Aggrieved With The Aforesaid Assessment Order, The Appellant/Assesseefiled An Appeal v. Commissioner Of Income Tax, Kolkata - Xvi

OD – 1 IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE ITA/8/2012 SK. JAYNAL ABDDINVERSUSCOMMISSIONER OF INCOME TAX, KOLKATA-XVI BEFORE : THE HON’BLE JUSTICE SURYA PRAKASH KESARWANIANDTHE HON’BLE JUSTICE RAJARSHI BHARADWAJDate : 2[nd] April, 2024. Appearance:Mr. J. P. Khaitan, Senior AdvocateMs. Anupa Banerjee, AdvocateMr. Sourav Chunder, AdvocateMr. P. Sharma, Advocate… for the appellant.Ms. Smita Das De, AdvocateMr. Prithu Dudheria, Advocate… for the respondent. 1.Heard Sri J. P. Khaitan, learned senior advocate assisted by Smt.Anupa Banerjee, learned counsel for the appellant/assessee and Smt.Smita Das De, learned standing counsel for the respondent/Income TaxDepartment. 2.This appeal was admitted by this Court by order dated 25.01.2012 onthe following substantial question of law: Facts:- “Whether the Tribunal was justified in law in judging theapplicability of Section 40A(3) of the Act with reference to thelump sum amount paid to the leader of each group of workersfor the purpose of disbursement to the individual workers on theappellant’s behalf and not with reference to the payment madeto each individual worker and in holding that the group leaderwas the appellant’s sub-contractor or that the individualworkers worked not under the appellant but under such groupleader and its purported findings in that behalf are arbitrary,unreasonable and perverse ?” 3.Briefly stated facts of the present case are that the appellant/assesseeis engaged in business of embroidery and stitching. The assessee paida sum of Rs.1,21,49,190/- for payment to labourers. According to theassessee, the aforesaid amount was paid to labours through supervisorswho were employees of the assessee. The assessee used to draw a lumpsum amount from bank by cheque through his employees i.e.,supervisors for payment to be made to labours. The supervisors usedto make payment to labours and give an account to the assessee in theform of a list containing payments made to each individual labour. Innone of the cases, the payment so made by the supervisors to individuallabour exceeded Rs.20,000/-. The assessing officer, while passing theassessment order dated 31.12.2008 for the assessment year in questioni.e., 2006-07, invoked Section 40A(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act, 1961’) by recording the followingfacts : “The ground level labourers were not subject to professional tax,ESI, PF, etc. There were no employer employee relationshipwith the assessee and the labourers. The assessee simply got thework done by skilled labourers and the payment is ascertained onthe basis of quality and quantity of the work done by them. Theassessee in his submission dated 30.12.2008 further clarified thatthe job allotted to the worker are purely temporary. Workers arepaid some times for few month even for a few days. Thus thelabour welfare measures are not take up nor it is particable.These workers are quite illiterate, partly homeless and fast changingthe employer and work on piece rate on the condition on no work nopay. It is therefore inferred that the assessee could not producesatisfactory explanation for violation of the Provision of sec. 40A(3).20% of Rs.12149191/- that is Rs.2429838/- is therefore disallowed.U/S 40A(3).” 4.Aggrieved with the aforesaid assessment order, the appellant/assesseefiled an appeal No.261/CIT(A)-XXX/Circle-48/2008-09 which wasallowed by order dated 03.05.2010. The CIT(A) has recorded thefollowing finding of fact: “I have carefully gone through the assessment order andexplanation given by the appellant. The A.O. has stated that thepayments to the Supervisor workers are in excess of Rs.20,000/- incash for which he has disallowed the expenses in terms of section40A(3) of I.T. Act. It has already been held in the precedingparagraphs that the so called sub-contractors are actually Supervisorworker and employees of the appellant firm. The payments made to 4.Aggrieved with the aforesaid assessment order, the appellant/assesseefiled an appeal No.261/CIT(A)-XXX/Circle-48/2008-09 which wasallowed by order dated 03.05.2010. The CIT(A) has recorded thefollowing finding of fact: “I have carefully gone through the assessment order andexplanation given by the appellant. The A.O. has stated that thepayments to the Supervisor workers are in excess of Rs.20,000/- incash for which he has disallowed the expenses in terms of section40A(3) of I.T. Act. It has already been held in the precedingparagraphs that the so called sub-contractors are actually Supervisorworker and employees of the appellant firm. The payments made to them are meant for disbursement amongst the workers. It would beseen from the labour sheets that no single payment to the workerexceeds Rs.20,000/- in cash. The practice followed by theappellant is to withdraw the aggregate amount of labourcharges from bank and to disburse the same amongst theindividual workers through the Supervisor. In not a singlecase, the individual payments to each worker ever exceedRs.20,000/- as would be seen from the monthly pay sheet andwage summary sheet. I have gone through the case laws relied onby the appellant in the case of CIT vs. Aloo Supply Co. and CIT vs.Triveni Prasad Pannalal, cited supra, where the Hon’ble HighCourts held that the statutory limit u/s. 40A(3) applies to paymentmade to the party at a time and not to the aggregate of thepayments made to a party. Considering the totality of the factsand circumstances and having regard to the case laws cited above, itis held that the disallowance u/s. 40A(3) made by the A.O. is notcalled for. Accordingly, the addition of Rs.24,29,838/- isdeleted.” 5.Aggrieved with the order of the CIT(A), the revenue filed an appeal beingITA No.1647/Kol/2010 (A.Y. 2006-07) which was allowed by the ITATby the impugned order. On the aforesaid issue the ITAT has recordedthe following finding to hold that the supervisors are nothing but sub-contractors of the assessee. “We observe that assessee with each of above so-calledsupervisors ledger account has enclosed the copies of weeklywork sheet showing the name of worker, inter alia, amountpaid to each of them. However, on the top of the said work sheet,name of the said supervisor is stated. It is observed that assesseewas making lumpsum payment on an adhoc basis for the purpose offurther disbursement to workers and not as per the amount payable by them to individual workers. We also observe from each of the pageof ledger account placed in paper book (supra) that there is a closingbalance. Had these supervisors been merely an employee ofassessee along with the other workers, we are of theconsidered view that there was no question of any closingbalance as on 31.03.2006. If assessee had made the payments tothem for the purpose of further disbursement, assessee would havepaid the amount to the so-called supervisors the amounts which wereactually payable to them. However, this is not the case.Considering the entries in the ledger account, it fortifies theviews of Assessing Officer that so-called group leaders orsupervisors are nothing but sub-contractors of assessee andthe workers whose names are mentioned in the work sheet towhom the payments were made through respective so-calledgroup leaders, who were working not under the assessee butunder the said so-called group leader.” 6.Aggrieved with the aforesaid order of the ITAT dated 12.08.2011 in ITANo.1647/Kol/2010, the appellant/assessee has filed the presentappeal.No.1647/Kol/2010, the appellant/assessee has filed the presentappeal. Submissions: 6.Aggrieved with the aforesaid order of the ITAT dated 12.08.2011 in ITANo.1647/Kol/2010, the appellant/assessee has filed the presentappeal.No.1647/Kol/2010, the appellant/assessee has filed the presentappeal. Submissions: 7.Learned senior advocate for the appellant/assessee submits that thesupervisors were the employees of the assessee. The payments to bemade to labours were withdrawn by the assessee from bank throughthe supervisors for disbursement to individual labours and thesupervisors, after disbursement, gave an account in the form of a list ofpayments made to individual labours. Payments so made to individuallabours in no case exceeded Rs.20,000/-. Non-payment of EPF or PF issupervisors were the employees of the assessee. The payments to bemade to labours were withdrawn by the assessee from bank throughthe supervisors for disbursement to individual labours and thesupervisors, after disbursement, gave an account in the form of a list ofpayments made to individual labours. Payments so made to individuallabours in no case exceeded Rs.20,000/-. Non-payment of EPF or PF is not relevant for the purposes of Section 40A(3) of the Act, 1961. Thesupervisors acted as agent of the assessee and, therefore, the paymentsmade to labours is payment made by the assessee which in no caseexceeded Rs.20,000/- to any individual. Therefore, Section 40A(3) ofthe Act, 1961 is not attracted and the assessee’s case is covered byproviso in Rule 6DD(l) of the Income Tax Rules, 1962. 8.Learned standing counsel for the respondent/department supports theimpugned order of the Tribunal.impugned order of the Tribunal. Discussion and Finding:- 9.We have carefully considered the submission of learned counsel for theparties and perused the paper book. Before we proceed to examine therival submissions of learned counsel for the parties, it would beappropriate to reproduce Section 40A(3) of the Act, 1961, Rule 6DD(l) ofthe Income Tax Rules, 1962 and Sections 182, 185, 186, 188 and 211of the Indian Contract Act, as under :- Income Tax Act, 1961 40A. (3) Where the assessee incurs any expenditure in respect ofwhich payment is made, after such date (not being later than the 31[st]day of March, 1969) as may be specified in this behalf by the CentralGovernment by notification in the Official Gazette, in a sum exceeding[twenty thousand] rupees otherwise than by a crossed cheque drawnon a bank or by a crossed bank draft, [twenty per cent of suchexpenditure shall not be allowed as a deduction]; Provided that where an allowance has been made in the assessmentfor any year not being an assessment year commencing prior to the1[st] day of April, 1969, in respect of any liability incurred by theassessee for any expenditure and subsequently during any previousyear the assessee makes any payment in respect thereof in a sumexceeding [twenty thousand] rupees otherwise than by a crossedcheque drawn on a bank or by a crossed bank draft, the allowanceoriginally made shall be deemed to have been wrongly made and the[Assessing] Officer may recompute the total income of the assesseefor the previous year in which such liability was incurred and makethe necessary amendment, and the provisions of section 154 shall, sofar as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of theassessment year next following the previous year in which thepayment was so made: Provided further that no disallowance under this sub-sectionshall be made where any payment in a sum exceeding [twentythousand] rupees is made otherwise than by a crossed cheque drawnon a bank or by a crossed bank draft, in such cases and undersuch circumstances as may be prescribed, having regard to thenature and extent of banking facilities available, considerations ofbusiness expediency and other relevant factors.]Income Tax Rules, 1962 Provided further that no disallowance under this sub-sectionshall be made where any payment in a sum exceeding [twentythousand] rupees is made otherwise than by a crossed cheque drawnon a bank or by a crossed bank draft, in such cases and undersuch circumstances as may be prescribed, having regard to thenature and extent of banking facilities available, considerations ofbusiness expediency and other relevant factors.]Income Tax Rules, 1962 6DD.No disallowance under sub-section (3) of section 40A shall bemade where any payment in a sum exceeding [twenty thousand]rupees is made otherwise than by a crossed cheque drawn on a bankor by a crossed bank draft in the cases and circumstances specifiedhereunder, namely :- (a). . . . . . (l) where the payment is made by any person to his agentwho is required to make payment in cash for goods orservices on behalf of such person; Contract Act 182. “Agent” and “principal” defined.- An “agent” is a personemployed to do any act for another, or to represent another indealings with third persons. The person for whom such act is done,or who is so represented, is called the “principal”. 185. Consideration not necessary.- No consideration is necessaryto create an agency. 186.Agent’s authority may be expressed or implied.- Theauthority of an agent may be expressed or implied; 188. Extent of agent’s authority.- An agent, having an authorityto do an act, has authority to do every lawful thing which isnecessary in order to do such act. An agent having an authority to carry on a business, hasauthority to do every lawful thing necessary for the purpose, orusually done in the course, of conducting such business. 211. Agent’s duty in conducting principal’s business.- An agentis bound to conduct the business of his principal according to thedirections given by the principal, or, in the absence of any suchdirections, according to the custom which prevails in doing businessof the same kind at the place where the agent conducts suchbusiness. When the agent acts otherwise, if any loss be sustained,he must make it good to his principal, and if any profit accrues, hemust account for it.” 10.On perusal of the assessment order, we find that the assessing officerhas not disputed the specific case of the appellant/assessee that thesupervisors are his employees. The specific stand of the appellant/assessee that the supervisors are his employees, wassupported by books of account which were before the assessing officer.The assessing officer recorded the finding that since the provision ofESI, PF etc. were not followed by the assessee, therefore, the individuallabours are not employees of the assessee. The assessing officernowhere disputed the stand of the assessee supported by books ofaccount that the supervisors are employees of the assessee. Inparagraph 11 of the impugned order the ITAT recorded a finding basedon surmise and presumption that the supervisors are nothing but sub-contractors of the assessee. This finding is perverse inasmuch as firstlyit is not supported by any evidence and secondly it is contrary toevidence on record in the form of books of account that the supervisorsare the employees who have been paid salary. Therefore, the findingrecorded by the ITAT in the impugned order that the supervisors aresub-contractors, is perverse and is hereby set aside. 11.Section 40A(3) of the Act afore-quoted, as it stood at the relevant time,clearly provides by the second proviso that no disallowance under thissub-section shall be made, where any payment in a sum exceedingRs.20,000/- is made otherwise than by a crossed cheque drawn on abank or by a crossed bank draft; in such cases and under suchcircumstances as may be prescribed, having regard to the nature andextent of banking facilities available, considerations of business 11.Section 40A(3) of the Act afore-quoted, as it stood at the relevant time,clearly provides by the second proviso that no disallowance under thissub-section shall be made, where any payment in a sum exceedingRs.20,000/- is made otherwise than by a crossed cheque drawn on abank or by a crossed bank draft; in such cases and under suchcircumstances as may be prescribed, having regard to the nature andextent of banking facilities available, considerations of business expediency and other relevant factors. Circumstances as referred inthe aforesaid second proviso to Section 40A(3) of the Act, 1961have been prescribed in Rule 6DD of the Income Tax Rules, 1962.Rule 6DD(l) clearly provides that no disallowance under sub-section (3)of Section 40A shall be made where any payment in a sum exceedingtwenty thousand rupees is made otherwise than by a crossed chequedrawn on a bank or by a crossed bank draft in the cases andcircumstances where the payment is made by any person to hisagent who is required to make payment in cash for goods orservices on behalf of such person. Supervisors of the assessee actedas “agent” of the assessee. The word “agent” and “principal” has beendefined in Section 182 of the Indian Contract Act. An agent is a personemployed to do any act for another, or to represent another in dealingswith third persons. The person for whom such act is done, or who is sorepresented, is called “principal”. Undisputed facts of the present caseare that the appellant withdrawn amount from his bank accountthrough his employees i.e., supervisors for disbursement to individuallabours and the supervisors gave an account of the money so receivedfor payment to labours. Thus, the appellant/assessee is principal andsupervisors acted as agent of assessee. It is settled law that anauthority of an agent may be express or implied. Submission ofaccount by a supervisor acting as agent of the assessee, for the amountreceived and disbursed to individual labourers, leaves no manner of doubt that the supervisors who were employees of the assessee, actedas agent of the assessee for the purposes of disbursement of amount tolabourers. The payment so made by the supervisors had not exceededRs.20,000/- to any individual labour. As per provision of Section 211 ofthe Indian Contract Act, agent is bound to conduct the business of hisprincipal according to the direction given by the principal or in theabsence of such direction according to the customs which prevail indoing business of the same kind at the place where the agent conductssuch business. In the present set of facts the supervisors acted asagent of the assessee in conducting the assessee’s business. There isno material or evidence of record to indicate or establish that thesupervisors were sub-contractors. Under the circumstances, thefinding recorded by the ITAT that the supervisors were sub-contractorsis perverse and contrary to law. Consequently, the said finding ishereby set aside. 12.We have found that the supervisors acted as agent of the assessee todisburse the amount to individual labours which in no case exceededRs.20,000/- to any individual labour. Therefore, in view of thecircumstances prescribed in the second proviso to Section 40A(3) of theAct, 1961 read with Rule 6DD(l) of the Income Tax Rules, 1962 and theabove-referred provisions of the Indian Contract Act, the aforesaidpayment of Rs.1,21,49,190/- cannot fall within the scope of Section 40A(3) of the Act, 1961. Consequently, the disallowance to the extent of20% made by the ITAT and to add it in the income of the assesseecannot be sustained and is hereby set aside. 12.We have found that the supervisors acted as agent of the assessee todisburse the amount to individual labours which in no case exceededRs.20,000/- to any individual labour. Therefore, in view of thecircumstances prescribed in the second proviso to Section 40A(3) of theAct, 1961 read with Rule 6DD(l) of the Income Tax Rules, 1962 and theabove-referred provisions of the Indian Contract Act, the aforesaidpayment of Rs.1,21,49,190/- cannot fall within the scope of Section 40A(3) of the Act, 1961. Consequently, the disallowance to the extent of20% made by the ITAT and to add it in the income of the assesseecannot be sustained and is hereby set aside. 13.For all the reasons afore-stated, the impugned order of the ITAT to theextent it upholds the disallowance under Section 40A(3) of the Act,1961 for Rs.24,29,838/-, cannot be sustained and is hereby set aside.Consequently, the substantial question of law is answered in favour ofthe assessee and against the revenue.extent it upholds the disallowance under Section 40A(3) of the Act,1961 for Rs.24,29,838/-, cannot be sustained and is hereby set aside.Consequently, the substantial question of law is answered in favour ofthe assessee and against the revenue. 14.The appeal is allowedto the extent indicated above. (SURYA PRAKASH KESARWANI, J.) (RAJARSHI BHARADWAJ, J.) A/s.