UNH Management Services Private Limited Vs DCIT (ITAT Mumbai)
PCIT Cannot “Recruit” Section 263 for a Second Inquiry: 1.24 Crore Section 80JJAA Deduction Restored
The Mumbai ITAT quashed the revisionary order under Section 263 concerning UNH Management Services Pvt. Ltd.’s deduction of ₹1,23,89,236 under Section 80JJAA.
During the original assessment, the AO had specifically examined the claim, proposed its disallowance and considered the assessee’s response, Form 10DA, employee-wise particulars, salary details and PF/ESIC records before accepting it. Therefore, this was not a case of “lack of enquiry”; at most, the PCIT wanted a more extensive enquiry conducted differently. Such inadequate enquiry or difference of opinion could not justify revision under Section 263.
The Tribunal further held that Section 80JJAA does not exclude employees merely because they are deployed at clients’ premises by a staffing or manpower-supply company. Operational supervision by the client does not destroy the employer–employee relationship where the staffing company recruits the employees, pays their salaries, deducts TDS and fulfils PF and ESIC obligations. Similarly, recovery or reimbursement of salary costs from clients does not mean that the staffing company incurred no employee cost.
Since the PCIT neither identified any employee who violated the statutory conditions nor established that the AO’s view was legally unsustainable, the Section 263 order was quashed and the original assessment restored.
List of Cases Discussed / Relied Upon
- UNH Management Services Private Limited Vs DCIT (ITAT Mumbai)
- Manpower Services India Pvt. Ltd. v. ACIT, ITA No.3585/Del/2024, for assessment year 2020-21, order dated 25.09.2025
- Commissioner of Income-tax v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.)
- Mrs. Suneeta Sekhri, Legal Heir of Mr. Anmol Govindram Sekhri v. DCIT, ITA No.1091/Mum/2025, for assessment year 2018-19, order dated 02.02.2026
- Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC)
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal filed by the assessee is directed against the order dated 31.03.2026 passed by the learned Principal Commissioner of Income-tax, Thane-1 [“the learned PCIT”], under section 263 of the Income-tax Act, 1961 [“the Act”], for the assessment year 2022-23. By the impugned order, the learned PCIT held that the assessment order dated 20.03.2024 passed by the Assessing Officer under section 143(3) read with section 144B of the Act was erroneous insofar as it was prejudicial to the interests of the Revenue, to the extent that the assessee’s claim of deduction of Rs.1,23,89,236/- under section 80JJAA of the Act had been allowed without proper verification.
2. Facts in brief
2.1. Briefly stated, the assessee filed its return of income for the assessment year 2022-23 on 29.09.2022, declaring total income of Rs.1,94,43,690/-. The case was selected for scrutiny and, during the assessment proceedings, the Assessing Officer specifically examined, inter alia, the assessee’s claim of deduction of Rs.1,23,89,236/- under section 80JJAA of the Act. In response to the notices issued under section 142(1), the assessee furnished Form No. 10DA, employee-wise particulars and other supporting documents. The Assessing Officer thereafter issued a show-cause notice dated 08.03.2024 proposing, among other variations, disallowance of the deduction claimed under section 80JJAA. After considering the assessee’s reply dated 13.03.2024 and the documents furnished in support of the claim, the Assessing Officer accepted the returned income and completed the assessment under section 143(3) read with section 144B of the Act on 20.03.2024, determining the total income at Rs.1,94,43,690/-.
2.2. Subsequently, the learned PCIT initiated revisional proceedings under section 263 of the Act on the ground that the Assessing Officer had allowed the deduction under section 80JJAA without properly examining whether the personnel deployed at the establishments of the assessee’s clients could be regarded as employees of the assessee’s own business, whether the employer-employee relationship genuinely existed, and whether the other statutory conditions were fulfilled. By the impugned order dated 31.03.2026, the learned PCIT held that the assessment order was erroneous insofar as it was prejudicial to the interests of the Revenue. He consequently set aside the assessment order on this limited issue and directed the Assessing Officer to re-examine the allowability of the deduction under section 80JJAA afresh, after carrying out the necessary enquiries and affording an adequate opportunity of hearing to the assessee.
3. Aggrieved, the assessee is in appeal before us and has raised following grounds:
GROUND I
1. On the facts and circumstances of the case and in law, the learned Pr. CIT was not justified in passing the order u/s 263 of the Act.
2. On the facts and circumstances of the case and in law the Pr. CIT failed to appreciate that:
a. The AO had completed assessment u/s 143(3) r.w.s 144B of the Act after examining the submissions made by the appellant and facts available on record.
b. The appellant hasfully complied with all the procedural requirements and provided all the relevant documents for claiming deduction u/s 80JJAA in response to the specific query.
c. Section 80JJAA does not exclude the employment for the purposes of Manpower and staffing.
d. The deduction U/s 80JJAA is consistently claimed in earlier years also.
3. The appellant therefore submits that the order is not erroneous, and prays that the order passed u/s 263 may please be annulled.
The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal.
4. During the course of hearing before us, the learned Authorised Representative (AR) reiterated the facts and submissions made before the lower authorities. He submitted that the deduction under section 80JJAA of the Act was not claimed by the assessee for the first time during the year under consideration. An identical deduction had been claimed by the assessee in assessment year 2020-21 and was allowed by the Assessing Officer in the scrutiny assessment completed for that year. In support of this submission, the learned AR invited our attention to the copy of the assessment order for assessment year 2020-21 placed at pages 22 and 23 of the paper book and, more particularly, to the specific portion thereof wherein the details relating to the deduction claimed under section 80JJAA were examined. It was therefore submitted that the claim was recurring in nature and had been accepted upon examination in the earlier assessment year.
5. In respect of the assessment year under consideration, the learned AR submitted that the Assessing Officer had made a specific enquiry into the claim under section 80JJAA. He invited our attention to pages 7 and 8 of the assessment order and pointed out that the Assessing Officer had issued a show-cause notice proposing the disallowance of the deduction of Rs.1,23,89,236/- claimed under section 80JJAA. In response thereto, the assessee furnished its detailed reply dated 13.03.2024, along with Form No. 10DA and employee-wise particulars in the format prescribed by the Assessing Officer. The assessee had also furnished the details of employee benefit expenses, salary payments, employer’s contributions to provident fund and ESIC and other supporting documents. It was thus contended that the deduction was allowed only after the Assessing Officer had raised a specific query, considered the assessee’s reply and examined the supporting material placed on record.
6. The learned AR further invited our attention to section 80JJAA of the Act, which provides for deduction in respect of employment of new employees. Referring specifically to clause (ii) of the Explanation to section 80JJAA, the learned AR submitted that the expression “additional employee” is defined in the following terms:
“(ii) „additional employee‟ means an employee who has been employed during the previous year and whose employment has the effect of increasing the total number of employees employed by the employer as on the last day of the preceding year, but does not include—
(a) an employee whose total emoluments are more than twenty-five thousand rupees per month; or
(b) an employee for whom the entire contribution is paid by the Government under the Employees‟ Pension Scheme notified in accordance with the provisions of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952); or
(c) an employee employed for a period of less than two hundred and forty days during the previous year; or
(d) an employee who does not participate in the recognised provident fund:”
7. On the strength of the aforesaid definition, the learned AR submitted that section 80JJAA does not exclude an employee merely because the employer is engaged in the business of manpower supply or staffing services. The exclusions specified in clauses (a) to (d) of Explanation (ii) relate to the amount of monthly emoluments, payment of the entire pension contribution by the Government, the minimum period of employment and participation in a recognised provident fund. There is no exclusion based upon the nature of the employer’s business as a manpower supply or staffing concern, nor is an employee excluded merely because such employee is deployed at the establishment of a client in the course of the employer’s business.
8. To support the claim on merits, the learned AR placed reliance on the decision of the Co-ordinate Bench in Manpower Services India Pvt. Ltd. v. ACIT, ITA No.3585/Del/2024, for assessment year 2020-21, order dated 25.09.2025. The learned AR submitted that the assessee in the said decision was also engaged in providing staffing services to its customers and its employees were deputed at the premises of its clients. The deduction claimed under section 80JJAA was disallowed on the ground that the employees were not regular employees and that no employer-employee relationship existed between the staffing company and the personnel deputed at the clients’ premises. The Co-ordinate Bench, after examining the amended provisions of section 80JJAA and the nature of the employment and service arrangements, allowed the claim.
9. On the jurisdictional ground, the learned AR first placed reliance upon the judgment of the Hon’ble jurisdictional Bombay High Court in Commissioner of Income-tax v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.). The learned AR submitted that, in the said case, the Assessing Officer had raised a specific query regarding the allowability of the expenditure claimed by the assessee, considered the written explanation furnished in response thereto and allowed the claim. The assessment order, however, did not contain a detailed discussion of the enquiry made or the explanation furnished. The Commissioner invoked section 263 on the ground that the absence of discussion in the assessment order indicated non-application of mind and directed the Assessing Officer to re-examine the claim. The Hon’ble jurisdictional High Court held that such exercise of revisional jurisdiction was not permissible.
10. The learned AR also relied upon the decision of the Co- ordinate Bench of the Mumbai Tribunal in Mrs. Suneeta Sekhri, Legal Heir of Mr. Anmol Govindram Sekhri v. DCIT, ITA No.1091/Mum/2025, for assessment year 2018-19, order dated 02.02.2026. He submitted that the said decision reiterates the distinction between a case of complete absence of enquiry and a case where the Principal Commissioner considers the enquiry conducted by the Assessing Officer to be inadequate.
11. The learned AR accordingly submitted that the eligibility of each employee was required to be examined with reference to the statutory conditions prescribed in section 80JJAA and the exclusions expressly contained in Explanation (ii). According to him, the learned PCIT could not introduce an additional disqualification, not contemplated by the statutory provision, merely because the assessee was engaged in manpower and staffing services or because its employees were deployed at the establishments of its clients. It was reiterated that the relevant employee-wise particulars, Form No. 10DA and supporting records had been furnished before the Assessing Officer and were examined before the claim was allowed.
12. Per contra, the learned Departmental Representative (DR) relied upon the impugned order passed by the learned PCIT and supported the exercise of revisional jurisdiction under section 263 of the Act. The learned DR submitted that the deduction of Rs.1,23,89,236/- under section 80JJAA had been allowed without proper examination of the statutory conditions governing the claim.
13. On the merits of the deduction, the learned DR submitted that no genuine employer-employee relationship existed between the assessee and the personnel deployed at the establishments of its clients. According to him, such personnel performed their duties under the supervision and control of the respective clients and the salaries paid to them were reimbursed to the assessee by those clients. It was submitted that the assessee merely acted as an intermediary in sourcing and deploying personnel and disbursing salaries reimbursed by its clients. Therefore, according to the learned DR, it was necessary to examine whether the employees in question were, in substance, employees of the assessee’s own business and whether the assessee had incurred any real additional employee cost within the meaning of section 80JJAA.
14. The learned DR particularly relied upon paragraph 22 at page 6 of the impugned revisional order. The said paragraph reads as under:
“22. The material available on record shows that certain documents such as Form 10DA and employee-wise details were furnished. However, there is nothing on record to show that the Assessing Officer examined the service agreements with clients, the actual nature of employer-employee relationship, the extent of supervision and control over the deployed personnel, or the salary reimbursement arrangement. These were central issues in the facts of the case. In the absence of examination on these issues, it cannot be said that the claim was properly verified.”
15. The learned DR submitted that the mere calling for and furnishing of Form No. 10DA and employee-wise particulars did not establish that the Assessing Officer had examined the essential conditions for allowing the deduction. The Assessing Officer was required to verify whether the employees in respect of whom the deduction was claimed qualified as “additional employees” within the meaning of section 80JJAA, whether their employment had resulted in an increase in the total number of employees employed by the assessee, whether they had remained in employment for the prescribed period, whether they participated in a recognised provident fund and whether the amount claimed represented additional employee cost incurred in the course of the assessee’s business.
16. Referring to paragraph 17 at page 5 of the impugned order, the learned DR submitted that the Assessing Officer had not examined the extent of the salary reimbursed by the clients, the salary actually paid by the assessee to the employees or whether the prescribed emolument condition was fulfilled in respect of each employee for whom the deduction was claimed. According to him, the salary reimbursement arrangement was a material circumstance for determining the real nature of the employment relationship and whether the assessee had incurred additional employee cost in the course of its own business.
17. The learned DR further submitted that the issuance of appointment letters, payment of salary and compliance with provident fund, ESIC and other statutory requirements were not, by themselves, conclusive of the employer-employee relationship. Considering the nature of the assessee’s staffing business, it was necessary to examine the service agreements entered into with the clients, the actual terms governing the deployment of personnel, the right to exercise supervision and control, the power to regulate their employment and the substance of the contractual relationship. In the absence of such examination by the Assessing Officer, the claim could not be regarded as having been properly verified.
18. Adverting to the jurisdictional requirements of section 263, the learned DR submitted that the twin conditions prescribed therein stood fulfilled. Explanation 2(a) to section 263 provides that an assessment order shall be deemed to be erroneous insofar as it is prejudicial to the interests of the Revenue where it is passed without making enquiries or verification which should have been made. Likewise, Explanation 2(b) applies where an order is passed allowing any relief without enquiring into the claim. The learned DR submitted that, although certain details had been called for, no enquiry was made into the material aspects concerning the service agreements, employer-employee relationship, supervision and control, salary reimbursement and fulfilment of the employee-specific conditions under section 80JJAA.
19. The learned DR also placed reliance upon the judgment of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC). Referring to the principle governing the exercise of jurisdiction under section 263, he submitted that an order passed without application of mind and resulting in the loss of tax lawfully payable is erroneous and prejudicial to the interests of the Revenue.
20. The learned DR submitted that the above ratio applied to the present case because the deduction of Rs.1,23,89,236/- was allowed without examining the material facts necessary to determine the assessee’s eligibility. He further pointed out that complete identifying particulars were not available in respect of some of the employees included in the employee-wise details. This deficiency also required verification before allowing the substantial deduction claimed by the assessee.
21. According to the learned DR, the failure to conduct the necessary enquiries resulted in prejudice to the interests of the Revenue because a substantial deduction was allowed without verification of the statutory conditions. The impugned order did not finally disallow the deduction but merely restored the matter to the Assessing Officer for a fresh examination after conducting the necessary enquiries and affording an adequate opportunity of hearing to the assessee. He accordingly prayed that the order passed by the learned PCIT under section 263 be upheld and the appeal filed by the assessee be dismissed.
22. In rebuttal, the learned AR submitted that the contention of the Revenue that the claim under section 80JJAA had been allowed without verification of the employee-wise particulars was contrary to the assessment record. He submitted that Form No. 10DA, together with complete employee-wise particulars relevant to the claim, had been placed before the Assessing Officer during the assessment proceedings. In support of this contention, the learned AR invited our attention to pages 27 to 68 of the paper book. It was submitted that these pages contained Form No. 10DA and the supporting employee-wise details furnished in response to the specific queries raised by the Assessing Officer.
23. The learned AR submitted that the Assessing Officer had not merely called for the particulars but had also issued a show- cause notice proposing the disallowance of the deduction of Rs.1,23,89,236/-. The assessee had responded to the show-cause notice and had once again furnished the supporting particulars. Therefore, according to the learned AR, this was not a case where the deduction was allowed without calling for or examining the primary material relevant to the claim. The fact that the learned PCIT considered that some further particulars or additional enquiries were required could not convert the enquiry actually conducted by the Assessing Officer into a case of complete absence of enquiry.
24. On the contention of the Revenue regarding the absence of an employer-employee relationship, the learned AR invited our attention to paragraph 13 of the decision of the Delhi Co-ordinate Bench in Manpower Services India Pvt. Ltd. v. ACIT, placed at page 51 of the legal paper book. The relevant observations of the Co-ordinate Bench read as under:
“13. We have heard the rival submissions and have perused the relevant material on record. A Co-joint reading of the terms of service agreements between the assessee and its customer and the fixed term employment contract between the assessee and its employees shows that the assessee, in its capacity of the employer of its employees, has the authority to deploy/assign employees for provision of services at its customer‟s premises. Post assignment, the customer of the assessee, has the authority restricted only to supervise and instruct the work of the deployed employee. The customer cannot take any disciplinary action against the erring employee and can only seek replacement of such employees from the assessee. As per Service Contract, the supervision and control of the employees lies with the assessee company. Upon completion of the task at the customer‟s premise or under any other circumstances, the employees return to the assessee, who may then reassign them to a different location or customer premise.”
25. The learned AR further submitted that reimbursement of salary by the clients did not alter the employer-employee relationship. The employees were recruited and appointed by the assessee; their salaries were paid by the assessee; and the obligations relating to tax deduction at source, provident fund and ESIC were discharged by the assessee. The learned AR accordingly reiterated that deployment of employees at client locations and reimbursement of salary cost could not, by themselves, constitute grounds for denying the deduction under section 80JJAA or for treating the assessment order as erroneous and prejudicial to the interests of the Revenue.
26. We have carefully considered the rival submissions, the written submissions filed by the learned DR, the impugned revisional order, the assessment order and the material placed before us. We have also perused the judicial precedents relied upon by both sides. The principal question arising for our consideration is whether the assessment order dated 20.03.2024, whereby the Assessing Officer allowed the assessee’s claim of deduction of Rs.1,23,89,236/- under section 80JJAA of the Act, was passed without making the enquiries or verification which ought to have been made, so as to render it erroneous insofar as it was prejudicial to the interests of the Revenue within the meaning of section 263 of the Act.
27. The assessment record demonstrates that the claim under section 80JJAA was specifically taken up for examination by the Assessing Officer. By notice under section 142(1), the assessee was expressly called upon to furnish Form No. 10DA and employee-wise particulars for assessment years 2021-22 and 2022-23, including the name, PAN and address of each employee, designation and nature of work, emoluments paid, mode of payment, recognised provident fund deduction, number of days employed and date of employment. In response thereto, the assessee furnished Form No. 10DA and the prescribed employee- wise particulars on 11.11.2023.
28. The Assessing Officer thereafter issued a show-cause notice dated 08.03.2024 proposing, inter alia, the disallowance of the entire deduction of Rs.1,23,89,236/- claimed under section 80JJAA. In response, the assessee furnished a detailed reply dated 13.03.2024 and again submitted Form No. 10DA and the employee-wise particulars. The assessee also furnished a break- up of employee benefit expenses aggregating to Rs.93,68,21,721/-, including salaries of Rs.88,55,29,780/-, employer’s contribution to provident fund of Rs.3,38,24,809/- and employer’s contribution to ESIC of Rs.91,82,204/-. The assessment order further records that the assessee furnished details of eligible employees and the working of the total salary paid. The learned AR also invited our attention to pages 27 to 68 of the paper book, stated to contain Form No. 10DA and the supporting employee-wise particulars.
29. The concluding portion of the assessment order shows that the Assessing Officer was conscious of the precise nature of the assessee’s business. He recorded that the assessee was engaged in providing complete payroll outsourcing and payroll management services and had multiple clients across different segments to whom it provided human resource and staffing services. The Assessing Officer further recorded that the deduction under section 80JJAA was claimed in respect of the employment of new employees and that details of eligible employees and the working of the total salary paid had been furnished. It was after considering these replies and documents that the Assessing Officer accepted the returned income.
30. These facts establish that the claim was not allowed without enquiry. The Assessing Officer raised a specific query, called for the statutory audit report and employee-wise particulars, proposed disallowance of the claim through a show-cause notice, considered the assessee’s response and thereafter took a conscious decision to allow the deduction. The absence of an elaborate discussion in the assessment order cannot, in the face of this contemporaneous record, be equated with an absence of enquiry or non-application of mind.
31. Explanation 2(a) to section 263 applies where the order is passed without making enquiries or verification which should have been made, while clause (b) applies where relief is allowed without enquiring into the claim. Neither situation exists in the present case. The enquiry was directed specifically towards the deduction under section 80JJAA and the primary statutory material, namely, Form No. 10DA and employee-wise particulars, was called for and furnished. The impugned order proceeds on the basis that certain further enquiries, particularly regarding the service agreements with clients, the extent of supervision and control and the salary reimbursement arrangement, ought to have been conducted. In our considered view, this is, at best, a disagreement regarding the extent and manner of enquiry and not a case of complete absence of enquiry into the claim.
32. At this stage, it is apposite to refer to the binding judgment of the Hon’ble jurisdictional Bombay High Court in CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.). In that case also, the Assessing Officer had raised a query, considered the written explanation furnished by the assessee and allowed the claim without discussing the enquiry and the explanation elaborately in the assessment order. The Commissioner set aside the assessment for re-examination. The Hon’ble jurisdictional High Court, in paragraph 14, held as under:
“14. We may now examine the facts of the present case in the light of the powers of the Commissioner set out above. The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the ITO on being satisfied with the explanation of the assessee. Such decision of the ITO cannot be held to be „erroneous‟ simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter that, in our opinion, is not permissible. Further inquiry and/or fresh determination can be directed by the Commissioner only after coming to the conclusion that the earlier finding of the ITO was erroneous and prejudicial to the interests of the revenue. Without doing so, he does not get the power to set aside the assessment. In the instant case, the Commissioner did so and it is for that reason that the Tribunal did not approve his action and set aside his order. We do not find any infirmity in the above conclusion of the Tribunal.”
33. The ratio of the aforesaid judgment applies to the facts before us. The Assessing Officer had made a specific enquiry into the deduction claimed under section 80JJAA and had considered the assessee’s written explanation and supporting documents. The learned PCIT has not demonstrated that the particulars furnished in Form No. 10DA or the employee-wise details were false or that the deduction was calculated contrary to any specific statutory condition. He has instead directed the Assessing Officer to undertake further examination. Such a course, without first demonstrating that the conclusion reached by the Assessing Officer was erroneous in law or on facts, is contrary to the binding principle laid down in Gabriel India Ltd.
34. We also find support from the decision of the Co-ordinate Bench in Mrs. Suneeta Sekhri, Legal Heir of Mr. Anmol Govindram Sekhri v. DCIT, ITA No.1091/Mum/2025, order dated 02.02.2026. After referring to the distinction between lack of enquiry and inadequate enquiry, the Co-ordinate Bench reproduced the following observations:
“12. We have considered the rival submissions of the counsel on the other side and have gone through the records. The first issue that arises for our consideration is about the exercise of power by the Commissioner of Income-tax under section 263 of the Income-tax Act. As noted above, the submission of learned counsel for the revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between „lack of inquiry‟ and „inadequate inquiry‟. If there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter. It is only in cases of „lack of inquiry‟, that such a course of action would be open.”
35. In the present case, the learned PCIT himself acknowledged that Form No. 10DA and employee-wise details were furnished during the assessment proceedings. His objection was that the Assessing Officer did not additionally examine the agreements with the clients, the actual nature of supervision and control and the salary reimbursement arrangement. Thus, the impugned order itself demonstrates that this is not a case where the Assessing Officer omitted to enquire into the deduction altogether. It is a case where the learned PCIT considered that the enquiry should have been conducted in a different and more extensive manner.
36. We have also examined whether the view adopted by the Assessing Officer was legally unsustainable. Section 80JJAA, as applicable to the assessment year under consideration, allows a deduction equal to thirty per cent of the additional employee cost incurred in the course of business, subject to the conditions specified therein. Explanation (ii) defines “additional employee” and excludes employees whose monthly emoluments exceed Rs.25,000/-, employees in respect of whom the entire contribution is paid by the Government under the Employees’ Pension Scheme, employees who do not satisfy the prescribed period of employment and employees who do not participate in a recognised provident fund. The provision does not exclude an employee merely because the employer is engaged in the business of manpower supply or staffing services, nor does it provide that an employee deployed at the premises of a client ceases, for that reason alone, to be an employee of the staffing concern.
37. The legal position on the eligibility of a staffing concern has been examined by the Co-ordinate Bench in Manpower Services India Pvt. Ltd. v. ACIT, ITA No.3585/Del/2024, for assessment year 2020-21, order dated 25.09.2025. In paragraph 13, the Co- ordinate Bench examined the service agreements with the customers and the employment contracts as reproduced in the submission of the learned AR. On the scope of the amended provision, the Co-ordinate Bench recorded the following finding in paragraph 18:
“18. We find from the amended Sec. 80JJAA of the Act that there is no condition of „regular workman‟, as construed by the AO, rather the section specifically provides for deduction in respect of employees employed for 240 days or more which indicates that the deduction is allowable in respect of fixed period employment. The thrust of the amended section is that the employee should participate in recognized provident fund. We further find that admittedly all these conditions are complied with in assessee‟s case and the action of Assessing Officer in disallowing the deduction is based on considerations which were the requirements of erstwhile section before amendment.”
38. The Co-ordinate Bench thereafter explained the legal effect of operational supervision by a client in paragraph 22 as under:
“22. We thus find that in all the above rulings, it is held that mere exercise of operational supervision on the assigned employees pursuant to a contractual arrangement, cannot be read as the recipient entity is the employer of such contracted employees. In determining the relationship of employer and employee, all relevant facts and circumstances have to be considered including the terms of the contract. Further, what is imperative is to see, whether the person was fully integrated into the employer‟s concern or remained independent of it. Thus, where the contractor had the power to select, dismiss, pay remuneration, deduct insurance contributions, organize the work, and the establishment merely had the „control to supervise‟ and not complete control, it was held that the contractor was the employer of the employees and not the establishment.”
39. Upon examining the relevant facts and statutory compliances, the Co-ordinate Bench concluded in paragraph 25 as under:
“25. In view of the above discussion, we are of the considered view that the assessee is the employer qua the employees employed by it and there is an established relationship of employer-employee between them. The fact is established from the declaration by customer acknowledging deputed personnel as employees of assessee. The payments towards salaries to the employees is subject to Tax withholding u/s 192 of the Income Tax Act, 1961 and TDS certificate in Form 16 is issued by the assessee to its employees on an annual basis. Not only salary, the accompanied obligations of employees towards Provident Fund and Employee State Insurance are discharged by the assessee. We also note that the Department accepted the claim of deduction u/s 80JJAA in the immediately preceding AY 2019-20 after due enquiry u/s 143(3). We therefore hold that the assessee satisfies all the eligibility criteria under amended section 80JJAA of the Act and the AO is directed to allow the deduction u/s 80JJAA. Ground 1 is allowed.”
40. The aforesaid decision demonstrates that the deployment of employees at client locations and the exercise of operational supervision by the clients do not, by themselves, negate the employer-employee relationship between the staffing concern and its employees. The decisive considerations include the right to recruit and appoint, determine and pay remuneration, reassign or relocate, take disciplinary action, terminate the employment and discharge statutory obligations relating to tax deduction, provident fund and ESIC.
41. In the case before us, the assessee’s consistent explanation was that it recruited and appointed the employees, paid their salaries and discharged the statutory obligations relating to provident fund and ESIC. Form No. 10DA and employee-wise particulars were placed before the Assessing Officer. The Assessing Officer was also aware that the employees were deployed in the course of the assessee’s payroll outsourcing and staffing business. Therefore, the decision to allow the deduction was a legally tenable view supported by the language of section 80JJAA and the principle subsequently explained by the Co- ordinate Bench in Manpower Services India Pvt. Ltd.
42. The observation in the show-cause notice under section 263 that more than 99 per cent of the employees worked under the supervision and control of the clients was not demonstrated by reference to any specific agreement or other material examined by the learned PCIT. Likewise, the assertion that the assessee merely acted as a conduit and did not incur any real or incremental employee cost was not supported by a finding that the salaries were not paid by the assessee or that the employee cost was not recorded in its accounts. The commercial recovery or reimbursement of salary cost from clients, by itself, does not establish that the assessee had not paid or incurred the employee cost, particularly when the assessee was carrying on the business of providing payroll outsourcing and staffing services.
43. The learned PCIT has himself clarified in paragraph 12 of the impugned order that his finding did not mean that a staffing concern could never claim deduction under section 80JJAA. Once this position is accepted, the mere nature of the assessee’s business could not render the assessment order erroneous. It was incumbent upon the learned PCIT to demonstrate, on the basis of the material on record, which particular statutory condition was violated and how the deduction allowed by the Assessing Officer was inadmissible. The impugned order does not record any such concluded finding. It merely directs the Assessing Officer to make further enquiries and decide the claim afresh.
44. The fact that the same deduction had been claimed and allowed in the scrutiny assessment for assessment year 2020-21 is not, by itself, conclusive of the assessee’s entitlement for the year under consideration. It is nevertheless a relevant circumstance demonstrating that the Assessing Officer’s view was not an isolated or manifestly untenable view. The copy of the assessment order for assessment year 2020-21 was placed before the Assessing Officer during the present assessment proceedings and was again referred to before us at pages 22 and 23 of the paper book.
45. The learned DR relied upon Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC). There is no dispute regarding the proposition that an order passed without application of mind or without any supporting material and enquiry may be revised under section 263. On the facts of that case, the Hon’ble Supreme Court observed:
“Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the Income-tax Officer was erroneous is irresistible.”
46. The facts before us are materially different. The Assessing Officer did not accept the claim merely on the basis of an entry in the return or in the absence of supporting material. He specifically called for Form No. 10DA and employee-wise particulars, proposed disallowance of the entire claim, considered the assessee’s response and recorded the nature of the business, employment of new employees, details of eligible employees and the salary working furnished by the assessee. Therefore, the Revenue’s reliance on the factual conclusion in Malabar Industrial Co. Ltd. does not advance its case.
47. Malabar Industrial Co. Ltd. also holds that every loss of revenue does not render an order erroneous and prejudicial and that where the Assessing Officer adopts one of the courses permissible in law, the order cannot be revised merely because the Commissioner does not agree with that view, unless the view taken by the Assessing Officer is unsustainable in law. In the present case, the view taken by the Assessing Officer was permissible under the language of section 80JJAA and is supported by the decision in Manpower Services India Pvt. Ltd.
48. On a cumulative consideration of the assessment record, we find that the learned PCIT invoked section 263 not because the Assessing Officer had failed to enquire into the claim under section 80JJAA, but because, in his opinion, the enquiry should have extended to certain additional aspects and should have been conducted in a particular manner. The learned PCIT has neither demonstrated that the material furnished by the assessee was false nor recorded a finding that any identified employee failed to satisfy a specified statutory condition. He has also not established that the view adopted by the Assessing Officer was contrary to law. The impugned order, in substance, sets aside the assessment for a further and more elaborate enquiry, which is impermissible in the facts of the present case.
49. In view of the foregoing discussion and respectfully following the binding judgment of the Hon’ble jurisdictional High Court in Gabriel India Ltd. and the principles applied by the Co-ordinate Benches in Mrs. Suneeta Sekhri and Manpower Services India Pvt. Ltd., we hold that the assessment order dated 20.03.2024 cannot be regarded as erroneous insofar as it is prejudicial to the interests of the Revenue. The conditions necessary for the assumption of jurisdiction under section 263 are not satisfied.
50. Accordingly, the impugned order dated 31.03.2026 passed under section 263 of the Act is quashed and the assessment order dated 20.03.2024 passed under section 143(3) read with section 144B of the Act is restored. The grounds raised by the assessee are allowed.
51. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 21.08.2026.
