Sec 80IB- Workers need to be employed for substantial period of time to satisfy minimum workers criteria

Brief of the case:

The Hon’ble Himachal Pradesh High Court in the case of CIT vs. M/s Indus Cosmeceuticals held that the condition of employing atleast 10 workers as required to be complied with for claiming deduction u/s 80IB cannot be deemed to have complied by employing workers for a small part of year. It is because the employment should be for a substantial period of time during the financial year.

Facts of the case:

• Assessee claimed deduction u/s 80IB (2) for Assessment 2003-04 years in respect of the business of its industrial undertaking. For claiming deduction under this section one of the mandatory requirement is that an industrial undertaking is required to employ ten or more workers in a manufacturing process carried on with the aid of power.

• In the course of assessment proceedings, AO while checking the attendance register noted that in all 13 workers were employed and most of the workers had only worked for three to four months during the entire financial year 2002-03 except the two workers.
• The AO disallowed the deduction on the following grounds:

(i) Only two workers were employed for substantial period of time during the financial year

(ii)On enquiry with two workers they responded that the maximum number of workers employed by the assessee during the financial year 2002-03 was eight.

• CIT(A) in appeal confirmed the findings of AO. In appeal before ITAT the case was decided in favour of assessee , ITAT held that the assessee has claimed 13 workers whereas the requirement of law is that there must be minimum 10 workers. Workers employed for short duration cannot be excluded while counting the no. of workers employed for the purpose of determining eligibility as per Sec 80IB.
• Aggrieved by the order of ITAT, revenue is in appeal before Hon’ble Himachal Pradesh High Court.

Contention of the Revenue:

• Revenue contended that only two workers worked for substantial period of time out of 13 employed and rest 11 has worked for on an average 3-4 months only during the financial year.
• Further, upon enquiry from two regular workers AO came to know about that infact only 8 workers were actually employed by the assessee.
• Therefore, the requirement of having atleast 10 workers cannot be deemed to be complied with by employing the workers for a little part of year.

Issue before the High Court:

• Whether the condition specified in section 80IB(iv) requiring employment of ten or more workers in the process carried out could be said to have been complied with, when most of the workers had not actually worked for more than four months during the year?

Held by Hon’ble High Court:

• The findings of the tribunal are really surprising which are without there being any material placed before it. It was never the case of the assessee that the workers include the assessee, who are husband and wife who are qualified persons and therefore should be counted as workers.
• Further, the finding of tribunal that the employing 13 workers for any period of time in the year is a substantive compliance is erroneous. The tribunal recorded the finding ignoring the same issue dealt with by this court in the case of M/s Amrit Rubber Industries vs. Commissioner of Income Tax, IT Appeal Nos. 32 & 33 of 2004.

• In the aforesaid case this court held that employing persons for short period of time (say 1-6 months) could not be deemed to fulfill the requirements of Sec 80IB because the employment should be for a substantial period of time.
• Substantial part does not mean the entire year, but employment for 1/6th of the year or half of the year can under no circumstance be termed to be employment for a substantial part of the year.
• Following our judgment of that case , since the assessee has not employed ten or more workers during the substantial part of the year it cannot be entitled to claim deduction u/s 80IB.
• In result the appeal of revenue is allowed.