Case Law Details

Case Name : Tapas Paul Vs ACIT (ITAT Kolkata)
Appeal Number : ITA No.237/Kol/2014
Date of Judgement/Order : 03/05/2017
Related Assessment Year : 2008-09
Courts : All ITAT (3562) ITAT Kolkata (231)

AO has disallowed the payment made by assessee to the labourers on the ground that TDS was not deducted u/s. 194C of the Act which was subsequently confirmed by the Ld. CIT(A).

Now the issue before us arises so as to whether the labourers are the employees of assessee or they are working in contractual capacity attracting the provisions of TDS. From the laborers register placed on pages 27 to 91 of the paper book, we find that the payment was made to individual labourers and not to the labour contractor. Therefore the individual labourers can be treated as employee of the assessee.

The employer is a person who controls and directs a servant or worker under an express or implied contract of employment. The employer accordingly is under obligation to pay him the salary or wages in compensation. Accordingly, an individual who works part-time or full-time under a contract of employment whether oral or written expressed or implied and he is liable to perform the duties as assigned. That person is called as employee.

In the instant case we find that the labourers are working under the direct supervision of the assessee. They have no other separate business organization. They are representing the organization of the assessee. Thus in our considered view there exists an employer and employee relationship between the assessee and labourers. The payment to the employees can be in the form of fixed salary plus incentive commission as mutually agreed.

Similarly the payment of PF and ESI by the employer cannot be the basis of deciding whether there exist employer and employee relationship. For the applicability of PF and ESI there are certain conditions attached to an organization. The character of the relationship of the employer and employee cannot be changed on the basis whether an organization is registered under PF and ESI.

Full Text of the ITAT Order is as follows:-

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-XXXII, Kolkata dated 16.12.2013. Assessment was framed by JCIT, Circle-51,Kolkata u/s 147/144 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 30.12.2011 for assessment year 2008-09.Shri A.K. Tibrawal, Ld. Authorized Representative appeared on behalf of assessee and Shri Sallong Yaden, Ld. Departmental Representative represented on behalf of Revenue.

2. The grounds raised by the assessee per its appeal are as under:-

“1) That the Ld. Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.80,19,210 made by the Assessing Officer u/s. 40(a)(ia) of the Income Tax Act, 1961 in respect of wages paid by the Appellant to its workers on the alleged ground that there were shortcomings and defaults in payment of wages or otherwise.

2) That the Ld. Commissioner of Income Tax (Appeals) while confirming the aforesaid disallowance u/s. 40(a)(ia) of the Act erred in not accepting the remand report submitted by the Assessing Officer in response to directions issued by him, on mere suspicion and arbitrary allegations made against the Appellant and the Assessing Officer.

3) That the Ld. Commissioner of Income Tax (Appeals), having accepted that the sum of Rs.80,19,210 representing daily wags paid to labour cannot be equated to payments made to contractors, erred in confirming the disallowance of the same made by Assessing Officer u/s. 40(a)(ia) of the Act.

4) That the Ld. Commissioner of Income Tax (Appeals) was not justified in confirming the disallowance of wages of Rs.80,19,210 paid to daily workers employed by the Appellant, relying on the provisions of sec. 40(a)(ia) of the Act on the ground of alleged shortcomings in maintenance of wage register although the provisions of sec. 40(a)(ia) are applicable for failure to deduct tax and/or payment of the tax deducted at source in accordance with the provisions of Chapter XVII B of the Act.

5) That the Ld. Commissioner of Income Tax erred in dismissing the Appellant’s ground of appeal relating to validity of the impugned re-assessment proceedings initiated in pursuance to the Notice issue by the Assessing Officer under section 148 of the Income Tax Act, 1961.”

3.  Effective inter-connected issue raised by assessee in ground No. 1 to 4 of this appeal is that Ld. CIT(A) erred in confirming the order of Assessing Officer by sustaining the disallowance of ₹80,19,210/- on account of non-deduction of Tax Deducted at Source (TDS) u/s. 194C of the Act.

4. The facts in brief are that assessee in the present case is an individual and engaged in the business of civil construction. The assessee in the year under consideration has claimed labour charges amounting to ₹80,19,210/- without deducting the TDS u/s. 194C of the Act. The AO called upon the assessee to explain the reasons for non-deduction of TDS and also directed to furnish the labour register, name and address of the labour, mode of payment, bank statement and details of PF/ESI. However, assessee failed to furnish the same. Therefore, AO disallowed the labour charges for non-deduction of TDS and added to the total income of assessee.

5. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that the payments were made to individual labour and none of the case, it was exceeding more than the prescribed limit u/s. 194C of the Act. The assessee in support of his claim also filed a monthly list of payments made to the labour and also produced the labour register. A remand report was called for from the AO wherein it was submitted that the wage register has been prepared after-thought and it did not contain the address of the labourers and details of work location.

However, Ld. CIT(A) observed certain defects in the labour register produced by assessee and accordingly he rejected the contention of assessee by observing as under:-

“The claim of the assessee is not convincing. The assessee admits the apparent flaw but claims that it was by inadvertence. The assessee has not explained as to how a single serially numbered list of labour is enumerated in the computerized Register of Wages when the assessee was working at different sites and when the assessee has no assets in the name of office machines or even a computer. The assessee has not offered to produce the person(s) who have put their thumb impressions against multiple names. The assessee has not offered to have the register forensically examined. The entire Register contains no date of payment to labour and there is no date of receipt of the payment by any so called signatory. Therefore, it is held that the Register of Wages, on which the assessee has placed his entire reliance, cannot be taken as proof that the assessee had not hired labour under a contract or sub-contract. Thus the applicability or non applicability of section 40(a)(ia) of the Act cannot be tested as the payments are in cash. However it is quite possible that all the labour may not have been engaged through a contractor or sub-contractor but the as has not produced any PF/ESI registers and proof of payment of sums under the EPF & MP Act or the ESI Act to substantiate that all the labour were his own. The assessee has also not complied with the State Government’s Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and has not adduced evidence that he has got his business and his labour registered under the State Act. The Register of Wages so produced has not been certified to have been inspected by the Labour Department as per law.

In view of the above shortcomings and defaults it is held that in principle the Assessing Officer was justified in holding that section 40(a)(ia) of the Act was applicable to the assessee in respect of the labour payments and the Revised Ground No.1 is dismissed.”

Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

6. Ld. AR for the assessee before us filed paper book which is running pages from 1 to 91 and submitted that all the labourers are employee of assessee and in none of the case payment is exceeding the limit to attract the provision of TDS. Ld AR drew our attention on the labour register which is placed on pages 27 to 91 of the paper book.

On the other hand, Ld. DR heavily relied on the order of Authorities Below.

7. We have heard rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that AO has disallowed the payment made by assessee to the labourers on the ground that TDS was not deducted u/s. 194C of the Act which was subsequently confirmed by the Ld. CIT(A).

Now the issue before us arises so as to whether the labourers are the employees of assessee or they are working in contractual capacity attracting the provisions of TDS. From the laborers register placed on pages 27 to 91 of the paper book, we find that the payment was made to individual labourers and not to the labour contractor. Therefore the individual labourers can be treated as employee of the assessee.

The employer is a person who controls and directs a servant or worker under an express or implied contract of employment. The employer accordingly is under obligation to pay him the salary or wages in compensation. Accordingly, an individual who works part-time or full-time under a contract of employment whether oral or written expressed or implied and he is liable to perform the duties as assigned. That person is called as employee.

In the instant case we find that the labourers are working under the direct supervision of the assessee. They have no other separate business organization. They are representing the organization of the assessee. Thus in our considered view there exists an employer and employee relationship between the assessee and labourers. The payment to the employees can be in the form of fixed salary plus incentive commission as mutually agreed.

Similarly the payment of PF and ESI by the employer cannot be the basis of deciding whether there exist employer and employee relationship. For the applicability of PF and ESI there are certain conditions attached to an organization. The character of the relationship of the employer and employee cannot be changed on the basis whether an organization is registered under PF and ESI.

In this connection we also rely in the order of Hon’ble Tribunal of Delhi in the case of St. Stephen’s Hospital Vs. DCIT reported in 6 SOT 60 wherein it was held as under :

“A careful perusal of the said appointment letters showed that out of the 18 consultant doctors in question, 11 doctors were being paid a fixed monthly amount by the assessee, whereas the remaining 7 doctors were being paid some fixed share of fees received from private patients treated by them in addition to the fixed monthly payment. Barring that aspect, there was no material difference in the terms and conditions of their appointment. [Para 11]

Keeping in view the position arising from the terms of appointment of consultant doctors as well as the Service Rules governing the employees of the assessee ’s hospital, it could reasonably be concluded that all the consultant doctors were employees of the assessee, and that even if there was a distinction between the terms of employment of the permanent employees and those of consultant doctors, the fact was that they were the employees of the assessee falling in the category of fixed period/contract employee and/or part-time employee. It, therefore, followed that the relationship between the assessee and the consultant doctors was purely that of employer and employee and remuneration paid to them in terms of the said relationship was salary which attracted the provisions of section 192. [Para 14]

The treatment given by the assessee as well as the consultant doctors to the remuneration paid in their respective books of account was not conclusive to decide the nature of the said remuneration which had to be ascertained on the basis of relationship between the assessee and the consultant doctors. [Para 16]

There was an employer-employee relationship between the assessee and the consultant doctors and, consequently, remuneration paid to them was chargeable to tax under the head ‘Salaries’. The said payments, thus, were subject to deduction of tax as per provisions of section 192 and not as per provisions of section 194J. Thus, the Assessing Officer was fully justified in treating the assessee as in default for short deduction of tax at source from the payments made to the consultant doctors. [Para 17]

The assessee ’s appeal was, accordingly, dismissed.”

In the light of above reasoning, we hold that the assessee is not liable for TDS deduction under section 194C of the Act. The assessee gets the relief accordingly. Hence, this issue of assessee’s appeal is allowed. As we have adjudicated the issue in favour of assessee on merit, we are not inclined to adjudicate the technical issue raised by the assessee. Hence, the ground No.5 of the assessee is dismissed as infructuous.

8. In the result, assessee’s appeal stands partly allowed.

Order pronounced in open court on 03/05/2017

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Category : Income Tax (24535)
Type : Judiciary (9649)
Tags : ITAT Judgments (4104) Section 194C (122) section 40(a)(ia) (164) TDS (858)

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