1. This order will dispose of Income-tax References Nos. 130 to 134 of 1972 as they arise out of a common order and common questions of law have been referred to this court.
2. The Income-tax Appellate Tribunal has referred the following questions for opinion of this court at the instance of the Additional Commissioner, Income-tax, Delhi:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income derived by the assessed from running the business of Central Cottage Industries Emporium handed over to it by Government under an agreement dated October 13, 1952 was income derived by the society engaged in a cottage industry within the meaning of section 14(3)(i)(b) of the Indian Income-tax Act, 1922, or section 81(i)(b) of the Income-tax Act, 1961, as the case may be
2. Was the Tribunal right in exempting from tax the business income of the assessed derived from running the Cottage Industries Emporium handed over to it by the Central Government ?'
3. The assessed, the Indian Co-operative Union Ltd. (hereinafter referred to as 'the society'), was registered with the Registrar of Co-operative Societies, Delhi, under the provisions of the Bombay Co-operative Societies Act 1912, as extended to Delhi. The Society was a voluntary non-profit organisation devoted to the economic and social development through co-operation. The main object of the society is to work for the organisation and development of producers, consumers, educational, housing and multipurpose societies. The relevant objects of the society as set out in bye-law No. 2 are as follows:
'(b) Organising or undertaking the purchase and storing of raw materials and supplying them to member societies, stocking, displaying and selling the products of the societies.
(c) Co-ordinating and rationalising the productive and commercial activities of member societies and advising and guiding them in regard to quality, designs and patterns, grading and standardisation, etc.
(d) Advancing raw material for being manufactured into goods:...
(g) Securing orders for the supply of goods and to arrange the manufacture of the same.
(h) Establishing trade connections, sales depots, selling agencies, offices for distributing agents, etc...
(o) Establishing branch offices, consumer stores, etc.
(u) The Union will also work to assist displaced persons and their co- operatives.'
4. On October 13, 1952, an agreement was entered into by the society with the President of India. Under the said agreement, the Government agreed that the establishment known as the Central Cottage Industries Emporium shall be run by the society and for that purpose the Government handed over the premises and furniture on the terms and conditions set out in the agreement. The Society undertook not to use the premises for any purpose other than the purposes of the Emporium. Clause 12 of the agreement reads us under:
'Clause 12. - The Emporium will bear the same title as at present, namely, the Central Cottage Industries Emporium, New Delhi, and the Society will continue business with the main object of facilitating and marketing of cottage industries products in India and abroad. The Society will take steps to merge into the Emporium within one month the activities of refugee handicrafts run by them except such of the activities which are beyond the purview of the Emporium.'
5. The Society claimed that being a co-operative society and engaged in 'cottage industry' it was entitled to exemption under s. 14(3)(i)(b) of the Indian I.T. Act, 1922, as amended by the Finance Act, 1960 (s. 81(i)(b) of the I.T. Act, 1961). The ITO, however, held that the marketing of the products of a cottage industry was different from the activity of manufacture or production of goods in regard to which alone the exemption was allowed by statute. The ITO further held that the assessed was only engaged in selling what it bought from outsiders, though some of the suppliers were co-operative societies which did manufacture. Accordingly, the ITO rejected the claim for exemption in regard to the income derived by the society from the running of the Emporium.
6. The assessed filed an appeal and the AAC held that the assessed was a co-operative society which was engaged in cottage industry and as such was entitled to the exemption claimed. The AAC summed up his findings as under:
'In fact the society can deal only in handicrafts, a list of which has been drawn up by the Government. When the Emporium was taken over, the Society was having a production centre of its own at Rouse Avenue, New Delhi. Since then 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 AAC was also of the view that the society was also entitled to exemption under s. 14(3)(i) of the 1922 Act.
7. Dissatisfied with the order of the AAC, the department went up in appeal to the Tribunal. The Tribunal upheld the findings of the AAC as regards the exemption under s. 14(3)(i)(b) of the 1922 Act/s. 81(i)(b) of the 1961 Act, but set aside the findings as regards exemption under s. 14(3)(i) of the 1922 Act.
8. The department filed an application under s. 256(1) of the Act for referring the aforesaid two questions of law for the opinion of this court and as a consequence the said questions were referred.
9. It was contended by the learned counsel for the petitioner that according to clause 12 of the agreement dated October 13, 1952, the society was carrying on the business with the object of facilitating the marketing of cottage industries' products and as such it cannot be said to be engaged in a 'cottage industry' within the meaning of s. 14(3)(i)(b) of the Indian I.T. Act, 1922. He further contended that engaging in trade of goods does not amount to engagement in industry as envisaged by the provisions of the Act. In order to appreciate this contention it is necessary to reproduce the relevant provisions:
'14. (3) The tax shall not be payable by a co-operative society -
(i) in respect of its profits and gains of business carried on by it, if it is - ...
(b) a society engaged in a cottage industry.'
10. The provisions of the s. 81(i)(b) of the 1961 Act are to the same effect. 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'. The Allahabad High Court had occasion to deal with the provisions of s. 14(3)(i)(b) of the Act in the cases of District Co-operative Federation Ltd. v. CIT : 88ITR330(All) . In both these cases, the assessed was a co-operative society and had brick kilns at different places. The society claimed exemption under s. 14(3)(i)(b) on the income derived by it from the said brick kilns on the ground that it was engaged in 'cottage industry'. The claim of the assessed was negatived and it was held that the expression 'cottage industry' occurring in s. 14(3)(i)(b) contemplated an industrial activity of which a well-recognised feature was that it was commonly located in cottages or homes of the artisans. It is carried out on a small scale with a small amount of capital and a small number of workers and has a turnover which is correspondingly limited. 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 'cottage industry'. The word 'cottage industry' has not been defined in the Act. However, it is a word of every day use and its meaning is well understood. According to Webster's New International 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. It is true that primarily a cottage industry is carried on by the families in their dwelling houses but when the term 'cottage industry' is applied to co-operative societies the idea of a family unit does fit in. The co-operative society can in a way be likened to a family constituted by its members. 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 the family constituted by its members is engaged in a cottage industry. Before it can be said that a co-operative society is engaged in an industry, it is necessary that there must be an activity relating to an industry. An industry obviously implies manufacture of certain articles and it cannot embrace a business of a mere purchase and sale of goods. In the present case, we are concerned with the activities of the society only to the extent of its business relating to the Emporium. Clause 12 of the agreement dated October 13, 1952, reproduced above, indicates that the society will continue business with the main object of facilitating the marketing of cottage industries' products in India and abroad. The findings of the AAC and the Tribunal to the effect that the activities of the society relating to the Emporium are for the purpose of development and promotion of cottage industries 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.
11. For the reasons recorded above, we are of the opinion that the activities of the assessed-society to the extent of its buying and selling products of other societies or individuals cannot qualify for exemption under s. 14(3)(i)(b) of the 1922 Act or s. 81(i)(b) of the I.T. Act, 1961. The manufacture and sale of its own products or products of its members would certainly qualify for the said exemption. Thus, our answers to the questions referred would be that the Tribunal was not right in holding that the income derived by the assessed from running the business of buying and selling of products of outsiders was exempt under s. 14(3)(i)(b) of the 1922 Act or s. 81(i)(b) of the 1961 Act and it was right in holding that the income derived by the assessed from running the business of manufacture and sale of products confined to its own members, was exempt under the said provisions. There will be no order as to costs.