Income Tax Appellate Tribunal - Ahmedabad
V.B. Narania And Co. vs Income-Tax Officer on 23 January, 1986
Equivalent citations: [1986]16ITD334(AHD)
ORDER
P.J. Goradia, Accountant Member
1. Against the common order passed by the AAC the common ground raised in these appeals is as follows :
The learned AAC has erred in not considering the claim under Sections 80J and 80HH of the Income-tax Act, 1961.
2. The assessee is a registered partnership firm engaged in the business of manufacturing and selling carborandum i.e., a part used in petrochemicals. It sells the manufactured parts on wholesale basis and turnover of sales during the year amounted to over Rs. 4 lakhs. While making an assessment under Section 143(3) of the Income-tax Act, 1961 ('the Act') the ITO rejected the claim as under :
The assessee had claimed deduction under Sections 80HH and 80J of the Act as it is an industrial undertaking which carries on manufacturing activity. However, on scrutiny of manufacturing account it is seen that the assessee has not employed 10 or more persons in manufacturing process. It has got certain processes done from outsiders on piecemeal basis. The assessee has not provided regular employment to any person in its manufacturing process. Mere providing of job work to some persons cannot be said to be regular employment and, therefore, I am unable to agree with the submission of learned ITP that the assessee can be said to be satisfying conditions of Sections 80HH(2)(iv) and 80J(4)(iv) and is eligible for relief under Sections 80HH and 80J of the Act.
2.1 On appeal, the assessee submitted following factual data for the consideration of the AAC :
The industrial undertaking has employed workers and paid Rs. 91,502.45. This has duly been debited in trading and manufacturing account in the account styled as Majuri-Pagar Kharch. The workers are doing work in the factory and whatever work that is done by them is measured and on the basis of the quantity of work done and rate, voucher is made and payment against that voucher is made to the worker.
The full details of Majuri-Pagar Kharch of the payments made to the workers are prepared and filed herewith and a summary of the workers monthwise is also prepared. From the details of the worker and payments made to them and the monthwise summary it is quite evident that more than 10 workers were working.
When industrial undertaking has provided work and the workers are paid on the basis of the work done the relief should have been allowed. It is, therefore, claimed that more than 10 workers were working in the factory. They were paid on the basis of the work done, therefore, they were working on piecemeal basis. There are vouchers for the payments made to the workers and regular Majuri-Pagar Kharch account is maintained and there ITO was not justified in rejecting our claim.
Reliance was also placed on the decision of the Karnataka High Court in the case of CIT v. K.G. Yediyurappa & Co. [1984] 17 Taxman 191 under the Act. The AAC rejected the claim on the basis of following reasoning :
It is also stated by the ITO in his order that most of the works/processes done from outsiders on piecemeal basis. The applicant has not provided regular employment to any person in its manufacturing process. Mere providing job works on contract rate basis to some persons cannot be said to be regular employment. From the above, it is clear that the appellant had not employed any regular workers during the years under appeal. As stated above most of the works are done by outsiders on job work basis and they are paid as per the contract rates. Hence, it cannot be held that the appellant had engaged 10 or more workers in its manufacturing activities. When the law was enacted, it was the intention of the Legislature that the benefit will go to the needy and the society as a whole. In this case, the appellant had deprived of the benefits of the workers in many ways as the appellant had not engaged the workers on permanent basis promoting welfare with labour and social security. Moreover, most of the works are carried on piecemeal basis on job contract by outsiders. Considering all the above facts and circumstances of the case, I am of the view that the appellant is not fulfilled the conditions eligible for deductions under Sections 80HH and 80J of the Act. Accordingly, I hereby differ from the decisions cited by the appellant.
3. At the time of hearing, the learned counsel for the assessee strongly attacked the order passed by the AAC, firstly, on the ground that he has not given any reasons for differing, from the case cited by the assessee as the case was decided under Section 80HH of the Act, the section required to be considered in the present appeal. Relying on All India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1 (Delhi) it was submitted that the AAC was bound to respect the law laid down by the High Court, even of the different State, in the absence of any contrary decision of any other High Court. The assessee also relied upon decision in ITO v. Pheonix Sorap Processors [1983] 15 TTJ 42 (Bom.). Bringing to our notice the detailed account of workers' salary it was submitted that at no point of time the workers employed by the undertaking was less than ten. In fact, according to him, even the casual workers and employees of the contractor in case of a contract are also required to be considered. He fairly clarified that there was no time limit of the employment by the worker but he would work at the factory premises for various processes and payment would be made according to the number of processes or pieces completed but usually they would work during the regular hours for the whole day. The learned departmental representative relied upon the decision in CIT v. Sawyer's Asia Ltd. [1980] 122 ITR 259 (Bom.) and submitted that substantial employment was a condition precedent of the allowance of the claim.
4. In reply, the learned counsel for the assessee submitted that the facts of the case relied upon by the revenue were distinguishable.
5. In our opinion, the claim of the assessee is required to be accepted. The reasons are as follows :
5.1 Perusing the historical background in respect of the incentive granted under Section 80J of the Act (corresponding to Section 15C of the Indian Income-tax Act, 1922) it is seen that originally before 1953 the condition for exemption was that the manufacturing process was carried on with the aid of power and there were 50 or more workers. This condition was relaxed by the Indian Income-tax (Amendment) Act, 1953 and, therefore, manufacturing process undertaken even without the aid of power was considered for the purpose of incentive. The number of employees required for the process was also reduced. This aspect reflect the perpetual anxiety of the Legislature for increasing the sphere and activities so as to reduce more and more number of unemployed persons. The present section also considers manufacturing processes without the aid of power required to be extended the incentive in the present era of technological evolution. Considering the socio-economic background of the people in India and evolution of cottage industry, it is a known fact that people are engaged in employment on the basis of 'contract of service' and not on the basis of contract for service.
5.2 The grievance of the revenue is that persons engaged by the assessee cannot be said to be persons employed. To put it clearly, what is meant is that there is no relationship of employer and employee or master and servant. There is no definition of an employee in the Act and, therefore, meaning of the word 'employee' cannot be gathered from the provisions of the Act. The Payment of Bonus Act, 1965, defines employee as below :
2(13) 'employee' means any person (other than an apprentice) employed on a salary or wage not exceeding one thousand and six hundred rupees per mensem in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied ;
The Industrial Disputes Act, 1947, defines the word 'workmen' The essential condition of this definition is that there should be relationship between the employer and the employee or master and servant. The definition of the term 'worker' in the Factories Act, 1948, is different from one given in the Industrial Disputes Act and as per the Factories Act worker includes a person employed directly or through any agency and, therefore, employees of the contractor cannot be considered for the purpose of Section 80J as submitted by the learned counsel for the assessee. However, one aspect is clear that there must exist a relationship of master and servant and then only the person can be said to be employee for the purpose of satisfying one of the conditions in both the sections. The principles according to which such relationship is required to be determined are well settled by number of judicial pronouncements. One of the tests uniformly applied is to find out the existence of a right of control in respect of the manner in which the work is to be done rather than mere order for the work to be done. That is why a distinction is made between contract for service and contract of service. In the former case what is to be done is stated while in the other case besides that the person hiring the services can also tell how the work is to be done, when the same is to be done, where the same is to be done, etc. In the case of contract for service evidently it cannot be said that the person receiving the contract has been employed by the assessee according to the provisions of Section 80HH/80J. In the case of contract of service certainly it can be said that person who is engaged is an employee.
5.3 Mode of remuneration whether piece wages or monthly wages cannot be a relevant factor much less a criterion. Whether the payment in respect of services obtained should be on piece basis or time basis is a matter solely for the consideration of the assessee. Because the decision would rest on number of facts like tenure of the assessee's own business, method of work, conduct during work, sincerity to the work and attendance, importance attached to various cost elements comprised in the cost of production of an article, nature and quality of the labour and influence of trade union activities and host of various other factors. Therefore, so long as the assessee has employed the persons on the basis of contract of service meaning thereby the payment would be made, accordingly, it cannot be said that the assessee has not employed persons, so as to deny the due concession justifiably earned in fulfilling the legislative intent.
5.4 The decision relied upon by the revenue in the case of Sawyer's Asia Ltd. (supra) was concerned with period for which number of workers must remain in the employment of the assessee, that is to say, whether minimum number of workers should be throughout the year or part of the year or substantial part of the year. Therefore, the ratio of the decision is not at all relevant for the purpose of issues considered here. If at all, reading the judgment, the approach adopted by their Lordships of the Bombay High Court supports the claim of the assessee.
5.5 We, therefore, set aside the order of the A AC and direct the ITO to allow the claim of the assessee if other conditions are fulfilled. He shall verify the correctness of the claim for all the years after giving reasonable opportunity to the assessee. He shall pass the orders in the case of the firm as also partners.
6. In the result, all the appeals arc allowed.