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 - 'Whether, the Tribunal was right in holding that for the purpose of availing deduction under sections 80HH and 80-I, direct employment of the stipulated number of workers is relevant and individuals or workers of outside parties, whose services have been availed of by the assessee in its own manufacturing activities, either on contract basis, job basis or on per piece basis, have not to be taken into account?' - We answer the question referred to us in the affirmative, i.e., in favour of the Department 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.