In a significant ruling the Calcutta High Court observed that the 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 assessee used to draw a lump sum amount from bank by cheque through his employees i.e., supervisors for payment to be made to labours. The supervisors used to make payment to labours and give an account to the assessee in the form of a list containing payments made to each individual labour.
In none of the cases, the payment so 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.
The senior advocate for the appellant/assessee submitted that the supervisors were the employees of the assessee. The payments to be made to labours were withdrawn by the assessee from bank through the supervisors for disbursement to individual labours and the supervisors, after disbursement, gave an account in the form of a list of payments made to individual labours. Payments so made to individual labours 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 Income Tax Act. The supervisors acted as agent of the assessee and, therefore, the payments made to labours is payment made by the assessee which in no case exceeded Rs.20,000/- to any individual. Therefore, Section 40A(3) of the Income Tax Act is not attracted and the assessee’s case is covered by proviso in Rule 6DD(l) of the Income Tax Rules, 1962.
A Division Bench of Justices Surya Prakash Kesarwani and Rajarshi Bharadwaj observed that “In the present set of facts the supervisors acted as agent 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 law. Consequently, the said finding is hereby set aside.”
“We have found that the supervisors acted as agent of the assessee to disburse the amount to individual labours which in no case exceeded Rs.20,000/- to any individual labour. Therefore, in view of the circumstances prescribed in the second proviso to Section 40A(3) of the Income Tax Act read with Rule 6DD(l) of the Income Tax Rules, 1962 and the above-referred provisions of the Indian Contract Act, the aforesaid payment of Rs.1,21,49,190/- cannot fall within the scope of Section 40A(3) of the Income Tax Act” the Court ruled.
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