Eligibility of Contractual workers for inclusion in Number of Workers

Section 80I(2)(iv) (effective up to 31-3-1991) of the One finds that similar language and expression has been used under the Act of 1922 and has been continued to be used by the Legislature even under the provisions of the 1961 Act while stipulating one of the conditions for the ‘tax holiday’. For ready reference, the language and expressions as used in different provisions over the period are tabulated below:

Comparison of incentive provisions where employment of workers is mandated.

Income-tax Act, 1961, analogous to present section 80IB(2)(iv) of the Act, requires employment of certain number of workers by the new industrial undertaking as one of the conditions for the undertaking to qualify for the ‘tax holiday’. The industrial undertaking should employ ten or more workers in a manufacturing process where the manufacture or production of articles or things takes place with the aid of power or employ twenty or more workers in a manufacturing process if manufacture or production is undertaken without the aid of power.

It appears that one of the aims and objects of the Legislature under the scheme of ‘tax holidays’ over the period is to generate employment in the country.

The language and expression as used in the aforesaid sections have been subject of the judicial interpretation by Courts on different counts viz., the determination of period for which the aforesaid condition needs to be satisfied in a financial year, interpretation of the expression ‘employs’, meaning of the word ‘workers’, etc.

The controversy, sought to be discussed here, revolves around the issue whether the contractual workers or the workers supplied by a contractor for manufacture or production of articles or things could be treated as ‘workers’ employed by the assessee undertaking for the purpose of deduction u/s.80IB/u/s.80I of the Act.

The Bombay High Court recently had an occasion to deal with the aforesaid issue under consideration, wherein the High Court held that it was immaterial as to whether the workers were directly employed or employed by hiring them from a contractor. What was relevant was the employment of ten or more workers and not the mode and the manner in which the said workers were employed. In deciding the issue, the Bombay High Court dissented with the findings that were given on the subject by the Allahabad High Court.

Jyoti Plastic’s case The issue came up recently before the Bombay High Court in the case of CIT v. M/s. Jyoti Plastic Works Private Limited, [339ITR 491 (Bom)]

Jyoti Plastic Works Private Limited (‘Jyoti Plastic’) was engaged in the manufacture of plastic parts which were excisable and had claimed deduction u/s.80IB of the Act. In the reassessment proceedings, the AO disallowed the deduction u/s.80IB of the Act for the following two reasons:

(1) Jyoti Plastic was not a manufacturer, as the goods were manufactured at the factory premises of the job worker; and

(2) The total number of permanent employees employed in the factory were less than ten and thereby the condition as required u/s.80IB (2)(iv) was not satisfied.

The first Appellate Authority and the Mumbai Tribunal allowed the claim of Jyoti Plastic and the Revenue, being aggrieved, carried the issue to the Bombay High Court. As regard the first issue, the Court held in favour of Jyoti Plastic. With respect to the second issue, the Court, in the absence of the meaning of the word ‘worker’ under the Act, referred to the following external aids of construction to determine the meaning of the word ‘worker’:

(1) Black Law Dictionary — ‘worker’ means a person employed to do work for another;

The Court further relied on its earlier judgment in the case of CIT v. Sawyer’s Asia Limited (122 ITR 259) (Bom.), wherein the Court while considering the provisions of section 84(2)(iv) of the Act had observed that the word ‘workers’ should also include ‘casual workers’.

The Revenue relied on the following decisions of the Allahabad High Court to submit otherwise :

(1)    R and P Exports v. CIT, (279 ITR 536); and

(2)    Venus Auto Private Limited v. CIT, 321 ITR 504.

The Bombay High Court distinguished the decision of the Allahabad High Court in the R and P Exports’ case on the ground that the Tribunal in the case before the Bombay High Court had recorded a specific finding of fact that the agreement between Jyoti Plastic and the contractor was a ‘contract of service’ and not ‘contract for service’, whereby the contractual workers were under direct control and supervision of Jyoti Plastic as against the facts which were to the contrary in the case of R and P Exports (supra).

With regard to the decision of Venus Auto Private Limited (supra), the Court acknowledged that the facts in the said case were similar to the facts of the case before the Court; it dissented with the ratio of the decision in the said case and chose to rely on its own decision in the case of Sawyer’s Asia Limited (supra).

The Court finally concluded that since the agreement with the contractor was a ‘contract of service’ i.e., of employer-employee relationship and just because it differed with terms of contract of service with regular employees, that could not be a ground to deny the deduction u/s.80IB of the Act. In other words, so long as the agreement between the parties was a ‘contract of service’ and not ‘contract for service’, it would satisfy the condition prescribed u/s.80IB(2)(iv) of the Act.

Venus Auto’s case

The issue had come up earlier before the Allahabad High Court in the case of Venus Auto Private Limited v. CIT, (321 ITR 504).

Venus Auto Private Limited (‘Venus Auto’) was engaged in the manu-facturing activity of the scooter seat and claimed deduction u/s.80HH and u/s.80I of the Act. In the assessment and appellate proceedings up to the Tribunal stage, Venus Auto’s claim for deduction was rejected on the ground that the condition u/s.80I(2) (iv) of workers employed was not satisfied as the workers employed through the contractor were not to be treated as the workers employed in the industrial undertaking.

On appeal by Venus Auto before the High Court, the Allahabad High Court observed that the word ‘employment’ meant employment of workers by Venus Auto. There should be a relationship of employer and employee between the workers and Venus Auto. The Court observed that with regard to the contractual employees, there was no such employer-employee relationship between Venus Auto and the contractual employees; such relationship existed between the contractor and the contractual employees. The Court on facts and in law distinguished the reliance of Venus Auto on the following decisions:

(1)    Aditya V. Birla v. CBDT, (170 ITR 137) (SC);
(2)    CIT v. K. G. Yediyurappa, (152 ITR 152) (Kar.);
and
(3)    CIT v. V. B. Narania & Co., (252 ITR 884) (Guj.)

Further, the Court observed that vide word ‘it employs’, the Legislature sought to limit the relationship between employer and employee only i.e., between Venus Auto and the workers and therefore, it would not include the workers employed by the contractor.

Observations

‘Tax holidays’ have been provided from time to time vide various sections, viz., section 15C of the Act of 1922 section 84, section 80J, section 80HH, section 80I, section 80IA and section 80IB of the Act of 1961. The intention of the Legislature has been all along to encourage the setting up of new industrial undertakings with a view to expanding industries, employment opportunities and production of goods. The Courts have acknowledged the intention of the Legislature in introducing the said deduction/exemption/relief provisions of the Act and have held that such provisions should be interpreted liberally and reasonably and they should be so construed as to effectuate the object of the Legislature and not to defeat it.

The purpose of ‘tax holiday’ provisions has been apparently to provide tax incentives to stimulate the industry and manufacture of articles, resulting in more employment and economic gain for the country. The element of ‘number of workers to be employed’ being consistently present in all the ‘tax holiday’ provisions justifies the intention of the Legislature to promote and create employment opportunities in the country, thereby reducing unemployment.

In the case of CIT v. P. R. Alagappan, (173 ITR 522) (Mad.), the Court for the purpose of section 80J (4) of the Act explained that a ‘worker’ was a person who worked relying on the definition of ‘worker’ in the Factories Act.

The Court approved of the reference to the definition of ‘worker’ under the Factories Act and also observed that the expression ‘employs’ contemplated ‘contract of service’.

The Karnataka High Court in the case of CIT v. K. G. Yediruppa & Co., (152 ITR 152) in context of section 80HH(2)(iv) of the Act has held that in absence of definition of the word ‘worker’, the ordinary meaning of the word ‘worker’ meant casual, permanent or temporary workers.

Similarly, in the case of CIT v. Sawyer’s Asia Ltd. (supra), the Bombay High Court for the purpose of deduction u/s.84(2)(iv), observed as under:

“………The undertaking is not required to have ten or more regular workers and it may be said to have satisfied that requirement if the aggregate actual number of workers engaged in the manufacturing process, both regular and normal, is ten in number……….If it chooses to have less than 10 regular workers on its muster roll, it runs the risk of not satisfying the requirement on such days on which the necessary number of casual workers is not available.”

The Court also considered even persons employed on casual basis as eligible to be ‘workers’ for the purpose of satisfaction of condition u/s.84(2)(iv) of the Act.

Similarly, in the case of CIT v. V. B. Narania & Co., (252 ITR 884), the Gujarat High Court, in context of provisions of section 80HH(2)(iv) and section 80J(2) (iv), held by relying on the decision of Apex Court in the case of Harish Chandra Bajpai v. Triloki Singh, (AIR 1957 SC 444), that a contract of employment may be in respect of either piece work or time work. It held that the real test of deciding whether the contract was one of employment or not was to find whether the agreement was for the personal labour of the person engaged, and if that was so, the contract was one of employment and the rest of the facts were immaterial like, whether the work was 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.

In interpretation of the analogous provisions to sec-tion 80IB(2)(iv)/section 80I(2)(iv) the Courts have interpreted the word ‘worker’ to also include ‘casual and temporary workers’ and the expression ‘employ’ has been interpreted to mean a contract of service, where the requirement of personal labour of the person employed is of importance as against whether the employee is in normal employment of the undertaking or otherwise. The stress is upon the substance of the arrangement rather than its legal form.

Looking from the perspective of intention of the Legislature in creating employment and supported by the above-referred decisions, the better view appears to be that the casual and contractual workers employed directly or through the contractor are to be treated as the ‘workers’ for the purposes of the ‘tax holiday’. The decision in the case of Venus Auto (supra) may require reconsideration.