1986 (2) TMI 143 - AT - Income Tax

Summary

Issues Involved:

1. Whether the assessee is entitled to the deduction under section 80P(2)(a)(ii) of the Income-tax Act, 1961.
2. Whether the activities of the assessee constitute a cottage industry.
3. Whether the members of the primary societies can be considered members of the apex society for the purpose of section 80P.

Issue-wise Detailed Analysis:

1. Entitlement to Deduction under Section 80P(2)(a)(ii):
The main issue in these appeals is whether the assessee, an apex society of weavers' co-operative societies, is entitled to the deduction under section 80P(2)(a)(ii) of the Income-tax Act, 1961, which pertains to profits and gains from cottage industry. The Income Tax Officer (ITO) disallowed the exemption claimed by the assessee, relying on the decision of the Delhi High Court in Addl. CIT v. Indian Co-operative Union Ltd. [1982] 134 ITR 108. The ITO's rationale was that the assessee did not engage in manufacturing activities directly but merely purchased raw materials and sold them to its member societies. Consequently, the profits and gains could not be considered as arising from a cottage industry.

2. Activities Constituting Cottage Industry:
The assessee argued that its activities, which involved promoting the handloom industry through primary weavers' co-operative societies, constituted a cottage industry. The assessee's counsel contended that the term 'cottage industry' should be interpreted to include activities conducted through co-operative societies, as supported by case law, including CIT v. Tamil Nadu Co-operative Marketing Federation Ltd. [1983] 144 ITR 74 (Mad.) and Indian Co-operative Union Ltd.'s case. The counsel emphasized that the assessee was engaged in the collective disposal of the labor of its members, thus qualifying for the deduction under section 80P(2)(a)(ii).

3. Membership and Eligibility for Exemption:
A significant point of contention was whether the members of the primary societies could be considered members of the apex society for the purpose of section 80P. The assessee's counsel relied on the decision of the Madras High Court in Tamil Nadu Co-operative Marketing Federation Ltd., where it was held that members of affiliated primary societies could be considered members of the apex society for the purposes of section 80P. The Commissioner (Appeals) and the departmental representative, however, argued that the exemption could not be granted as the actual manufacturing was done by members of the primary societies, not the apex society itself.

Tribunal's Decision:
The Tribunal carefully considered the facts, the arguments, and the relevant case law. It noted that the Commissioner (Appeals) had heavily relied on the Delhi High Court's decision in Indian Co-operative Union Ltd., which emphasized that a cottage industry must involve manufacturing activities by the members of the society. However, the Tribunal found that the Commissioner (Appeals) had not fully considered the aspect that the assessee-society did engage in activities that could be deemed as a cottage industry through its member societies.

The Tribunal concluded that the assessee-society's activities, which involved purchasing raw materials and getting cloth manufactured by weavers working on looms in their cottages, constituted a cottage industry. It held that the apex society was entitled to the exemption under section 80P(2)(a)(ii) because the primary societies, whose members were engaged in the manufacturing activities, were members of the apex society. The Tribunal relied on the Madras High Court's decision in Tamil Nadu Co-operative Marketing Federation Ltd., which supported the view that the members of primary societies could be considered members of the apex society for the purposes of section 80P.

Conclusion:
The Tribunal allowed the appeals filed by the assessee in part, holding that the assessee was entitled to the deduction under section 80P(2)(a)(ii) as its activities constituted a cottage industry and the members of the primary societies could be considered members of the apex society for the purpose of claiming the exemption.