accepted by the Assessing Officer (AO) primarily for the ground that swan timber continues to remain as timber for all purposes and tax should have been collected at the post of sale.
As a result, order was passed against the respondent/assessee under Section 206C(6)/206C(7) of the Act on the ground that the assessee did not collect any tax on the sale of timber obtained by any other mode other than forest lease in terms of Section 206C(1) of the Act.
Aggrieved by such order, the assessee preferred appeal before the Commissioner of Income Tax (Appeals) who allowed the appeal and the order passed by the AO was set aside. Aggrieved by such order, the revenue preferred appeal before the tribunal which was dismissed. Not satisified, the Revenue agitated the issue before the Kolkata High Court.
The High Court observed that the argument on behalf of the revenue was based upon the decision of the High Court of Karnataka. In the said decision, the decision of the Hon’ble Supreme Court was referred to. The said decision was pressed into service by the department to state that the timber and sized or dressed logs are one and the same commercial commodity and, therefore, the assessee though stated to have dealt with sawn timber, it continues to remain as a timber and the assessing officer rightly treated the assessee as the assessee in default.
However, the High observed that the facts in the said case were quite different and distinct from the facts of the instant case.
The Hon’ble High Court observed that the object for introducing Section 206 of the Act by Finance Act, 1988 was intended to levy and collect presumptive tax in the case of trading in certain goods to remove hardship and to remove the lacuna. The trades mentioned therein are alcoholic liquor for human consumption; timber obtained under a forest lease; timber obtained by any mode other than under forest lease and any other forest produce not being timber, at different rates. The object of introduction of the new provisions for working out the profits on presumptive basis was to get over the problems faced in assessing the income and recovering the tax in the case of persons trading in the above mentioned items. Further, it was found that large number of persons who are engaged in these activities do not maintain any books of accounts and locating such persons after the contract or agreement becomes impossible in many cases and even in cases where assessment had been completed by the department, it became extremely difficult to collect taxes from them. Therefore, the provisions were brought into the statute not only to estimate the profits on presumptive basis but also to collect the tax on such transactions at specified rates mentioned in Section 206C of the Act. Thus, we are to bear in mind the object behind insertion of the provision by Finance Act, 1988 as the provision clearly states that Section 206C falls in Chapter XVII of the Act which deals with collection and recovery of tax. Sub-Chapter BB deals with collection at source. Section 206C deals with profits and gains from business of trading in alcoholic liquor, forest produce, scrap etc.
The Hon’ble High Court opined that the test was whether the respondent/assessee had dealt with a forest produce and the test was not whether the timber and sawn timber are one and the same.
The Hon’ble High Court noted that the assessee, while submitting their reply to the show cause notice at the first instance, pointed out that collection of tax in terms of Section 206C would be applicable only in respect of timber obtained from forests. In effect, the assessee meant to say that they had not dealt with forest produce.
The High Court Our observed that the facts of a case decided by the Division Bench of the Andhra Pradesh High Court was more or less identical. It was held that the Legislature intends to apply this provision in respect of timber and other produce obtained from the forest and it is not intended to apply to any produce. It was further held that basically, forest produce is the produce grown spontaneously, may be at the subsequent stages some human effort and skill may be applied in order to protect and extract the resultant produce which could be considered as a forest produce.
The Hon’ble High Court also took note of the decision of the Division Bench which held that de-embarking and seasoning tree trunks and converting them into logs would amount to production of a new commercial article or thing within the meaning of Sections 32AB, 80HH and 80J of the Act.
The Hon’ble High Court further observed that Sub Section (1A) inserted in 2003 states that notwithstanding anything contained in sub-Section (1) of Section 206C(1), no collection of tax shall be made in the case of a buyer who is a resident in India and if such buyer furnishes to the person responsible for collecting tax, a declaration in writing to the effect that goods referred to in Column 2 of the table contained under Section 206C(1) are to be utilized for the purposes of manufacturing, processing or producing articles or things and not for trading.
In view of the above, the Hon’ble High Court held that if the timber is being sized, sawn into logs of different dimensions and shapes in activities carried on saw mills authorised by the Government, it would amount to a different produce. Even in respect of timbers which are procured as described in table, if it is used in the process of manufacturing, the provision of Section 206C(1) of the Act would not be applicable due to the fact that the product ceased to be a forest produce.
Accordingly, the Hon’ble High Court dismissed the appeal filed by the revenue and the substantial questions of law were answered against the revenue.
Aggrieved by the decision of the Hon’ble High Court, the Revenue preferred a Special Leave Petition (SLP) before the Hon’ble Supreme Court challenging the decision of the High Court.
However, the Hon’ble Supreme Court dismissed the SLP of the Revenue observing as under;
“1. There is a delay of 880 days in filing the Special Leave Petition which has not been satisfactorily explained. Even otherwise, we have gone through the Special Leave Petition and do not find any merit in the same.
2. The Special Leave Petition is, therefore, dismissed on the ground of delay as well as on merits.”
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