Payments By Supervisors To Individual Labourers, Each Not Exceeding Rs. 20,000, Can't Be Disallowed: Calcutta High Court

The Calcutta High Court has held that payments by supervisors to individual labourers, each not exceeding Rs. 20,000, cannot be disallowed under Section 40A(3) of the Income Tax Act, 1961.

The bench of Justice Surya Prakash Kesarwani and Justice Rajarshi Bharadwaj has observed that the supervisors acted as agents of the assessee to disburse the amount to individual labourers, which in no case exceeded Rs. 20,000/- for any individual labour. Therefore, in view of the circumstances prescribed in the second proviso to Section 40A(3) read with Rule 6DD(l) of the Income Tax Rules, 1962, and the provisions of the Indian Contract Act, the payment of Rs. 1,21,49,190 cannot fall within the scope of Section 40A(3) of the Act, 1961.

The appellant/assessee is in the business of embroidery and stitching. The assessee paid a sum of Rs. 1,21,49,190 for payment to labourers.

The assessee stated that the amount was paid to labourers through supervisors who were employees of the assessee. The assessee used to draw a lump sum amount from the bank by check through his employees, i.e., supervisors, for payment to be made to labourers. The supervisors used to make payments to labourers and give an account to the assessee in the form of a list containing payments made to each individual labourer. In none of the cases, the payment made by the supervisors to individual labour exceeded Rs. 20,000. The assessing officer, while passing the assessment order for the assessment year in question, i.e., 2006–07, invoked Section 40A(3) of the Income Tax Act, 1961.

The assessee filed an appeal before the CIT (A), which was allowed. The CIT(A) noted that the practice followed by the appellant is to withdraw the aggregate amount of labour charges from the bank and to disburse the same amongst the individual workers through the supervisor. In not a single case, the individual payments to each worker ever exceed Rs. 20,000, as would be seen from the monthly pay sheet and wage summary sheet. The statutory limit under Section 40A(3) applies to payments made to the party at a time and not to the aggregate of the payments made to the party.

The department filed the appeal before the ITAT. The tribunal, while considering the entries in the ledger account, fortifies the views of the assessing officer that so-called group leaders or supervisors are nothing but subcontractors of the assessee and the workers whose names are mentioned in the worksheet to whom the payments were made through the respective so-called group leaders, who were working not under the assessee but under the said so-called group leader.

The assessee contended that the supervisors were the employees of the assessee. The payments to be made to labourers were withdrawn by the assessee from the bank through the supervisors for disbursement to individual labourers, and the supervisors, after disbursement, gave an account in the form of a list of payments made to individual labourers. Payments so made to individual labourers 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. The supervisors acted as agents of the assessee, and therefore, the payments made to labourers are payments made by the assessee, which in no case exceeded Rs. 20,000 for any individual. Therefore, Section 40A(3) of the Act, 1961, is not attracted, and the assessee's case is covered by provisions in Rule 6DD(l) of the Income Tax Rules, 1962.

Section 40A(3) of the Act aforequoted, as it stood at the relevant time, clearly provides by the second proviso that no disallowance under this subsection shall be made where any payment in a sum exceeding Rs. 20,000/- is made otherwise than by a crossed check drawn on a bank or by a crossed bank draft; in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency, and other relevant factors. Circumstances as referred to in the aforesaid second proviso to Section 40A(3) of the Act, 1961, have 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 exceeding twenty thousand rupees is made otherwise than by a crossed check drawn on a bank or by a crossed bank draft in the cases and circumstances where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person.

Supervisors of the assessee acted as “agents” of the assessee. The words “agent” and “principal” have been defined in Section 182 of the Indian Contract Act. An agent is a person employed to do any act for another or to represent another in dealings with third parties. The person for whom such an act is done, or who is so represented, is called the "principal." The undisputed facts of the present case are that the appellant withdrew money from his bank account through his employees, i.e., supervisors, for disbursement to individual labourers, and the supervisors gave an account of the money so received for payment to labourers. Thus, the appellant/assessee is the principal, and supervisors acted as agents of the assessee.

It is settled law that the authority of an agent may be expressed or implied. Submission of an account by a supervisor acting as an agent of the assessee for the amount received and disbursed to individual labourers leaves no doubt that the supervisors, who were employees of the assessee, acted as agents of the assessee for the purposes of disbursement of the amount to labourers.

The payment so made by the supervisors had not exceeded Rs. 20,000/- for any individual labour. As per the provision of Section 211 of the Indian Contract Act, an agent is bound to conduct the business of his principal according to the direction given by the principal or, in the absence of such direction, according to the customs that prevail in doing business of the same kind at the place where the agent conducts such business.

The court held that the supervisors acted as agents of the assessee in conducting the assessee's business. There is no material or evidence of record to indicate or establish that the supervisors were sub-contractors. Under the circumstances, the finding recorded by the ITAT that the supervisors were sub-contractors is perverse and contrary to the law.

The court held that the order of the ITAT, to the extent it upholds the disallowance under Section 40A(3) for Rs. 24,29,838, cannot be sustained and is hereby set aside. Consequently, the substantial question of law is answered in favour of the assessee and against the revenue.

Counsel For Appellant: J. P. Khaitan

Counsel For Respondent: Smita Das De

Case Title: SK. Jaynal Abddin Versus Commissioner Of Income Tax, Kolkata

Case No.: ITA/8/2012

Click Here To Read The Order