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TMI Blog1993 (9) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... able under section 80P(2)(a)(ii) of the Act. In other words, the case of the assessees was that they are entitled to deduction in respect of the entirety of their income by reason of the fact (i) that they were engaged in the business of providing credit facilities to their members, and (ii) that they were engaged in a cottage industry. 4. On an examination of the facts and circumstances of the case, the Assessing Officer found: (a) The assessee-society is constituted by a number of weaver members. Those weavers above 18 years of age and who do not own more than 5 looms are eligible for the membership of the society; (b) The weaver-members weave Kancheepuram silk sarees on their own and in their looms and the finished goods are marketed by the society; (c) When the sarees are ready, a weaver-member deposits them with the society, which determines the cost price of the finished products on the basis of the cost of the inputs, weaving charges, other incidental expenses, and the like. The cost price so determined is increased by a margin of profit and the sale price or tag price is fixed; (d) On the delivery of the finished products to the society, the society may advance lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods was only to the weaver-members so as to make use of the loan amounts for their subsequent weaving activities. The weaver will also be satisfied that a part of his sale consideration has been received in advance. The charging of interest on such loan was only a compensatory in nature as the member was entitled to his full sale consideration after the deduction of commission by the Society whether the goods are sold immediately or after a lapse of some months". 6. In view of the foregoing, therefore, the Assessing Officer held that the main activity of the societies was to market the finished goods of their weaver-members and that the advancing of small amount on nominal interest was but incidental to the main activity, namely, marketing of the finished goods produced by their weaver-members. He, therefore, held that the income of the assessee was not entitled to deduction under section 80P(2)(a)(i). In this regard he referred to and relied upon the Allahabad case of Addl. CIT v. U.P. Co-operative Cane Union [1978] 114 ITR 70. 7. The other contention of the assessee-societies that they were engaged in cottage industry was also rejected by the Assessing Officer. In this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the first criteria is that the co-operative society should itself be engaged in a cottage industry. (ii) As has been held by the Allahabad High Court in the case of Addl. CIT v. Hastkala Pital Udyog Sahkari Samiti Ltd. [1978] 114 ITR 723 (App.), an industry implies manufacture of certain articles. The business of mere purchase and sale of goods cannot be regarded as industry. (iii) The assessee-societies were not engaged in any industry. They are engaged only in marketing activities. 11. In view of the foregoing, therefore, he dismissed the appeals filed by the two assessee-societies. 12. It is in these circumstances that the assessees are now before us. 13. Shri P.P.S. Janardhana Raja, the learned counsel for the assessees, took us through the facts and circumstances of the case and contended that no tax was exigible on the income earned by the assessees before us. 14. Shri Janardhana Raja's first thesis was that the assessees herein are engaged in the business of providing credit facilities to their members. In this regard, drawing our attention to the bye-laws of the societies, Shri Janardhana Raja highlighted the fact that one of the objects of the societies is "t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the Madras case of CIT v. Pondicherry Co-operative Housing Society Ltd. [1991] 188 ITR 671. Drawing our particular attention to certain observations of the Madras High Court appearing at pages 674 and 675 of the report, Shri Janardhana Raja contended that the provisions of section 80P(2)(a)(i) must be construed liberally. In this regard, he also referred to and relied upon the Supreme Court case of CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117 in support of the proposition that the provisions of section 80P are intended to encourage co-operative societies and that, therefore, they should be construed liberally. 16. Shri Janardhana Raja's second thesis was that the assessees before us are entitled to the benefit of section 80P(2)(a)(ii) also. In this regard, he contended that weaving of silk sarees is essentially a cottage industry. The fact that the weaver-members wove the sarees in their homes and thereafter entrusted the marketing operations to the societies, does not matter. The fact of the matter is that the entire income of the assessees before us were attributable to cottage industry and hence the assessees are entitled to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of banking. Further, the so-called loan is nothing but an advance against the sale price of the sarees deposited by the members with the societies. For a fact, it was in the course of their business as marketing societies that the assessees herein came to make the advances in question. Merely because such advances are made by the assessees in the course of their marketing activities, it does not follow that they somehow became credit societies properly so called. In this regard, Shri Iyengar contended that the Madras case of Pondicherry Co-operative Housing Society Ltd. is clearly distinguishable. There the finding was that the assessee-society was also meant for purposes of providing credit facilities to its members. This finding was based on the significant fact that the assessee therein was advancing loans even to those members who had not purchased plots from the society. According to Shri Iyengar, the said Madras case cannot avail the assessees. 20. The second limb of Shri Iyengar's argument was that the assessees herein are not engaged in a cottage industry. They are obviously marketing societies. They do not own any factory. All that has happened in this case is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licy. Thus, in the I.T. Act, 1922 we had section 14(3) which dealt with the categories of co-operative societies listed thereunder. Under the new Act, we earlier had section 81 which granted certain rebate of tax in relation to specified categories of societies. Later on section 81 was deleted and section 80P was introduced in its stead which provides for deduction from the total income of certain types of co-operative societies. 27. As pointed out by the Madras High Court in the case of CIT v. Madras Autorickshaw Drivers' Co-operative Society Ltd. [1983] 143 ITR 981, the scheme of section 80P is to grant deduction "not to a category of income, but to a category of assessee", namely, co-operative societies answering the description of societies engaged in carrying on the activities listed under section 80P(2) of the Act. If a society answers the description, it is entitled to deduction; otherwise it is not. 28. Now, Shri Janardhana Raja's first thesis is that the assessees before us are engaged in the business of providing credit facilities to their members, and are as such entitled to deduction under section 80P(2)(a)(i). And, as pointed out earlier, this claim is made on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar to, or akin to 'carrying on the business of banking', the preceding clause in the same sub-section." Thus, while considering the assessee's claim that it was providing credit facilities to its members, the Kerala High Court construed the provisions of section 80P(2)(a)(i) in the context and the collocation of words occurring therein. 31. The same question arose before the Allahabad High Court in the case of U.P. Co-operative Cane Union, though in the context of the provisions of section 81 of the Act. There the assessee was deriving income from (i) interest on securities, (ii) interest on deposits, (iii) the business of running a printing press, and (iv) the business of purchase and sale of kolhus to its members. The printing press was run in order to supply to its members printed registers and forms. These articles were supplied to its members on credit. Relying on the said factum of credit sales to its members, the assessee claimed the benefit of section 81(i)(a) - (analogous to section 80P(2)(a)(i) of the Income-tax Act, 1961). The Tribunal held that the supply to the members of printed stationery on credit amounted to providing credit facilities to its members. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay engage itself in business of every conceivable kind not covered by clauses (a) to (f) and yet claim exemption by saying that it sells goods or merchandise on credit. This could never be the intention of the Legislature. Selling goods on credit is only a mode of carrying on of a business. It does not become a business of providing credit facility. The assessee-society may be said to be providing credit facilities to its members by selling stationery on credit but it cannot be said to be carrying on the business of providing credit facility. Its business is to run the printing press. We accordingly hold that the income of the assessee society from printing press business was not exempt from tax under section 81(i)(a) of the Act." 32. In the case of Rodier Mill Employees' Co-operative Stores Ltd. v. CIT [1982] 135 ITR 355, the Madras High Court observed as follows : "Section 80P(2)(a)(i) of the Act refers to a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members. It is not suggested in this case that the assessee carries on the business of banking. All that is urged is that it provides credit facilities to its members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to tax relief under section 80P(2)(a)(i) of a co-operative society by finding out what it is for which the society has come into being." (b) ".. (A) reference to the objects avowed in the bye-laws of a society gives a clearer indication of the nature of the business than any inquiry into the actual modus operandi of the business activities of the society." (c) ".. Co-operative societies are now governed, in our country, by special statutes. They are a class apart from other corporate bodies only because of the particular provisions contained in relevant statutes. In this context the Income-tax Act makes reference both to Central Act II of 1912 (The Co-operative Societies Act, 1912) and the various State enactments governing co-operative societies while making special provisions both for assessment and for tax relief concerning the income earned by those societies. It seems to us, therefore, permissible to look into the particular provision under which any given co-operative society functions with a view to finding out the precise nature of the society and the character of the business carried on by it. Under the scheme of the Tamil Nadu Co-operative Societies Act, 1951, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primarily for production or for any useful purpose. Rule 11(2)(g) defines 'marketing society' as a society which has as its principal object the arranging for the marketing of the agricultural produce or products of its members, or the undertaking of the distribution of the commodities, including any society which has as its principal object the providing of facilities for the operation of a marketing society. 36. Rule 4 of the said Rules deal with the subject-matter of bye-laws of co-operative societies. Under Rule 4(n), the bye-laws shall deal inter alia with the manner in which the society shall transact business with its members and others and the terms and conditions governing such business. 37. The Tamilnadu Co-operative Societies Act, 1983 and the Rules made thereunder contain analogous provisions. 38. The foregoing analysis brings into bold relief the following points: (i) The classification or categorisation of societies will have to be made with reference to their nature of the activities rather than with reference to the individual transactions of the society in the normal course of its business. (ii) Since co-operative societies are a class apart from other co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the society from their members. Thus, the assessee in ITA No. 2216/Mds/92 had earned, during the year of account ending on 31-3-1990 (for the previous year relevant to the assessment year 1990-91) an aggregate commission of Rs. 19,52,574 as against interest of Rs. 2,75,553. Similarly, the assessee in ITA No. 2323/Mds/92 had during the previous year ending on 31-3-1989 (relevant to the assessment year 1989-90, which is now before us) had earned an aggregate commission of Rs. 6,28,171 compared to interest income of Rs. 1,39,997. Given these facts, the lower authorities, as we see it, cannot be faulted in finding that the assessee-societies are marketing societies only. 41. Thirdly, the fact that the assessees used to charge interest on the advances made by them to the weavers against the finished products deposited by the latter can only be regarded as the manner in which the societies chose to transact business with their members. For fact, we may not be wrong in saying that almost all types of societies (other than credit societies) charge interest from their members/outsiders in the course of their ordinary business. But this factum alone will not make them credit societies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claim, not under section 80P(2)(a)(i) but under section 10(20A) of the Act. The Tribunal held that the first appellate authority had wrongly applied section 10(20A) of the Act. Secondly, one of the principal objects of the assessee-society was lending moneys to its members for purposes of building houses and the assessee-society was thus carrying on the business of providing facilities to its members; and that consequently, the assessee was entitled to the benefit of deduction under section 80P(2)(a)(i) of the Act. On a reference at the instance of the revenue, the High Court found as a fact first that the object set out in clause 2(j) of the bye-laws, namely, to lend money to the members of the society for purposes of building houses was an independent and distinct object of the society. Secondly, the availability of credit facilities provided by the assessee-society was not restricted only to such members as have secured a site from the assessee-society. Even other members, who had their own sites, had been given the benefit of credit facilities by the assessee-society. It was on these facts that the Madras High Court answered the reference against the revenue and in favour o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:--- (ii) A cottage industry." The validity of Shri Janardhana Raja's second thesis needs to be examined in the light of the aforesaid provisions. 49. The aforesaid provisions as also the analogous provisions of section 14(3)(i)(b) of the Income-tax Act, 1922 have been the subject-matter of judicial interpretation in a number of cases. 50. In the Allahabad case of District Co-operative Federation Ltd. v. CIT [1973] 87 ITR 639 the provisions of section 14(3)(i)(b) came up for consideration. The assessee's claim for exemption under the said section was negatived by the Assessing Officer and by the first appellate authority. The Tribunal too declined to interfere in the matter. In this regard, the following considerations weighed with it: (i) In the absence of any specific definition of the expression "cottage industry", it should be taken as one in which work was done, generally speaking, in the homes of the artisans as a subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed is also to be such which can be carried on in a cottage. The concept of 'cottage industry' is different from the concept of industry in which employer and employees take part. A cottage industry is one which is carried on by the artisan himself using his own equipment with the help of the members of the family. It is the family unit which provides the labour force. The idea of cottage industry is alien to the idea of industry where hired labour is engaged and the relationship of employer and the employees exists. For example, the parts of a watch may be manufactured by the artisans themselves in their homes in the form of cottage industry; the parts may thereafter be collected together by a merchant and assembled to make watches in a factory by the employment of hired labour. The first will be a case of cottage industry, while the second would be a non-cottage industry. Applying this test, it cannot be held that the industry carried on by the assessee is a cottage industry. It is not the case of the assessee that its members themselves carried on the manufacture of bricks. The bricks are manufactured through the employment of hired labour force and on a large scale, and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e industry' has not been defined in the Act. However, it Is a word of every day use and its meanings are well understood. 'Cottage' ordinarily means 'dwelling of a rural labourer, small farmer or a miner': See Webster's New International Dictionary. A 'cottage industry' would obviously mean an industry carried on in such cottages. According to Webster's Dictionary, 'cottage industry means' an industry based upon the family unit as a labour force in which workers using their own equipment at home process goods'. Primarily a cottage industry is carried on by families in their own dwelling houses, but when the term 'cottage industry' is applied to a co-operative society, the idea of a family does not fit in. A co-operative society can in a way be likened to a family constituted by its members; so where the members of a co-operative society are engaged in the manufacture of goods in their cottages or dwelling houses, it can be said that a family constituted by its members is engaged in a cottage industry. The other requirements of the definition are also present in the instant case. The Tribunal has recorded a finding that no outside labour is employed and the utensils are manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch items which were normally required for the working and preservation of a typewriter and presentation of a typewriter in good working condition. The Joint Registrar for Industrial Co-operatives had issued a certificate to the effect that the assessee-society could be considered to be one of members who carried on "cottage industry" as defined under section 2(b) of the Maharashtra State Aid to Industries Act, 1960 (17 of 1960), read with section 2(c) of the same Act and rule 2(e) of the Maharashtra State Aid to Industries Rules, 1961. The assessee also obtained registration under section 10 of the Bombay Co-operative Societies Act, 1925. 57. For the first time before the first appellate authority the assessee raised a specific claim that its income was exempt under section 81(i)(b) of the Act. The AAC held that the assessee-society did not satisfy the requirements of the definition in the Maharashtra State Aid to Industries Act, 1960, that the society did not qualify for being considered as an "industry", and that therefore the income of the society was not derived from a cottage industry within the meaning of section 81(i)(b) of the Act. The Income-tax Appellate Tribunal decl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g factors weighed with him: (a) The assessee-society could deal only in handicrafts. (b) When it took over the Emporium, the society was having its own production centre at Rouse Avenue, New Delhi. (c) After its take-over by the assessee-society, "the Emporium has enlarged its activities in this behalf. It employs tailors, ladies for embroidery, for knitting, etc. It has also engaged craftsmen for necklace making and shoe-making. It advances money to the artisans and craftsmen to enable them to buy tools and implements. At times it gives them raw materials and on payment of wages, takes over the goods from them which are finally channelised through the Emporium. The effort is to eliminate the intermediaries so that the craftsmen are benefited to the maximum. The society has also got up a bureau to advise the craftsmen on the designs, raw materials, etc.". The Income-tax Appellate Tribunal upheld the findings of the AAC on this issue. 63. Thereupon, at the instance of the revenue, the following question of law referred to the Delhi High Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income derived by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries and as such the society can be said to be engaged in cottage industry, are based on a misreading of the provisions of the Act and of the interpretation of the word 'cottage industry'. As we have said above the essential ingredient has to be an industry which must be a cottage industry. The mere buying and selling of goods of cottage industries cannot be said to be covered by 'engaged in cottage industry' as no industrial activity is involved in the same." It is of interest to note that referring to the Allahabad cases of District Co-operative Federation Ltd. and District Co-operative Development Federation Ltd., the Delhi High Court observed : "We have carefully considered these two judgments, but with respect to their Lordships of the Allahabad High Court, we cannot subscribe to the view that the activity should be carried out in the cottages or homes of the artisans or that the number of workers and the turnover have any relevance as long as the activities have been carried on by a co-operative society. We are of the opinion that the number of persons working in a cottage industry and the amount of turnover are immaterial as long as the activity can be said to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts members for the work done by them (that is to say, for the labour and skill supplied by them) as and by way of either wages; - that the net result of the business of manufacturing articles or things goes to the society; and - that, additionally but not necessarily plant and machinery, tools and workplace belong to the society. (iv) Primarily a cottage industry is carried on by families of the artisans in their own dwelling houses, but when the term "cottage industry" is applied to a co-operative society, the idea of a family does not fit in. Therefore, when we talk of a co-operative society engaged in cottage industry, we regard the society as a family constituted by its members. So, where the artisan-members of a society are engaged in the manufacture of goods in their cottages or dwelling places or even in the workplace belonging to the society, it can be said that the society is engaged in cottage industry. In other words, the articles or things must be produced by the artisan-members themselves. (v) By extension, the idea of cottage industry is alien to the idea of industry where hired labour is engaged and employer-employee relationship exists. 68. Now, what are t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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