Section 206ch

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

31 October 2015 a person took a mines on a yearly lease basis of rupees 2,00,000/- for a period of 20 years. after 5 years he transferred his rights to some other person. what will be the accounting treatment in this case and which provisions of TCS will be applicable? up-till-now no mining work was started.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 In this case, where a person has taken a mine on lease for ₹2,00,000 per year for 20 years, and after 5 years, transferred his rights to another person, the accounting treatment and Tax Collected at Source (TCS) provisions would be as follows:

Accounting Treatment:
Lease Payment (₹2,00,000/year):

The amount of ₹2,00,000 paid annually for the mining lease would be treated as Lease Expense or Lease Rent in the accounting books.

If the lease payments are made yearly, the amount will be accounted for in each year as an expense under Operating Expenses or Lease Rent (depending on the nature of the lease).

Transfer of Lease Rights after 5 Years:

When the rights to the lease are transferred to another party, the lessee (initial party) might either:

Assign the lease or sublet the lease.

If the rights are sold or transferred to a third party for a certain amount, this would typically be treated as capital receipt.

Revenue from Transfer: If the lessee receives any compensation or payment for transferring the rights to the lease, it may be recognized as income or capital gain depending on the terms of the agreement.

The unamortized portion of the lease or prepaid amount may need to be adjusted at the time of the transfer.

Accounting for Transfer (If Applicable):

If the rights are transferred and money is received, the amount received from the new lessee could be treated as capital gain (if rights were transferred permanently) or other income (if the transfer was temporary).

The previous lessee may also need to adjust their books based on any transfer fee or compensation received.

TCS (Tax Collected at Source) Applicability:
As per Section 206C of the Income Tax Act, TCS is applicable on sale of certain goods or services like motor vehicles, jewellery, etc. However, the TCS provisions in this case will depend on the type of transaction involved in the transfer of lease rights.

Relevant TCS Provisions:
TCS on Sale of Certain Goods (Section 206C):

TCS under Section 206C generally applies to the sale of specific goods such as cars, jewellery, and scrap. The sale of mineral rights or lease rights for mining is not specifically covered under this provision.

Transfer of Lease Rights:

If the transfer of rights to another party is considered as a sale of rights, TCS will not typically apply unless the sale involves specified goods (as per the TCS list).

If the transfer involves the sale of an asset, the transaction might fall under capital gains taxation, not under TCS provisions.

What Should Be Done:
No TCS on Lease Payments: The regular lease payment of ₹2,00,000 does not fall under TCS provisions, as it is an operating lease payment and not a sale of goods or services.

TCS on Transfer (If Any): If the transfer of mining lease rights is considered a sale or assignment, TCS provisions would not apply directly, since the transaction is not one of the specified goods under Section 206C. Instead, the lessee would be subject to capital gains tax on any profit derived from the transfer of the mining rights.

For example, if the person receives a consideration for transferring the rights, it would likely be treated as capital gain under the Income Tax Act, and capital gains tax would apply, not TCS.

GST (Goods and Services Tax):

Depending on whether the transaction is treated as a transfer of services or sale of goods, GST might be applicable. However, GST applicability would need to be confirmed based on the specifics of the lease agreement and the nature of the rights transferred.

Conclusion:
The lease payments of ₹2,00,000 per year are accounted for as operating lease expenses.

The transfer of lease rights does not attract TCS since it does not involve the sale of specified goods listed under Section 206C. Instead, it may be subject to capital gains tax.

GST might be applicable depending on the specifics of the lease and transfer agreement, but TCS does not apply to this type of transaction.

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