2015 (4) TMI 627 - HC - Income Tax

Entitlement to deduction u/s 80I - Whether relationship of master and servant is necessary to claim deduction under 80I - Held that - There is nothing in Section 80I(2)(iv) to say that the relationship in order to qualify for the term employment must be one of master and servant and cannot extend to contractual employment. That the concept of permanent or direct workmen is the precondition envisioned in Section 80I(2) when it was the term employs does not appear to be reflected in the statute as is imputed by the lower authorities. This Court also notices that there are situations where it has been held that services provided by outside agencies would also qualify for benefits of Section 80I. In Krishak Bharti Cooperative Limited V. Deputy Commissioner of Income Tax 2013 (7) TMI 632 - DELHI HIGH COURT , a Division Bench of this Court held that service charges received from the owner of the unit, could in fact be considered as profit derived from an industrial undertaking and thus be entitled for deduction under Section 80I. In other words, even though the ownership of unit, from which the profit was derived by the industrial undertaking claiming deduction under Section 80I, did not vest with it, the Court held that it was entitled to the said benefit - Decided in favour of the assessee

Summary

Issues:
1. Interpretation of Section 80I of the Income Tax Act, 1961 regarding the requirement of the relationship of master and servant for claiming deduction.

Analysis:

1. The primary issue in this case revolved around the interpretation of Section 80I of the Income Tax Act, 1961, specifically whether the relationship of master and servant is necessary to claim a deduction under this section. The appellant had employed workers through a contractor and claimed a deduction under Section 80I. The Assessing Officer (AO) disallowed the deduction, stating that since the employees were engaged through a contractor and not directly by the appellant, the deduction was not applicable. The Commissioner of Income Tax (Appeals) directed the Income Tax Officer (ITO) to verify if at least 10 workers were engaged in the manufacturing process to allow the deduction.

2. The Income Tax Appellate Tribunal (ITAT) reversed the decision of the Commissioner of Income Tax (Appeals), stating that the workers employed through contractors could not be considered as employees of the appellant. However, the High Court disagreed with this interpretation. The Court analyzed Section 80I(2)(iv) which requires an industrial undertaking to employ a certain number of workers in the manufacturing process to qualify for the deduction. The Court emphasized that the provision aims to provide relief to industrial undertakings involved in manufacturing and does not specify that the relationship must be one of master and servant.

3. The Court highlighted that the statute does not mandate a specific type of employment relationship for qualifying under Section 80I. It noted precedents where services provided by outside agencies were considered for benefits under Section 80I. Referring to a previous case, the Court emphasized that even if the ownership of the unit did not belong to the industrial undertaking claiming the deduction, it could still be entitled to the benefit under Section 80I. Therefore, the Court concluded that the restrictive interpretation by the ITAT was unjustified, and the appeal was allowed in favor of the assessee against the revenue.

4. In summary, the High Court clarified that Section 80I does not necessitate a master-servant relationship for claiming deductions. The Court emphasized the importance of fulfilling the conditions outlined in the provision regarding the number of workers employed in the manufacturing process, rather than focusing on the nature of the employment relationship. The judgment provided a broader interpretation of the statute to ensure that industrial undertakings involved in manufacturing receive the intended benefits under Section 80I of the Income Tax Act, 1961.