1. This is a reference at the instance of the assessee under s. 256(1) of the I.T. Act, 1961. In this reference, the following question is referred to us for our opinion :
'Whether, on the facts and in the circumstances of the case, it was rightly held that the assessee-society was not a society engaged in a cottage industry within the meaning of section 81(1)(b) of the Income-tax Act,
2. The facts lie within a narrow compass and may be briefly stated : We are concerned in this reference with the assessment year 1962-63, in which the assessee was assessed in the status of an association of persons. The assessee-society was formed on 1st January, 1960, of persons who previous to this date were working with Messrs. Voltas Ltd. This company had a department connected with its typewriter agency. Some time in December, 1959, the department was closed down and all the retrenched employees thereafter came together and formed a society to do the business of the former typewriter section. The main activity of the assessee-society was overhauling, repairing and servicing of typewriters. The business of the assessee was carried on in Bombay at Himalaya House, Paltan Road, in rented premises. The servicing of typewriters was mainly done at the customers' premises, but overhauling and repairing was carried out at the assessee's premises. For the assessment year under consideration the assessee filed a return showing a net profit of Rs. 18,236. After necessary computation the ITO arrived at the total income of Rs. 37,710.
3. The assessee went up in appeal to the AAC and raised a specific claim that its income was exempt under s. 81(i)(b) of the I. T. Act, 1961. In support of this plea, it was pointed out that the assessee had obtained registration under s. 10 of the Bombay Co-operative Societies Act, 1925. The assessee-society also relied upon another certificate from the Joint Registrar for Industrial Co-operatives, Maharashtra State, Poona, which was to the effect that the assessee-society can be considered to be one of members who are carrying on 'cottage industry' as defined under s. 2(b) of the Maharashtra State Aid to Industries Act, 1960 (17 of 1960) read with s. 2(c) of same Act and r. 2(e) of the Maharashtra State Aid to Industries Rules, 1961.
4. The AAC considered the provisions of s. 81 of the I.T. Act, 1961, and observed that the term 'cottage industry' is not defined in the I.T. Act. In his view, the definition of the term either in the Maharashtra State Aid to Industries Act, 1960, or the Maharashtra State Aid to Industries Rules, 1961, was not conclusive. Similarly, he was of the opinion that the certificate granted by the Joint Registrar for Industrial Co-operatives, Maharashtra State, did not conclude the issue. He examined the definition given in the Maharashtra State Aid to Industries Act, 1960, and in his opinion the assessee-society did not satisfy the requirements of the definition. He then considered the general or well-accepted connotation of the term 'cottage industry'. In his opinion, the type of activity undertaken by the assessee did not qualify for being considered as an 'industry'. Accordingly, taking all the facts and circumstances into consideration, the income of the assessee was not held to be derived from a cottage industry within the meaning of s. 81(i)(b) of the I. T. Act, 1961.
5. The matter was thereafter carried by the assessee is second appeal to the Tribunal.. The Tribunal in its order has set out the well-reasoned order of the AAC and it, after considering the arguments of the counsel for the assessee, confirmed the said order expressing its agreement with the reasons given by the AAC. In addition, it observed that the alleged activity said to have been carried on by the assessee could not be regarded as equivalent to an carrying on an industry in or near his home. On both the grounds, therefore, in the opinion of the Tribunal, the assessee was not carrying on a cottage industry and, therefore, was not entitled to the exemption sought for under s. 81(i)(b) of the I. T. Act, 1961.
6. Annexure 'C' to the statement of case is a letter addressed by the secretary of the assessee-society to the District Deputy Registrar, Co-operative Societies, Bombay, which sets out the type of work done by the assessee and indicates further reasons or considerations for which the assessee contended that it could qualify as a cottage industrial society. From the letter, it is found that the society undertook the following work :
(1) Servicing of typewriters on monthly/yearly contracts. - This denotes oiling, cleaning, adjustment, etc., of typewriters once each month at the client's place. (2) Repairing of typewriters. - This denotes major and minor repairing of typewriters, former at our premises while the latter at client's place inclusive of the supply of such parts which are broken and/or unserviceable. (3) Rebuilding of typewriters. - This denotes putting into working order typewriters which have completely broken down and are no longer in a working condition. This includes major and heavy replacements of many parts, overhauling, re-aligning of the working mechanisms, painting, polishing, etc., and selling such rebuilt typewriters. (4) Sales of typewriter ribbons, felts, covers, etc. - This denotes sales of such items which are normally required for the working and preservation of a typewriter in good working condition.
7. According to the assessee, further, it could be properly regarded as a cottage industrial society for the following reasons :
(1) The applicant society does not utilise power of any type. (2) All the operations are carried out by human labour and by hand. (3) All the workers engaged by the society are members of the society. (4) Also all the members of the society are workers in the society and devote their full time and attention. (5) All the operations of the society are on a small scale.
8. It is on the footing of this letter and the further letter dated 22nd December, 1964 (annexure 'D' to the statement of case), that the assessee obtained the certificate dated 8th January, 1965, from the Joint Registrar for Industrial Co-operatives, Maharashtra State, expressing the opinion of the said officer that the assessee could be considered to be one of the members carrying on a 'cottage industry' as defined in the Maharashtra State Aid to Industries Act, 1960, read together with the relevant rule of the Maharashtra State Aid to Industries Rules, 1961; this letter is annexure 'H' to the statement of case.
9. Section 81(i)(b) of the I. T. Act, 1961, as it stood prior to its deletion by the Finance (No. 2) Act, 1967, with effect from 1st April, 1968, provided that income-tax shall not be payable by certain co-operative societies and clause (i)(b) exempted profits and gains of business carried on by it if it is a society engaged in a cottage industry. Thus, the two requirements were that the assessee claiming exemption must be a co-operative society and, further, that it must be engaged in a cottage industry. It may be taken that the first requirement is satisfied in our case and, indeed, the matter would seem to be concluded by the certificate of registration under the Bombay Co-operative Societies Act, 1925. The only question which is required to be considered is whether the assessee could be said to be engaged in a cottage industry.
10. It was submitted by counsel on behalf of the assessee that inasmuch as the I. T. Act, 1961, or the Indian I. T. Act, 1922, does not contain any definition of the term 'cottage industry', the definition of 'cottage industry' in Maharashtra State Aid to Industries Act, 1960, read together with the Maharashtra State Aid to Industries Rules, 1961, should be accepted and that the income-tax authorities were required to act upon the opinion formed by the officer of the State Government on whom was cast the duty of properly classifying such societies. On the other hand, it was submitted by counsel for the revenue that different States may enact different Acts and Rules for the purpose of giving aid to small-scale industries and what was enacted, which would necessarily differ from State to State, can have no bearing on the general concept of a 'cottage industry' to which exemption is given under s. 81(i)(b) of the I.T. Act, 1961. He further submitted that the letter or certificate, annexure 'H' to the statement of case, is not conclusive and if the definition of 'cottage industry' under the Maharashtra State Aid to Industries Act, 1960, is perused, it would be clear that one or two important ingredients of the definition were not satisfied by the assessee.
11. In the Maharashtra State Aid to Industries Act, 1960 (Act 17 of 1960), the term 'cottage industry' is defined in s. 2(b), which reads as under :
'2. (b) 'Cottage industry' means an industry prescribed by rules made by the State Government, regard being had in particular to the fact that such industry is carried on by an artisan in or near his home, and the capital of which does not exceed Rs. 25,000 (or such other sum as the State Government may from time to time in such rules denote).'
12. The definition section, viz., s. 2, goes on the define 'industry' as follows :
'2. (c) 'industry' means the manufacture, preservation or processing of goods, or any handicraft, or industrial business or enterprise, carried on by any persons.'
13. Under the Maharashtra State Aid to Industries Rules, 1961, framed in exercise of the powers conferred by sub-s. (1) and cls. (a) (b),(c),(d),(e),(f),(g) and (i) of sub-s. (2) of s. 7 of the Act 17 of 1960, the term 'cottage industry' was re-defined by r. 2(c) as under :
'2. (c) 'Cottage industry' means an industry (the fixed capital of which does not exceed Rs. 25,000 in value) which, whether or not using mechanical or electric power, is ordinarily carried on in the home of an artisan or in any factory or at any place near the home of the artisan in the State, by the artisan, and his dependents, and occasionally with the aid of hired labour in which case the number of persons including the artisan, his dependents and hired labour does not exceed nine.'
14. Relying upon these definitions and particularly the definition given in the Rules it was submitted that the assessee was a 'cottage industry' as defined and the certificate (annexure 'H' to the statement of case) was correctly given. It was contended that the definition of 'cottage industry' (to be found in the Rules) permitted such industry being carried on in a factory and, therefore, the idea that it should be carried on by artisan in or near his home had been given a go-by to by the Rules. emphasis was laid on the fact that the assessee-society did not hire or employ workers as such and all the members were active workers carrying out the various activities though not at their houses or near their homes but at the rented premises of the assessee at Himalaya House.
15. The definitions to the found in the Maharashtra State Aid to Industries Act, 1960, and Maharashtra State Aid to Industries Rules, 1961, in our opinion, must be regarded as artificial definitions for the purpose of qualifying certain persons, institutions or industries for State aid. The concept of cottage industry to be considered by us would be the ordinary concept, for which we would have to turn to what is ordinarily understood by the phrase. In this connection, our attention was drawn by Mr. Joshi to the definition of 'cottage industry' to be found in the Webster's Third New International Dictionary, Vol. I, where the term 'Cottage industry' is defined as 'an industry based upon the family unit as a labour force in which workers using their own equipment at home process goods usually belonging to a merchant employer and supplement their income from small agricultural holdings'.
16. It is important to realise that in this definition emphasis is placed upon the business being carried on at the home, which is also the underlying idea in, the definition of 'cottage industry' in the Maharashtra Act, 17 of 1960.
17. The exemption provided in s. 81(i)(b) of the I. T. Act, 1961, came to be considered by a Division Bench of the Allahabad High Court in Addl. CIT v. Hastkala Pital Udyog Sahakari Samiti Ltd. : 114ITR723(All) . The Allahabad High Court was mainly considering the contention of the department which had urged that since the work was being done at the houses or homes of the individual members, it could not be regarded as being done at or near the home of the society and, therefore, could not qualify as a cottage industry. This contention was rejected by the High Court in the following words (p. 725) :
'In order to qualify for exemption, a co-operative society must be engaged in an industry which can be said to be a 'cottage industry'. An industry obviously implies manufacture of certain articles. It will not embrace a business of mere sale and purchase of goods, so that the first two requirements of law are satisfied, namely, that the assessee is a co- operative society and it is engaged in an industry. The only question left to be decided is as to whether the industry can be said to be a cottage industry. The word 'cottage 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 the 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 exclusively by the members of the society at their own homes.'
18. We have before us a case totally different from the one before the Allahabad High Court. The assessee is a legal person and for the purposes of application of the concept of cottage industry, one would be required to consider whether the activity is being carried on at or near the homes of the members constituting the assessee-society. It is found in the case before us that no such activity is being carried on at or near the homes of the members comprising the assessee-society. Further, it would appear that the activity or the work being undertaken by the assessee also would not qualify as industry as ordinarily understood. it would not seem to satisfy the definition of 'industry' given in s. 2(c) of Act 17 of 1960. In this view of the matter, it would appear that the conclusion reached by the Tribunal that the assessee is not qualified to seek exemption under s. 81(i)(b) of the I. T. Act, 1961, is in order. In the view that we have taken, therefore, the question referred to us will be required to be answered in favour of the revenue. We may add, although it is not necessary to do so, that even if another view is possible, it cannot be said that the view taken by the Tribunal on the consideration of the totality of the facts and circumstances of the case is not possible view. Merely because another view may appeal to us more would be no occasion to decide against the revenue. However, as stated earlier, we are in full agreement with the approach and the conclusion of the Tribunal.
19. For these reasons, the question referred to us is answered in the affirmative and against the assessee.
20. The parties, however, will bear their own costs of the reference.