Contract labour counted as workers for deduction under section 80-I when real control and substance of employment are shown

Contract labour supplied through an intermediary can be counted as workers employed by an industrial undertaking for deduction under section 80-I(2)(iv) where the undertaking has the requisite number of workers and the manufacturing activity is carried on without power. The provision was treated as beneficial and not to be construed narrowly, with emphasis on the broader labour-law understanding of "worker" and "employee" and on the real substance of the working arrangement, including ultimate control over the establishment. On that basis, direct engagement was not essential, the deduction could not be denied, and revision under section 263 was unsustainable.

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Issues: Whether contract labour supplied through a contractor could be counted as workers employed by the assessee for the purpose of deduction under section 80-I(2)(iv) of the Income-tax Act, 1961, and consequently whether revision under section 263 was justified.

Analysis: The undertaking had more than 20 workers engaged in its manufacturing activity without the aid of power. The decisive question was whether direct employment was necessary. The provision was held to be a beneficial one and therefore not to be read narrowly. The Court relied on the broader statutory understanding of "worker" and "employee" in labour welfare enactments, which include persons engaged directly or through a contractor. It further accepted that ultimate control over the establishment and the real substance of the working arrangement, rather than the intermediary contractor's presence, determined the employment relationship for the purpose of the deduction.

Conclusion: The assessee was entitled to treat the contract labour as workers employed in the industrial undertaking, and the deduction under section 80-I(2)(iv) could not be denied. The revisionary order under section 263 was therefore unsustainable.

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