Chhattisgarh High Court Directs Income Tax Department to Refund Amounts Recovered from Cement Companies After Tax Demand Against Mining Department Was Quashed

Introduction

In an important ruling concerning tax recovery proceedings under the Income Tax Act, 1961, the Chhattisgarh High Court has directed the Income Tax Department to refund amounts recovered from UltraTech Cement Limited and Shree Cement Limited towards the alleged tax liabilities of the State Mining Department.

The Court held that once the underlying tax demand raised against the Mining Department had already been quashed by the High Court, amounts recovered from the cement companies in connection with that demand could not be retained by the Income Tax Department.

The decision reinforces an important principle of tax administration: recovery proceedings must remain legally sustainable, and amounts collected under a demand that no longer survives cannot continue to be retained by the tax authorities.

The judgment was delivered by Justice Narendra Kumar Vyas on 28 October 2026 in a batch of writ petitions filed by the cement companies.

Background of the Case

UltraTech Cement Limited and Shree Cement Limited are engaged in manufacturing cement and clinker, for which limestone is an essential raw material. Both companies had obtained mining leases from the Government of Chhattisgarh to extract limestone for their manufacturing operations.

Under the applicable mining arrangements, the companies were required to pay royalty to the State Mining Department. The royalty was paid in advance through an online mechanism against the allotment of pit passes, enabling the companies to undertake mining activities.

The controversy arose when the Income Tax Department alleged that the State Mining Department had failed to collect and deposit the applicable Tax Collected at Source (TCS) on royalty payments received from the mining leaseholders.

Taking the view that the Mining Department had defaulted in its TCS obligations, the Income Tax Department initiated proceedings under Sections 206C(6) and 206C(7) of the Income Tax Act, 1961, and raised a tax demand against the Mining Department.

Subsequently, instead of restricting recovery proceedings to the Mining Department, the Income Tax Department proceeded against the cement companies, which were the mining leaseholders.

For this purpose, recovery notices were issued to UltraTech Cement and Shree Cement under Section 226(3) of the Income Tax Act, 1961, seeking recovery of the outstanding amounts from them.

Aggrieved by the recovery action, the cement companies approached the authorities of the State Government seeking a refund or adjustment of the amounts paid to the Income Tax Department against their advance royalty payments. However, their representations were rejected by the State Government through a communication dated 4 January 2021.

Consequently, the companies approached the Chhattisgarh High Court by filing writ petitions under Article 226 of the Constitution of India.

Proceedings Before the Chhattisgarh High Court

During the proceedings, an important development significantly changed the legal position of the dispute.

The State Government informed the High Court that the Mining Department had independently challenged the tax demand raised by the Income Tax Department before the same High Court.

The matter was considered by a Division Bench in Tax Case No. 189 of 2025 and connected matters.

On 26 February 2026, the Division Bench allowed the tax cases filed by the Mining Department and quashed the tax demand raised against it.

This development became crucial to the writ petitions filed by UltraTech Cement and Shree Cement because the recovery notices issued against them were directly connected with the very same tax demand.

The cement companies contended that once the original tax demand against the Mining Department had been set aside, the Income Tax Department could not retain the amounts already recovered from them in connection with that demand.

The State Government’s submission regarding the earlier Division Bench judgment was also placed before the Court.

Findings and Directions of the High Court

After considering the submissions and the subsequent judicial development, Justice Narendra Kumar Vyas observed that the tax cases filed by the Mining Department had already been allowed by the Division Bench and the underlying demand had been quashed.

In view of this development, the Court held that any amount already recovered by the Income Tax Department from the petitioner companies towards the disputed demand must be returned.

The High Court specifically directed that:

• Any amount already recovered by the Income Tax Department from UltraTech Cement and Shree Cement in connection with the disputed demand must be refunded.

• Each petitioner company must submit an individual application for obtaining the refund.

• The Income Tax Department must return the recovered amounts upon submission of the respective applications.

Accordingly, the High Court disposed of the batch of writ petitions with the above directions.

Case Details

Legal Significance and Implications of the Judgment

This judgment carries considerable significance for taxpayers, particularly businesses facing recovery proceedings arising from tax demands raised against third parties.

Section 226(3) of the Income Tax Act empowers the Income Tax Department to recover outstanding tax dues by issuing notices to persons who owe money to, or hold money on behalf of, an assessee in default, subject to the statutory requirements.

However, the exercise of such recovery powers must necessarily remain connected with a legally sustainable tax liability.

The present ruling highlights the consequences of a situation where the original demand forming the basis of recovery proceedings is subsequently quashed by a competent court.

The judgment also provides important guidance on the following aspects:

1. Recovery must have a sustainable legal foundation: Tax recovery proceedings cannot be continued on the basis of a demand that has already been judicially quashed.

2. Refund of amounts already recovered: Where the underlying tax liability ceases to exist following a judicial decision, amounts recovered in connection with that demand cannot simply be retained by the Department.

3. Protection of third-party taxpayers: Businesses should not be made to bear the financial consequences of tax demands that have subsequently been set aside, subject to the facts and applicable legal provisions.

4. Importance of subsequent judicial developments: A decision setting aside the original tax demand may have consequential implications for connected recovery proceedings initiated against other parties.

Conclusion

The Chhattisgarh High Court’s decision is an important reminder that the power of tax recovery under the Income Tax Act must be exercised within the boundaries of law.

Once the underlying tax demand against the State Mining Department was quashed by the Division Bench, the Income Tax Department was directed to refund the amounts already recovered from UltraTech Cement and Shree Cement.

The ruling reinforces the principle that recovery proceedings cannot survive independently when their very foundation has been removed by a judicial decision.

For businesses facing recovery notices under Section 226(3) of the Income Tax Act, this judgment highlights the importance of examining the validity and continuing enforceability of the underlying tax demand before accepting or challenging recovery action.

Disclaimer: This article is intended for general legal and informational purposes and should not be construed as legal advice. The applicability of the judgment depends upon the facts and circumstances of each case.