2013 (12) TMI 537 - AT - Income Tax

Income Tax Tribunal: Molasses & Bagasses not Scrap, No TDS Required

The Tribunal ruled that molasses and bagasses generated during sugar production do not qualify as scrap under section 206C of the Income Tax Act, 1961. ... Definition of 'scrap' in Explanation (b) to section 206C - collection of tax at source under section 206C - default under section 206C(6) and interest under section 206C(7) - by-product not being 'scrap' - literal/plain meaning rule of statutory interpretationDefinition of 'scrap' in Explanation (b) to section 206C - by-product not being 'scrap' - collection of tax at source under section 206C - Molasses sold by the assessee does not fall within the meaning of 'scrap' in Explanation (b) to section 206C and therefore is not subject to collection of tax at source under section 206C. - HELD THAT: - The Tribunal examined the Explanation to section 206C which defines 'scrap' as 'waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons.' Applying the ordinary, grammatical meaning of the words and the established rule that clear statutory language is to be given its plain meaning, the Bench held that the phrase 'waste and scrap' must be read together as arising from manufacture or mechanical working and being unusable as such. Molasses, however, is a marketable by-product produced during the crystallisation and processing of sugarcane juice, and is not unusable waste arising from breakage or wear. The process of separation into sugar crystals and molasses is not a form of mechanical working producing unusable waste; instead molasses is a distinct product obtained in the course of manufacture. Consequently, the Explanation was inapplicable to molasses and the assessee was not obliged to collect tax at source on its sale under section 206C. [Paras 7]Molasses is not 'scrap' within Explanation (b) to section 206C; no TCS liability arises on sale of molasses.Default under section 206C(6) and interest under section 206C(7) - collection of tax at source under section 206C - Assessment of default under section 206C(6) and interest under section 206C(7) in respect of sale of molasses is not sustainable. - HELD THAT: - The finding that molasses is not 'scrap' removes the statutory foundation for treating the assessee as being in default for failing to collect tax at source under section 206C. Since no TCS obligation arises, the consequential demand made under section 206C(6) and the levy of interest under section 206C(7) cannot be sustained. The Tribunal accordingly set aside the impugned demand and interest insofar as they relate to molasses. [Paras 7]Demand and interest under sections 206C(6) and 206C(7) in respect of molasses are cancelled.Final Conclusion: All four appeals for the assessment years 2007-08 to 2010-2011 are allowed: molasses does not fall within the Explanation (b) definition of 'scrap', and the liability to collect tax at source and consequent demands/interest in respect of molasses are set aside; earlier deletion of bagasse-related demand is noted and the same reasoning applies mutatis mutandis to the other appeals. Issues:Assessment of whether molasses and bagasses generated during sugar production can be considered as scrap under section 206C of the Income Tax Act, 1961.Detailed Analysis:Issue 1:The assessee challenged the order of the Ld. CIT(A) upholding the action of the AO in holding the assessee in default under section 206C(6) of the Act for the sale of molasses.Analysis:The Hon'ble Delhi High Court's decision in CIT vs. Deep Chand and others emphasized interpreting statutes in their natural sense unless leading to absurdity. The ordinary meaning of scrap and waste from the Oxford English Dictionary was considered. The IT Act's explanation of scrap as 'waste and scrap' from manufacturing or mechanical working of material was analyzed. The Tribunal found that molasses, a by-product of sugar extraction, does not fit the definition of scrap as it is not waste or scrap and cannot be used as such. The Tribunal concluded that molasses does not fall within the meaning of scrap as defined in Explanation (b) to section 206C of the Act. Therefore, the assessee was not required to deduct tax under section 206C(6) on molasses, and no interest could be charged under section 206(7) of the Act.Issue 2:The assessment of whether bagasses are considered scrap under section 206C of the Income Tax Act, 1961.Analysis:The Ld. CIT(A) partly allowed the appeal by ruling that bagasses are not scrap for the purpose of section 206C of the Act. The Tribunal upheld this decision based on similar reasoning as the molasses issue. Bagasses, utilized as biofuel and in manufacturing pulp and paper products, do not meet the definition of scrap. The Tribunal found that the Ld. CIT(A) rightly deleted the addition on account of bagasses, as upheld in previous cases. Therefore, the assessee was not liable to collect tax at source under section 206C(1) for the sale of bagasses, and the demand raised and interest charged under section 206C(6) and 206C(7) were vacated.Conclusion:The Tribunal allowed all four appeals filed by the assessee, determining that molasses and bagasses generated during sugar production were not to be considered as scrap under section 206C of the Income Tax Act, 1961. The orders of the Ld. CIT(A) and AO were overturned, and the assessee was not held in default for failing to deduct tax at source on the sale of molasses and bagasses.