2005 (3) TMI 89 - HC - Income Tax

Contract Karigars not Eligible for Tax Deductions

The court ruled in favor of the Department and against the assessee, holding that karigars/artisans engaged on a contract basis cannot be considered as ... Deduction under sections 80HH and 80-I - employment in a manufacturing process carried on with the aid of power or without the aid of power - employer-employee relationship - contract of service versus contract for service - right of control test - industrial undertakingDeduction under sections 80HH and 80-I - employment in a manufacturing process carried on with the aid of power or without the aid of power - employer-employee relationship - contract of service versus contract for service - right of control test - industrial undertaking - Whether artisans/karigars engaged on contract, job or piece basis are to be treated as persons 'employed' by the assessee for the purpose of satisfying the worker-number requirement in section 80HH(2)(iv) and section 80-I(2)(iv). - HELD THAT: - The court construed the phrase 'it employs' in the context of sections 80HH and 80-I by reference to the scheme of those provisions, which grant deductions only to an industrial undertaking that fulfils the enumerated conditions. The statutory requirement that an undertaking 'employs' the stipulated number of workers must be read in the company of associated expressions such as 'worker' and 'industrial undertaking', and thus denotes a contract of service (employer-employee relationship) rather than a contract for service. The determinative test is the right of control over the manner of doing the work (how, when, where), not merely the placing of orders for results. Where karigars/artisans are engaged on job, per piece or contract basis, operate from their own premises, perform work for others and are not under direct supervision or control of the assessee, no master-servant relationship exists and they cannot be regarded as workers 'employed' by the assessee. The court observed that allowing workers engaged through outside agencies to be counted would render the requirements unworkable and would be inconsistent with the statutory scheme that the deduction attaches to profits derived from an industrial undertaking which itself employs the requisite labour. Reliance on authority distinguishing contract types and emphasising the control test was applied to conclude that the persons engaged by the assessee were not its employees for the purposes of sections 80HH(2)(iv) and 80-I(2)(iv).Artisans and karigars engaged on contract/job/piece basis are not 'employees' of the assessee and therefore cannot be counted to satisfy the worker-number condition in sections 80HH(2)(iv) and 80-I(2)(iv).Final Conclusion: The reference is answered in the affirmative for the Revenue: the Tribunal was right in holding that workers engaged by the assessee through outside agencies on contract/job/piece basis are not to be counted as employees for meeting the numerical employment requirement under sections 80HH and 80-I; the assessee accordingly failed to satisfy those conditions for the assessment year 1987-88. Issues Involved:1. Eligibility for deductions under sections 80HH and 80-I of the Income-tax Act, 1961.2. Interpretation of 'it employs' in sections 80HH(2)(iv) and 80-I(2)(iv) concerning direct employment of workers.Detailed Analysis:1. Eligibility for Deductions under Sections 80HH and 80-I:The primary issue is whether the assessee qualifies for deductions under sections 80HH and 80-I of the Income-tax Act, 1961. The assessee, engaged in the export of brass artware and other handicrafts, claimed deductions under these sections. The assessing authority rejected the claim, stating that the firm was neither a small-scale industrial undertaking nor a manufacturer. The Commissioner of Income-tax (Appeals) upheld the claim but eventually rejected it, noting that the conditions prescribed in sections 80HH(2)(iv) and 80-I(2)(iv) were not satisfied. Specifically, the assessee did not directly employ the stipulated number of workers.2. Interpretation of 'It Employs' in Sections 80HH(2)(iv) and 80-I(2)(iv):The crux of the case lies in the interpretation of the term 'it employs' within the context of sections 80HH(2)(iv) and 80-I(2)(iv). The assessee argued that karigars/artisans paid for polishing, engraving, cutting, etc., should be considered as workers employed by the firm, thereby meeting the requirement of employing 20 or more workers. However, the Tribunal rejected this argument, emphasizing that the assessee did not have a direct employment relationship with these workers.Legal Provisions and Context:Sections 80HH and 80-I provide deductions for profits and gains from industrial undertakings, with specific conditions. Section 80HH(2)(iv) requires an industrial undertaking to employ ten or more workers with power or twenty or more without power. Similarly, section 80-I(2)(iv) has identical requirements. The court noted that the term 'it employs' should be interpreted in the context of the entire scheme of these sections, which aim to provide deductions for industrial undertakings directly employing the stipulated number of workers.Employer-Employee Relationship:The court emphasized that for workers to be considered 'employed' by the assessee, there must be an employer-employee relationship. This relationship is characterized by the right of control over how and when the work is done. The court distinguished between a contract of service (employer-employee relationship) and a contract for service (independent contractors). The karigars/artisans working on a contract basis do not fall under the direct control of the assessee and thus do not establish an employer-employee relationship.Case References and Precedents:The court referred to several precedents, including Chintaman Rao v. State of Madhya Pradesh and Harish Chandra Bajpai v. Triloki Singh, to elucidate the concept of employment and the distinction between contracts of service and for service. The court also cited its previous judgment in Mahender Kumar Aggarwal v. CIT, which reinforced the requirement of direct employment for claiming deductions under section 80-I.Conclusion:The court concluded that the karigars/artisans engaged by the assessee on a contract basis cannot be considered as workers employed by the assessee for the purposes of sections 80HH(2)(iv) and 80-I(2)(iv). Consequently, the assessee failed to meet the conditions required for claiming deductions under these sections. The question referred to the court was answered in the affirmative, in favor of the Department and against the assessee.