Prakash Krishna, J.
1. The Income Tax Appellate Tribunal, New Delhi has referred the following question of law under Section 256(1) of the Income Tax Act 1961 (hereinafter referred to as the Act) for opinion to this Court:-
Whether, the Tribunal was right in law and on facts in holding that for the purpose of availing deduction under Section 80HH and 80I, 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?'
2. Briefly stated the facts giving rise to the present reference are as follows:-
The reference relates to the assessment year 1987-88.
3. The applicant is a registered firm and is engaged primarily in the export of brass artwares and other Indian handicrafts. Its claim for deduction under Sections 80HH and 80I of the Act was rejected by the Assessing Authority on the ground that the it firm was not a small scale industrial undertaking and it was not a manufacturer. In appeal, the Commissioner of Income-tax (Appeals) upheld the claim for deduction under the aforesaid two sections but ultimately rejected the same on the ground that the conditions prescribed in Sections 80HH(2)(iv) and 80I(2)(iv) were not satisfied. The contention of the applicant was that Karigars/ Artisans who worked for it were paid remuneration and which has been debited in the purchases account as polishing charges, engraving charges, cutting charges etc. and therefore are to be treated as workers employed it and since the total number of such workers would exceed the prescribed limit being almost 100 workers, the benefit of these sections should be allowed, was rejected by the Tribunal. There is no dispute that the applicant does not have power connection. It is also admitted that it does not directly employ 20 or more persons in. his employment. In this factual set up the claim of deductions under Sections 80 HH and 80I of the Act was rejected.
4. Heard Shri Vikram Gulati, the learned counsel for the respondent assessee and Shri A.N. Mahajan, the learned standing counsel for the department.
5. The learned counsel for the assessee submitted that on proper construction of Sections 80HH and 80I of the Act, the 'applicant is entitled for deductions under the aforesaid provisions. It was submitted that the persons who are not directly employed by it should also be treated as persons employed within the meaning of Sub-section (2) (iv) of Section 80HH and 80I(2)(iv) of the Act. He submitted that the remuneration has been paid by the applicant towards polishing charges, engraving charges, cutting charges etc. to Karigars/ Artisans and such Karigars/ Artisans should be treated as employees of the applicant within the meaning of the aforesaid sections.
6. At this juncture it is essential to refer the relevant provisions of the Act. Section 80HH provides deduction in respect of profits and gains from newly established industrial undertakings or hotel business in a backward areas. This section applies to an industrial undertaking which fulfills all the conditions enumerated in Sub-section (2) thereof. For the present case, Clause (iv) of Sub-section (2) of Section 80HH, which is relevant is reproduced below:-
Section 80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas -
(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent., thereof.
(2) This section applies to any industrial undertaking which fulfils all the following conditions namely:-
(i)....................................................(ii)...................................................(iii)...................................................(iv) It employs ten or more workers in a manufacturing process carried on with the aid of power or employs twenty or more workers in a manufacturing process carried without the aid of power
Similarly relevant portion of Section 80I which provides deduction in respect of profit and gains from industrial undertaking after a certain date, etc. is reproduced below:-
Section 80I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.-
(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel [or the business of repairs to oceangoing vessels or other powered craft] to which this section applies, there shall in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assessee, a deduction from Such profits and gains of an amount equal to twenty per cent, thereof:
Provided that in the case of an assessee, being a company, the provisions of this sub-section [ shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel] as if for the words 'twenty per cent', the words 'twenty-five per cent.' Had been substituted.
(1A)............................
Sub-section 2 : - This section applies to any industrial undertaking which fulfills all the following conditions, namely--
(i)............................................
(ii)...........................................
(iii)..........................................
(iv) In a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power.
7. Both Section 80HH arid 80I of the Act provides that an industrial undertaking should employ 10 or more workers in manufacturing process carried on with the laid of power or employ 20 or more persons in a manufacturing process carried on without aid of power as one of the conditions for grant of deduction. The learned counsel for the applicant submitted that the words 'it employs' should be given a wider meaning to include the Karigars/Artisans not directly under the employment of the applicant but also those who are under its control in as much as these persons have carried out the work done as ordered by the applicant.
8. Having given our anxious consideration1 to the various submissions made by the learned counsel for the applicant we are of the opinion that such Karigars/Artisans engaged by the applicant cannot be said to be persons employed by it. To put it clearly, what is meant is that there is no relationship of employer or employee or master and servant with such persons. One of the test uniformly applied is to find out existence of a right of control in respect of the manner in which the work is to be done, rather the mere order for the work to be done. Distinction between contract of services and contract for services is firmly established. In the case of contract of service, the persons hiring the service can tell how the work is to be done, when the same is to be done, where is to be done etc. In contract for service what is to be done, only this much is staled. Thus, in the case of contract for service evidently it cannot be said that the person receiving the contract has been employed by the assessee.
9. To ascertain the meaning of the words 'it employs' we have to look into the entire scheme of the aforesaid two sections. Whether a wide meaning to include work done on contract basis, job basis or per piece basis is to be given to the words 'it employs' or a limited meaning, would depend upon the text and context of the provision. Section 80HH talks about the deduction in respect of profit and gains from newly established undertakings or hotel business in backward areas. Sub-section (2) speaks of fulfillment of certain conditions by any industrial undertaking, to avail the deduction. A close reading of Section 80HH(2)(iv), undoubtedly points out that the phrase 'it employs' refers to any industrial undertaking. The deduction is granted to the newly established industrial undertaking or hotel business. Sub-section (2) of Section 80HH further provides that such industrial undertaking is not formed by the split up or reconstruction, of a business already in existence in any backward area.. It further provides that it is not industrial undertaking and has not been formed by transfer to a new business or machinery or plant previously used for any purpose in any backward area. In the context of Section 80HH if we give a wider meaning to Clause (iv) of Sub-section (2) of section 80HH, the provisions shall not be workable. The reason being that the workers should be employed in an industrial undertaking. If the work is got done on job basis from outside agency it cannot be said that the workers were employed in an industrial undertaking which fulfills the other three conditions of Sub-section (2) of Section 80HH. Secondly, if the manufacturing process is carried on with the aid of power, the minimum required number of workers is 10, otherwise 20 or more workers employed in a manufacturing process carried on without aid of power. It is quite possible when different kinds of work is got done by the assessee on job basis from outside agency, not under its direct employment, some of the agency may have carried on the manufacturing process with the aid of power and some may have carried on the job work without the aid of power in a manufacturing process. Therefore, we are of the view that the requirement of Clause (iv) of Section 80HH(2) is that the workers should be under the direct employment of the assessee in an industrial undertaking which is engaged in manufacturing process. The deduction under the aforesaid section is available to such an assessee whose total income includes the profits and gains derived from an industrial undertaking. One cannot miss that the words 'to employ' would take colour among associated words and expressions such as 'worker', industrial undertaking' etc., used in the section.
10. In Shri Chintamani Rao and Anr. v. State of Madya Pradesh : 1958CriLJ803 of the report,it was observed by the Apex Court that the concept of employment invoices three ingredients:-
(i) Employment (ii) Employer and (iii) the contract of employment.
11. The employee is one who works for others for hire. The employer is one who employs services of other persons. In the context of Section 80 HH, therefore, the word 'employee' will include only such workers who are directly employed by the assessee. If the employer is an assessee only then the deductions under Section 80HH(2)(iv) can be claimed. The word 'employee' has been used in the sense of contract of service and nor contract for service. At this juncture it may be noted that simple case of the applicant is that it gets the desired work done by placing order to Karigars or Artisans. Such Karigars or Artisans are free to get the desired work done at their own place, without any supervision or control of the assessee. Further these Karigars or Artisans are also free to do the work of other manufacturers also. Therefore the nature of the contract is contract for work. The applicant is interested only that it gets the desired result. In this view of the matter we are of the considered opinion that the Tribunal has rightly held that the applicant does not exercise any direct control over the Karigars and Artisans and the relationship of employer and employee is absent. Reference can be made to a judgment of the Apex Court in the case of Harishchand Bajpai v. Trilok Singh AIR (1957) S.C 555 which reads as follows:-
'The word 'employment' covers a much larger field in matter of conditions of service, the right of promotion, etc., then the word 'appointment'. Therefore, looking at the expression 'employment' both in its ordinary meaning and the meaning as derived from the language used in other rules, it would be right to construe it as meaning the state of being employed or as referring to the existence of employer and employee relation.
A contract of employment may he in respect of either piece-work or time-work but it does not follow from the fact that the contract is for piece-work that it must be a contract of employment. There is in law a well-established distinction between a contract for a service and a contract of service. In the one case the master can order or require what is to be done, while, in the other case, he cannot order or require what is to be done but how it shall be done. The real test for deciding whether the contract is one of employment is find out whether the agreement is for the personal labour of the person engaged, and if that is so, the contract is one of employment whether the work is time-work or piece-work, or whether the employee did the whole of the work himself or whether he obtained the assistance of other persons also for the work.'
12. In the ITR No. 3 of 1988 Mahendra Kumar Agrawal v. CIT decided on 15th October, 2004 this Court has held as follows:-
'Clause (iv) of Section 80I(2) specifically provides that where the industrial undertaking manufactures or produces articles or things, the undertaking should employ 10 or more workers in a manufacturing process carried on with the aid of power, or employ 20 or more workers in a Manufacturing process carried on without the aid of power. This is one of the conditions to be fulfilled by an industrial undertaking in order to claim the benefit of Section 80I of the Act. Clause (b) of the Explanation below Sub-section (8) of Section 80 HHA of the Act, which has been, made applicable by Explanation 3 to Sub-section (2) of Section 80I of the Act in respect of small scale industrial undertaking specifically provides that in a case where the previous year ends after 31st day of July, 1980 but before the 18th day of March, 1985 the value of machinery and plant installed for the purpose of business of the undertaking should not exceed rupees twenty lakh and for this purpose the value of the machinery and plant in case of any machinery or plant owned by the assessee is treated the actual cost and where it is taken on hire the actual cost as in the case of owner of such machinery and plant. Thus from the aforesaid provision it is absolutely clear that in order to claim the benefit of Section 80I of the Act the assessee should have to own plant and machinery as also to employ in the manufacturing process 10 or more persons as the case may be.
13. The learned counsel for the assessee has placed reliance upon a judgment of this Court in the case of Commissioner of Income tax v. Sultan and Sons : [2005]272ITR181(All) . The controversy involved in that case was entirely different and is distinguishable on facts. The court was examining the question as to whether the persons engaged as Beldar Khali labour, Bhoosi Hatwai, Fatkanwala etc. are Workers engaged in the manufacturing process of the industrial undertaking or not. In the aforementioned case it was not in issue that where the work has been got done on job basis from outside workers, such workers will be treated as employee of the assessee or not.
Next reliance was placed on the following cases:-
(1) Addl. Commissioner of Income-tax, West Bengal - III v. A. Mukherjee and Co. Pvt. Ltd. : [1978]113ITR718(Cal) . In this case the controversy was as to whether the assessee was engaged in any manufacturing or processing activity.
(2) The reliance placed by the learned counsel on Commissioner of Wealth-tax v. Radhey Mohan : [1982]135ITR372(All) is wholly misplaced one, as the issue involved therein was whether the firm was an industrial undertaking within the meaning of Section 5(1)(xxxii) of the Wealth Tax-Act Similarly, Commissioner of Income Tax v. K.G. Vediyurappa & Co. : [1985]152ITR152(KAR) has no application in as much as the issue involved therein was that the casual workers are also 10 be counted under Section 80HH(2)(iv) of the Act or not.
15. The upshot of the above discussion is that the Artisans and the Karigars from whom the work was got done on contract basis, job basis or per piece basis are not workers employed by the assessee and cannot be counted for the purposes of Section 80HH(2)(iv) of the Act to find out the minimum stipulated numbers of workers. For the same reason the assessee has failed to fulfill the conditions of Section 80I(2) of the Act.
16. In view of the foregoing discussion we answer the question referred to us in affirmative i.e. in favour of the Department and against the assessee. There shall be no order as to costs.