1. These three appeals by the assessee are directed against order dated 13th March, 1989 passed by Commissioner of Income-tax, Gujarat-III, Ahmedabad in exercise of powers under Section 263 of the Income-tax Act, 1961.
2. The assessment years involved are 1984-85, 1985-86 & 1986-87. On perusal of the records, the learned CIT formed an opinion that the orders passed by the ITO for all the years under consideration are erroneous and prejudicial to the interests of revenue.
3. The ITO allowed deduction under Section 80-I to the assessee for all the years under consideration, which according to the learned CIT was wrong. The learned CIT observed that since the assessee did not employ 20 or more workers in manufacturing process carried on without the aid of power, the assessee is not entitled to reduction as contemplated in Section 80-I(2)(iv) of the IT Act. Thus, he held that the deduction granted under Section 80-I to the assessee has caused loss of revenue and therefore, it is prejudicial and erroneous. This is the only material ground agitated before us by the contending parties.
4.1 The assessee carries on his business activity without the aid of power but has employed more than 20 persons as labourers in all these years. These labourers are employed on contract basis from M/s. Ambica Screen Printing Contractor. The stand of the assessee is that he was employing more than 20 workers in all the years under consideration whereas the department's stand is that the assessee did not employ more than 20 workers so as to claim benefit of Section 80-I. The claim of the assessee was negatived by the learned CIT on the ground that Section 80-I(2)(iv) requires that in case of an industrial undertaking which manufactures or produces articles or things should employ 20 or more workers in the manufacturing process and there should be an employer-employee relationship between the assessee and the workers working for him and since in the instant case of the assessee, assessee was obtaining labourers on contract from outside contractor and the wages and other benefits of these workers were not paid directly by the assessee, but paid through the contractor and furthermore the workers were not on the pay roll of the assessee, the assessee cannot be treated as employing 20 or more workers and, accordingly not entitled to deduction under Section 80-I. Further, the assessee claims exemption under the Factory Act, Employees State Insurance Act, etc., on the basis that these labourers are not its employees.
5. On behalf of the assessee, the learned counsel submitted that in the Income-tax Act. 1961 nowhere it is mentioned that the assessee in order to get benefit of Section 80-I should employ workers directly and also that there should be employer-employee relationship. All that the Act requires is that the assessee should employ 20 or more workers while carrying on the manufacturing process without the aid of power.
5.1 Further, the learned counsel submitted that comparing Section 80-I(2), Section 80RRA is more restrictive. While dealing with that section in the case of CBDT v. Adttya V. Birla [1988] 170 ITR 137, the Hon'ble Supreme Court held that 'Employ' means the use of services of any person; it comprehends whole time servant or part-time engagee. In the case of Chintaman Rao v. State of Madhya Pradesh AIR 1958 SC 388 the Hon'ble Supreme Court has observed that the concept of employment involved three ingredients: (1) employer, (2) employee and (3) the contract of employment. The "employee" is one who works for others for hire and the "employer" is one who employs the services of other persons. The expression 'to employ' has been considered in Ellis v.Joseph Ellis & Co. [1905] 1 KB 324 (CA) arid held that it does not mean generally to find actual employment; it rather means to retain and pay a person, whether employed or not, but if employed then to be employed in the work only in respect of which contract is made. If that is so, there is no reason to restrict the word 'employ' in Section 80-I(2)(iv). The learned counsel for the assessee also relied upon the decision of the Hon'ble Supreme Court in the case of Mangalore Ganesh Beedi Works v. Union of India AIR 1974SC 1832 and submitted that in the above case the Hon'ble Supreme Court in para 44 of its judgment observed that "in relation to contract labour, the principal employer is the person for whom or on whose behalf any contract labour is engaged in any establishment. An employer in relation to other labour is the person who has the ultimate control over the affairs of any establishment or has a substantial interest in the control of the affairs of any establishment". The learned counsel further brought to our notice the judgment of the Hon'ble Supreme Court in the case of Husainbhaiv. Alath Factory Tezhilali Union 1978 SCC (L & S) 506 in which Justice Krishna Iyer held that, 'the true test is where a worker or group of workers labours to produce goods or services and these goods or services are for the business of another, that other is, in fact, the employer. He has economic control over the workers' subsistence, skill and continued employment. If he, for any reason, chokes off, the worker is, virtually, laid off'.
5.2 The learned counsel further contended that the contractor supplies the labourers. The labour is engaged by the assessee in his premises in furtherance of his business interest. The assessee supervises and controls the labourers. In case of an accident, the assessee is responsible to the labourers and not the contractor. The learned counsel for the assessee also relied upon decision of Jaipur Bench of the Tribunal in the case of Rajasthan Transmission Wires (P.) Ltd. v.ITO [1985] 22 TTJ 343. wherein the Tribunal held that as the word 'worker' is not defined in the Income-tax Act itself, the definition given in the Factories Act, 1948 will be sufficient and should be adopted for the purpose of determining the word 'worker'. Further, he relied upon decision of Bombay Bench of the Tribunal in the case of ITO v. Pheonix Sorap Processors [1983] 15 TTJ 42 wherein the Tribunal held that for the purpose of Section 80J(4)(iv) it is immaterial whether the assessee employs the workers directly or not and also it is immaterial whether the workers were paid by the company or by the assessee-firm.
In that case, the Tribunal observed that, "the requirement is only that of ten or more workers should be employed by the assessee, or by the undertaking. Reading of the section makes it clear that it is not necessary for the assessee to employ ten workers but it is the undertaking who should employ ten workers". Old Section 80J(4)(iv) and the present Section 80-I(2)(iv) are similarly worded for giving benefits to certain kind of undertaking.
6. The learned Departmental Representative, on the other hand, supported the order of the learned CIT and submitted that in the case of the assessee - (a) there is no employer-employee relationship with his labourers, (b) the wages and other benefits of these workers are not being paid directly by the assessee, but paid by the contractor, who had supplied the workers, (c) the workers are not on the pay roll of the assessee, but are supplied by the contractor as and when required by the assessee, (d) there is no regular employment to the workers and (e) the assessee is claiming exemption under the Factory Act; Employees State Insurance Act, etc., on the ground that these labourers are not his employees. He vehemently argued that in the instant case of the assessee by no dint of imagination it could be said that the assessee is the employer so as to get the benefit of Section 80-I(2)(iv). He distinguished the cases relied upon by the learned counsel for the assessee. The learned D.R. submitted that in the case of Mangalore Ganesh Beedi Works (supra) the aggrieved labourers had approached the Court so as to get the benefit extended to the labourers by the statute which was denied by the employer by one pretext or the other. So also in the case of Hussainbhai (supra) the decision was rendered on the basis of the peculiar facts, existed before the Court in that case and no general law has been laid down by the Hon'ble Supreme Court. This point is clear from the observation of the Court which runs as under : The presence of intermediate contractors with whom alone the workers have immediate or direct relationship excontractuis of no consequence, when on lifting the veil or looking at the conspectus of factors governing employment, the naked truth is discerned and especially since it is one of the myriad devices resorted to by managements to avoid the responsibility when labour legislation casts welfare obligations on the real employer based on Arts. 32, 38, 42, 43 and 43A.7. We have heard both the parties at great length. The word 'worker" is defined in the Factories Act, 1948 as under : worker' means a person (employed, directly or by or through any agency (including a contractor with or without the knowledge of the principal employer, whether for remuneration or not), in any manufacturing process, or in cleaning any part of the machinery or premises used for a manufacturing process, or in any other kind of work incidental to or connected with, the manufacturing process, or the subject of the manufacturing process (but does not include any member of the armed forces of the Union).
In this definition, only members of the armed forces is excluded. In the Employees Provident Fund & Misc. Provisions Act, 1952, the words 'employer' & 'employee' are defined under Sections 2(e) & 2(f) as under : (i) in relation to an establishment which is a factory, the owner or occupier of the factory including the agent of such owner or occupier, the legal representative of a deceased owner or occupier and, where a person has been named as a manager of the factory under Clause (f) of Sub-section (1) of Section 7 of the Factories Act, 1948 (63 of 1948), the person so named, and (ii) in relation to any other establishment, the person who, or the authority which, has the ultimate control over the affairs of the establishment and where the said affairs are entrusted to a manager, managing director or managing agent, such manager, managing director or managing agent." [Emphasis supplied] Employee means: any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of (an establishment), and who gets his wages directly or indirectly from the employer and includes any person employed by or through a contractor in or in connection with the work of the (establishment) [Emphasis supplied] A perusal of the above definition makes abundantly clear that for the purpose of Factories Act, 1948, the 'worker' is a person employed directly by or through any agency including the contractor. In the Employees Provident Fund & Misc. Provisions Act, 1952, the word 'employer' includes the person who has the ultimate control over the affairs of the establishment. The word 'employee' as defined in the Act [Section 2(f)] includes any person, who gets his wages directly or indirectly from the employer and also includes any person employed by or through a contractor. Section 30 of the Employees Provident Fund & Misc. Provisions Act, 1952 fixes the responsibility upon the employer to contribute his portion of the provident fund. Section 32 which fixes the liability of employees employed through contractor runs as under : (2) In respect of employees employed by or through a contractor, the contractor shall recover the contribution payable by such employee (in this scheme referred to as the member's contribution and shall pay to the principal employer the amount of member's contribution so deducted together with an equal amount of contribution (in this scheme referred to as the employer's contribution) and also administrative charges.
Before going through the definitions given in various Acts, we will deal with Section 80-I(2)(iv). This is a provision in Section 80-I which gives certain benefits to certain assessees. Therefore, it is well settled principle of the interpretation that such provision should not be interpreted so narrowly to deprive the benefit extended by the Legislature to the assessee.
8. In this case, it cannot be disputed that the industrial undertaking employ more than 20 workers. But the question is, whether the assessee is entitled for the benefit of Section 80-I(2)(iv), for the reason that he employed the workers through a contractor Whether such employment amounts to employment in real term In the case of Hussainbhai (supra) the Hon'ble Mr. Justice Krishna Iyer speaking for the Court held that, "where a worker or group of workers labours to produce goods or services and these goods or services are for the business of another, that other is, in fact, the employer.... The court must be astute to avoid the mischief and achieve the purpose of the law and not be misled by the maya of legal appearances". Thus, even if he gets the workers from third party, that amounts to employing workers by the assessee.
Further, we have already noted that Section 2(1) of the Factories Act, 1948 the definition of the 'worker' includes a person employed through contractor also. The Employees Provident Fund & Misc. Provisions Act, 1952, Section 2(f) defines the word 'employee' as a 'person who gets his wages directly or indirectly from the employer and includes any person employed by or through a contractor in or in connection with the work of the establishment'. Here the Legislature makes it clear that the payment of wages directly or indirectly from the employer is not the paramount criteria for establishing a relationship with employer and employee. As per Section 2(e)(ii) one necessary ingredient is that, 'in relation to any other establishment, the person who, or the authority which, has the ultimate control over the affairs of the establishment ....' Here it is not disputed that the assessee is having ultimate control over the affairs of the establishment. Another argument raised by the learned D.R. was that the assessee is claiming exemption from contributing provident fund, etc. Coming to this point, we find that Section 30(2) of the Employees Provident Fund and Misc. Provisions Act, 1952 makes it clear that for the purpose of making contribution towards provident fund, etc., the contractor should recover the contribution if the principal employer to do so and other administrative charges. If this provision is not strictly complied with, that cannot be held against the assessee for denying his benefit. When the assessee gets labourers on contract basis from the contractor, it is for the contractor to get advantage and to extend the social benefit schemes on behalf of his labourers. This point also cannot be held against the assessee for denying the benefit of Section 80-I(2)(iv). It is also not disputed that in case of an accident, it is the assessee who is responsible to the workers. The assessee can let off the workers at any time if he desires so.
9. From the foregoing discussion, it is clear that the assessee is employing 20 workers in his industrial undertaking. As such, the assessee cannot be denied the benefit of Section 80-I(2)(iv) extended by the Income-tax Act. We hold that the assessee is entitled for the benefit as claimed for. Accordingly, the learned CIT's order under Section 263 for all the years is set aside.
10. In the result, the appeals by the assessee for all the three years are allowed.