2016 (11) TMI 1604 - AT - Income Tax

Disallowance of deduction u/s 80IA - assessee has not employed more than 10 employees - Held that - Material evidence available on record shows that Shri. Sowrirajan was working in the factory in the day time and since he is staying in the premises of the assessee, he was also shown as chowkidar. This Tribunal is of the considered opinion that an individual cannot be forced to work for more than eight hours in a day and if the assessee compels Shri. Sowrirajan to work in the day time in the factory and as a chowkidar in the night, it would be contrary to the provisions of labour welfare legislation. Therefore, the explanation of the assessee is contrary to the existing statutory provisions. Tribunal is of the considered opinion that Shri. Sowrirajan stay in the factory premises in the night cannot be considered as employment in the manufacturing process. Coming to the consultant so long as the consultant is not shown as an employee of the assessee in its pay role, he cannot be considered as an employee participating in the manufacturing process. The assessee may consult several consultants for several purposes including legal and technical aspect. It is not known, what are the functions the consultant performed in the manufacturing process of the assessee. Unless and until, it is established that the consultant has performed a role in the manufacturing of diesel generator, this Tribunal is of the considered opinion that such a consultant cannot be considered as an employee participating in the manufacturing process of the assessee - Decided against assessee.

Summary

Issues:
- Disallowance of deduction under Section 80IA for not employing more than 10 employees in the manufacturing process.
- Consideration of casual laborers as employees in the manufacturing process.
- Inclusion of a consultant as an employee participating in the manufacturing process.

Analysis:
1. The judgment involves three appeals by the assessee against a common order related to Assessment Year 2002-03 to 2004-05. The assessing officer disallowed the deduction under Section 80IA due to the assessee not employing more than 10 employees in the manufacturing process, citing the employment of a Chowkidar, Shri. Sowrirajan, as a point of contention. The assessee argued that Sowrirajan was involved in the manufacturing process and stayed on the industry premises, thus justifying his dual role as a worker and Chowkidar. However, the tribunal raised concerns about Sowrirajan's continuous 24-hour work without breaks as per labor laws, leading to doubts about his actual role in the manufacturing process.

2. The tribunal considered the nature of the assessee's business, which involved manual assembly of diesel generators by technicians. The absence of detailed employee records raised doubts about the actual number of employees engaged in the manufacturing process. The assessing officer noted the employment of casual workers but found the total count insufficient to meet the 10-employee threshold. The consultant's role was also scrutinized, with the tribunal emphasizing that unless the consultant's direct involvement in the manufacturing process was proven, they could not be considered an employee for the purpose of claiming deductions under Section 80IA.

3. In a second round of litigation, the tribunal revisited the issue of employee count in the manufacturing process. By excluding the consultant and Chowkidar, the total workforce fell below the required threshold of 10 employees. Drawing parallels with a previous case, the tribunal highlighted the distinction between automatic manufacturing processes and manual assembly, emphasizing that individuals without technical knowledge could not be deemed employees in the manufacturing process. The tribunal concluded that forcing an individual to work for extended hours, as in the case of Sowrirajan, contradicted labor welfare legislation, thereby rejecting the claim of his dual role as a worker and Chowkidar.

4. Ultimately, the tribunal dismissed all three appeals of the assessee, confirming the lower authority's decision. The judgment underscored the importance of substantiating the role of individuals claimed as employees in the manufacturing process for eligibility under Section 80IA deductions. The lack of clear evidence regarding the consultant's contribution and the questionable nature of Sowrirajan's dual role led to the rejection of the assessee's claims, highlighting the significance of compliance with labor laws and the need for verifiable employee records in such tax matters.