Reassessment under Section 148 is invalid when incriminating search material requires invocation of Section 153C.

ORDER

G.M. Doss, Accountant Member.- This appeal has been preferred by the Revenue, being aggrieved by the order dated 09.01.2026 passed by the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “the Ld. CIT(A)”] for Assessment Year 202021, whereby the Ld. CIT(A) directed the Assessing Officer to allow the deduction of Rs. 3,16,68,362/- claimed by the respondent-assessee under section 80JJAA of the Income-tax Act, 1961 (“the Act”), which deduction had been disallowed in the assessment framed under section 143(3) read with section 144B of the Act.

2. The respondent-assessee, M/s Prompt Personnel Private Limited is engaged in the business of manpower supply and allied human-resource services. For Assessment Year 2020-21, it claimed deduction under section 80JJAA of the Act of Rs. 3,16,68,362/-, being the amount available out of the total eligible deduction of Rs. 3,93,97,626.90/-, computed at 30% of aggregate emoluments of Rs. 13,13,25,423/- paid to 696 eligible “additional employees”, restricted to its gross total income, against a backdrop of an increase in total employee strength from 11,987 as on 31.03.2019 to 13,256 as on 31.03.2020. The Assessing Officer disallowed the claim on the ground that the assessee, though liable for audit under section 44AB and otherwise satisfying the conditions of increase in employee strength, wage ceiling, minimum period of employment and provident-fund participation as reflected in Form 10DA, does not itself incur the cost of emoluments of the deputed personnel, such cost being, in his view, in substance that of the clients to whom the personnel are deployed and recovered by the assessee from them along with its service margin. The Assessing Officer also doubted whether the claim had been the subject matter of scrutiny in the immediately preceding years, though the assessee clarified that Financial Year 2016-17 (Assessment Year 2017-18) was the first year of its claim, in which the claim had in fact been scrutinised and allowed under section 143(3). By assessment order under section 143(3) read with section 144B of the Act, the Assessing Officer disallowed the claim of Rs. 3,16,68,362/-.

3. In appeal, the Ld. CIT(A) found that the foundational eligibility conditions under section 80JJAA — audit under section 44AB, income comprising profits and gains of business, the business not being formed by splitting up or reconstruction of an existing business, increase in employee strength, the wage ceiling, the minimum period of 240 days’ employment, provident-fund participation, and payment through banking channels — stood satisfied on the strength of the employeewise details, payroll and provident-fund records and the Form 10DA audit report, and were not in dispute. The Ld. CIT(A) further held that a clear employer-employee relationship subsisted between the assessee and the personnel in question, who were recruited by, placed on the payroll of, and remained under the control, supervision and disciplinary authority of the assessee, which alone was responsible for payment of salary and statutory dues and for compliance with labour law, and that mere deployment of such personnel at client premises, intrinsic to the assessee’s business model, did not dilute or negate that relationship; that the Assessing Officer had confined his enquiry to the singular aspect of the place of deployment without a holistic examination of the statutory conditions, the place of deployment not being determinative under section 80JJAA; and that the deduction having been allowed to the assessee in the very first year of its claim under scrutiny assessment under section 143(3), with no change in facts or business model since, the principle of consistency also supported the claim. Holding section 80JJAA to be a beneficial provision enacted to encourage generation of employment, and that denial of deduction merely on the ground of the situs of deployment of employees would defeat its object, the Ld. CIT(A) directed the Assessing Officer to allow the deduction of Rs. 3,16,68,362/- claimed under section 80JJAA. Aggrieved by the relief so granted, the Revenue is in appeal before this Tribunal, urging, in substance, that the Ld. CIT(A) erred in deleting the disallowance without appreciating that the assessee does not itself bear or incur the “additional employee cost” contemplated under the section, such cost being ultimately recovered from, and in substance borne by, the clients to whom the personnel are deputed.

4. The Learned Departmental Representative (“Ld. DR”) submitted that the requirement of cost being incurred by the claimant employer continues to be the pivot of the provision. It was submitted that since the deputed personnel are, in substance, not paid any expenses by the assessee out of its own resources, the assessee cannot be said to be incurring expenditure on employees working with its clients. Referring to the Profit & Loss Account of the assessee, it was submitted that the assessee derives “income from services” (consultancy fees, staffing fees, recruitment fees, background-verification fees, etc.) and other income, out of which alone it meets its own administrative expenses and offers the balance to tax as profit, and that this profit does not include or bear any expense relatable to emoluments paid to personnel working with clients, which are separately routed as “income from contractual receipts” and corresponding “direct expenses pertaining to contract receipts”. On this basis, it was submitted that deduction under section 80JJAA ought not to be allowed to the assessee.

5. The Learned Authorised Representative (“Ld. AR”) of the respondent-assessee, in reply, drew our attention to the decision of the Hon’ble Supreme Court in Steel Authority of India Ltd. v. National Union Waterfront Workers AIR 2001 SC 3527, wherein it was held that the system of contract labour, i.e., an entity functioning as a provider of employees on a contract basis to its clients, is a system well recognized by the Ministry of Labour and Employment, Government of India, and is governed by the specific statutory framework of the Contract Labour (Regulation & Abolition) Act, 1970, which provides for registration of the principal employer/client and licensing of the contractor, and recognizes that the employees of the contractor deputed to a client remain the employees of the contractor and not of the client.

6. The Ld. AR further relied upon the decision of the Hon’ble Supreme Court in International Airport Authority of India v. International Air Cargo Workers  (SC)/(2009) 13 SCC 374, for the proposition that where a contract is for the supply of labour, the circumstance that the labour supplied works under the directions, supervision and control of the recipient entity does not, by itself, render such labour the direct employees of the recipient entity, so long as the salary is paid by the contractor and the right to regulate the terms of employment together with the ultimate supervision and control over the workmen continues to vest in the contractor.

7. Reliance was also placed on the decision of the Hon’ble Supreme Court in Bajaj Tempo Ltd. v. Commissioner of Income-tax [1992] 104 CTR 116/196 ITR 188/  (SC) for the settled principle that a provision in a taxing statute granting incentives for promoting growth and development ought to be construed liberally, and that a restriction on such a provision, if it defeats the very object sought to be achieved, ought to be read down accordingly.

8. The Ld. AR placed considerable reliance on the decision of the Coordinate Bench of the Delhi Tribunal in Manpower Group Services India (P.) Ltd. v. ACIT [IT Appeal No. 3585 (Del) of 2024, dated 25-9-2025], submitting that on facts materially identical to the present case, the Tribunal, upon examining the terms of the service agreements between the staffing services company and its customers, on the one hand, and the fixed-term employment contracts between the staffing services company and its employees, on the other, held that the staffing services company, in its capacity as employer, retains the authority to assign its employees to render services at customer premises; that the customer has no power to take disciplinary action against such employees and may, at best, seek their replacement from the staffing services company; that supervision and control over the employees, in the sense relevant to the employment relationship, continues to repose in the staffing services company; that upon completion of an assignment, or otherwise, the employees revert to the staffing services company, which may reassign them to another location or customer; and that the staffing services company alone controls the assignment of roles and responsibilities, deputation, relocation, imposition of disciplinary sanctions, remuneration and termination of its employees. On this basis, it was held that the staffing services company is the employer qua such employees, that an employer-employee relationship subsists between them, and that this relationship ought not to be conflated with the service arrangement between the staffing services company and its customer, which confers upon the customer only a mechanical and temporary right to supervise the day-to-day performance of work.

9. On the strength of the aforesaid decisions, the Ld. AR submitted that the respondent-assessee, being registered and functioning as a contractor/staffing services provider under the Contract Labour (Regulation & Abolition) Act, 1970, bearing sole responsibility for recruitment, payment of wages, statutory compliance and disciplinary control over its deputed personnel, is the “employer” of such personnel in law, and that the emoluments paid to them constitute cost incurred by the assessee and not by its clients, notwithstanding that the assessee recovers such cost, together with its service margin, by way of invoices raised on its clients.

10. We have heard the rival submissions of the Learned Representatives of both sides, perused the assessment order, the order of the Ld. CIT(A), and the material placed on record, and given our thoughtful consideration to the entire conspectus of facts and the case law cited before us.

11. The scope of controversy in the present appeal stands narrowed to a single question, namely, whether the respondent assessee, being a company engaged in the business of supply of manpower and allied human resource services, can be said to have incurred “additional employee cost” within the meaning of section 80JJAA of the Act in respect of personnel recruited and placed on its own payroll but deputed to render services at the premises of its clients, or whether, as contended by the Revenue, such cost is, in substance, that of the clients to whom the personnel are deputed, thereby disentitling the assessee to the deduction.

12. At the threshold, it is not in dispute, nor was it disputed before us, that the foundational conditions of eligibility under section 80JJAA stand satisfied on facts: the assessee’s accounts are liable to audit under section 44AB; its income comprises profits and gains derived from business; the business was not formed by splitting up or reconstruction of an existing business; there was an increase in the total number of employees from 11,987 as on 31.03.2019 to 13,256 as on 31.03.2020; the 696 employees considered for deduction satisfy the wage ceiling of Rs. 25,000/- per month, the minimum period of employment of 240 days, and participation in a recognized provident fund; emoluments were paid through banking channels; and the Audit Report in Form 10DA was furnished. These findings of the Ld. CIT(A) have not been controverted before us by the Ld. DR, whose challenge is confined to the singular question of whether the cost of such emoluments can be said to have been “incurred” by the assessee.

13. On this question, we find considerable force in the submissions advanced on behalf of the assessee. The decision of the Hon’ble Supreme Court in Steel Authority of India Ltd. (supra) authoritatively establishes that, in a contract labour arrangement recognized under the Contract Labour (Regulation & Abolition) Act, 1970, it is the contractor and not the principal employer/client to whom the labour is deputed who is, in law, the employer of such labour. The decision of the Hon’ble Supreme Court in International Airport Authority of India (supra) carries this principle further, and clarifies that even where labour supplied by a contractor works under the day-to-day direction, supervision and control of the recipient entity, this circumstance does not, without more, convert such labour into the direct employees of the recipient; the touchstone remains whether the salary is paid by the contractor and whether the right to regulate the terms of employment and the ultimate supervision and control over the workmen continues to vest in the contractor.

14. Applying this test to the facts on record, we find that it is the respondent assessee, and not its clients, who recruits the personnel in question, places them on its own payroll, disburses their wages through banking channels, deducts and deposits statutory dues including Provident Fund, ESIC and Gratuity, remains responsible for compliance with labour law, and bears the disciplinary authority over such personnel, with the client’s recourse being confined, at best, to seeking replacement of an unsatisfactory deployment. This is squarely the fact pattern considered by the Coordinate Bench of the Delhi Tribunal in Manpower Group Services India Pvt. Ltd. (supra), where, on materially identical facts, it was held that a staffing services company which retains control over assignment, deputation, relocation, disciplinary sanction, remuneration and termination of its employees is their employer in law, and that this relationship is not displaced merely because the employees render services under the day-to-day direction of the client pursuant to a service agreement, which confers upon the client no more than a mechanical and temporary right of supervision. We concur with, and adopt, the reasoning of the Coordinate Bench, there being no distinguishing feature brought to our notice, and no contrary decision of any higher forum or of any other Coordinate Bench cited before us.

15. We are unable to accept the contention of the Ld. DR that the assessee does not, in substance, incur the cost of emoluments merely because such cost, together with the assessee’s service margin, is recovered from clients by way of invoices, and is accordingly reflected in the Profit & Loss Account under the head “income from contractual receipts” with a corresponding head of “direct expenses pertaining to contract receipts”, as distinct from the assessee’s “income from services”. The manner of presentation of receipts and expenditure in the Profit & Loss Account is a matter of accounting classification and commercial billing practice; it does not, by itself, alter the underlying legal and contractual reality that the obligation to pay wages, and the liability for statutory compliance in respect of the personnel concerned, rests unconditionally and exclusively upon the assessee. As explained by the assessee, and not controverted by the Revenue, should a client default in settling the assessee’s invoice, the assessee remains bound to pay its employees and to discharge its statutory obligations in respect of them. A cost which an assessee is legally obligated to bear, and which it does in fact discharge out of its own resources through its own banking channels, does not cease to be a cost “incurred” by the assessee merely because the assessee seeks, and ordinarily succeeds, in recovering an equivalent amount from a third party pursuant to a separate contractual arrangement for the supply of its services.

16. We further note that the object underlying section 80JJAA, as reflected in its legislative history, is the encouragement of employment generation. Originally confined to regular workmen employed in manufacturing establishments, the provision was consciously widened by the Finance Act, 2016, with effect from Assessment Year 2017-18, to extend the incentive to every assessee having profits and gains from business, thereby bringing service-oriented businesses, including staffing and manpower supply enterprises such as the assessee, within its fold. It is well settled, as held by the Hon’ble Supreme Court in Bajaj Tempo Ltd. (supra), that a provision of a taxing statute granting incentives for promoting growth and development is to be construed liberally, so as to advance the object of the provision rather than to defeat it. The business model of a manpower-supply enterprise such as the respondent assessee, which recruited an additional 1,269 employees during the year and claimed deduction in respect of 696 such additional eligible employees, demonstrably results in the generation of employment on a substantial scale, and squarely sub serves the object underlying section 80JJAA. To deny the benefit of the provision to such an assessee, on the ground that the personnel so employed are deployed at client premises pursuant to the very nature of its business, would be to defeat rather than advance the legislative object, and we decline to adopt a construction productive of such a result.

17. We also find merit in the submission that the claim of the assessee under section 80JJAA cannot be said to be unexamined or untested. It stands on record, that Financial Year 2016-17 (Assessment Year 2017-18) was the first year of the assessee’s claim under section 80JJAA, and that the claim for that year was allowed in scrutiny assessment completed under section 143(3) of the Act. While we are mindful that each assessment year is, in principle, a separate and independent unit of assessment, the fact that the very foundation of the assessee’s claim, its character as employer of the deputed personnel and its business model of manpower supply, was accepted by the Department at the earliest point in time, and that no material change in facts, business model, or contractual arrangements for the year under consideration has been brought on record by the Revenue, lends further support to the view we have taken.

18. For the reasons aforesaid, we are of the considered view that the respondent-assessee satisfies all the conditions prescribed under section 80JJAA of the Act for Assessment Year 2020-21; that the assessee is the employer, in law and in fact, of the personnel in respect of whom the deduction has been claimed; and that the additional employee cost in respect of such personnel has been incurred by the assessee within the meaning of the said section. The order of the Ld. CIT(A) directing the Assessing Officer to allow the deduction of Rs. 3,16,68,362/-claimed under section 80JJAA calls for no interference, and we uphold the same. The grounds raised by the Revenue are, accordingly, rejected.

19. In the result, the appeal filed by the Revenue is dismissed.