1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act').
2. The assessee is a registered co-operative society. It has 120 members, who are all artisans. It purchases various metals, like copper, zinc, brass, etc., as well as coal and supplies the raw material and coal to its members, who in turn manufacture household utensils like Lota, Katora, etc., and supply them to the assessee-society. The assessee-society in turn sells those articles in the market.
3. In the course of the assessment proceedings for the assessment year 1963-64, the assessee put forward a claim for exemption from tax under Section 81(i)(b) of the Act on the ground that it was a co-operative society engaged in cottage industry. A certificate from the Deputy Director of Industries, Kanpur, to the effect that the assessee was engaged in the manufacture of household utensils on cottage lines was also filed. The Income-tax Officer declined to accept this claim on the ground that the assessee employed outside labourers and carried on manufacturing work with the aid of power in cottage type premises and, therefore, the exemption was not available to it. The order of the Income-tax Officer was confirmed on appeal by the Appellate Assistant Commissioner of Income-tax. The assessee then went up in appeal before the Income-tax Appellate Tribunal. The Tribunal found that the assessee supplied the raw material to its members who were all artisans and they manufactured utensils and supplied them to the society. It also held that no outside labour was employed, but the assessee-society got the utensils manufactured from its 120 members who were paid according to the quantum of work done by each one of them. The Tribunal also held that the assessee was not engaged in the manufacture of utensils with the aid of power as the electricity expenses claimed by the assessee were, in fact, the expenses of electricity consumed in the society's office. The Tribunal also found that there was no power connection and no machinery was run with the aid of power in the' premises of the society and each member of the society was engaged in the manufacture of utensils in a small way with the raw material supplied by the society. The Tribunal accordingly allowed the appeal of the assessee and held that the income of the assessee was exempt from tax. The Commissioner of Income-tax is aggrieved and at his instance the Tribunal has referred the following question for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the assessee was a cottage industry engaged in the manufacture of metal utensils and its income was exempt under Section 81(i)(b) of the Income-tax Act, 1961 ?'
4. The Tribunal having recorded the finding that the utensils were not manufactured by the society in its own factory and no outside labour was employed, the only question left to be decided is as to whether the asses-see-society can be said to be engaged in a cottage industry.
5. Before we examine this question, it is necessary to refer to Section 81 which has been deleted with effect from 1st April, 1968. That section reads :
'81. Income of co-operative societies.--Income-tax shall not be payable by a co-operative society-
(i) in respect of the profits and gains of business carried on by it, if it is-
(a) a society engaged in carrying on the business of banking or providing credit facilities to its members ; or
(b) a society engaged in a cottage industry; or
(c) a society engaged in the marketing of the agricultural produce ofits members; or
(d) a society engaged in the purchase of agricultural implements,seeds, livestock, or other articles intended for agriculture for the purpose of supplying them to its members ; or
(e) a society engaged in the processing without the aid of power of the agricultural produce of its members ; or
(f) a primary society engaged in supplying milk raised by its members to a federal milk co-operative society.'
It is clear that the scheme of this section is to exempt the income of a co-operative society arising from business carried on by it, if the business is of the nature enumerated in Clauses (a) to (f). Clause (b) relates to a society engaged in a cottage industry. Plainly, it is not material as to how the business is carried on, so long as the business can be called a cottage industry.
6. 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 X business of a 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 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.
7. The Tribunal has taken the view that what is not a factory under the Factories Act would be a 'cottage industry'. The word 'factory' as defined in Section 2(m) of the Factories Act, 1948, means any premises where ten or more workers are working and a manufacturing process is being carried on with the aid of power or where twenty or more persons are working and the manufacturing process is being carried on without the aid of power. We are unable to subscribe to this view. In our opinion, the number of persons working in a cottage industry is immaterial and the fact that power is used is also immaterial. The essential ingredient of a cottage industry is that the industry must be carried on by workers or members of their family at their houses. Number of workers may exceed ten or twenty and it is permissible that the workers may use power as often is done in these days where electricity is available. Small lathe and drilling machines are worked by power. But this fact does not change the nature of industry, if it is cottage industry otherwise, as explained above. We therefore, agree with the conclusion of the Tribunal, but for differentreasons.
8. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to the costs which we assess at Rs. 200.