1. The focus of these two appeals is on identical issues. They were, therefore, heard together and are disposed of by a common order.
2. The assessee in ITA No. 2216/Mds/92 is a co-operative society registered under Section 10 of the Madras Co-operative Societies Act VI of 1932 on flie basis of limited liability. The assessee in ITA No.2323/Mds/ 92 is a co operative society registered under Section 9 of the Tamilnadu Co-operative Societies Act (LIU) of 1961 on the basis of a limited liability.
3. In response to a notice under Section 142(1) of the IT Act, 1961 issued to them, both the societies filed returns of income declaring nil income on the ground that the entirety of their income was entitled to deduction under Section 80P(2)(a)(i). It was also their case before the lower authorities that deduction in respect of the entirety of their income is available 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 loan against the finished goods deposited. The monies thus advanced carry interest; (e) When the sarees are sold, the society recovers commission at a stipulated rate, together with interest on the money, if any, advanced by it to the weaver-member. The balance of sale consideration is paid by the society to the weaver-member; (f) It is open to the weaver-member to bring prospective purchasers to the society. In such cases also the society is entitled to deduct from the sale proceeds the stipulated commission and, of course, interest, if any, owed by the weaver-member to the society; and (g) In case the sarees deposited for sale are not sold within the stipulated period of six months, they are returned to the weaver-member. In such cases, no commission is charged. Interest, however, is charged on the money, if any, advanced by the society to the weaver-member.
5. On the said facts, the Assessing Officer held: "It is very clear that the main function of the society was marketing of the finished goods of silk sarees and half-sarees deposited by its members. However, during the course of such trading activities, the society was also advancing money against the future sale consideration of the goods intended for sale at a nominal rate of interest . . . the advancing of loan was only a subsidiary service done by the society only for the purpose of promoting its main trading activity of marketing of silk sarees and half-sarees of its weaver-members for the purpose of promoting its main activity of marketing of gocds on commission.
Because of this the interest income on loan thus advanced was only a meagre amount compared to the income of commission earned by marketing the finished goods of its members".
Yet another consideration weighed with the Assessing Officer in this regard and that was that the assessee-societies were advancing loan only on the deposit of finished goods, and not against other valuable materials belonging to its members such as raw silk (kora) and zari (golden threads) etc. According to the Assessing Officer, "the Society has not advanced any such loan against any kind of such raw-materials intended for weaving even for a shortest period. Therefore, the main intention of the Society was to market the finished products of its weaver-members thereby the Society has earned income of commission. The advancing of loans against such finished goods 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)d1. In this regard he referred to and relied upon the Allahabad case ot'Addl CITv. 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, the following considerations weighed with him: (b) They do not own any looms, nor do they supply any raw material intended for weaving by its members.
(d) They do not have any control over the looms or the weaving activities of their members. Every member is personally responsible for his weaving work. He utilised his own funds for procuring raw materials and used them to weave sarees either by himself or by employing on wage cooly weavers. Thus, the goods are produced at the risk of the members and brought to the society only for sale.
(e) It should, therefore, follow that the assessee-societies are not engaged in any industrial activity.
(f) With the result, the societies are not entitled to any deduction under Section 80P(2)(a)(ii) of the Act.
8. It was in these circumstances that the Assessing Officer brought to charge in the hands of the assessee-societies their net income from commission etc. after allowing deduction under Section 80P(2)(c).
9. Predictably, the assessee-societies took up the matter in appeal before the first appellate authority, reiterating the arguments that were earlier advanced, unsuccessfully, before the Assessing Officer, The CIT(A) declined to interfere in the matter. He rejected the assessee's claim under Section 80P(2)(a)(i) on the following grounds : (a) Admittedly the assessees are not engaged in the business of banking.
(b) They are merely marketing societies, which, in the ordinary course of their business as such societies, advance some money against the finished products deposited with them by their members.
(c) That the main business of the assessee-societies was to market the finished products of their members should be seen from the fact that on the sale of a saree for Rs. 808, the assessee gets maximum interest of Rs. 35 only (on the sum of Rs. 200 earlier advanced by it to the member) and a commission of Rs. 160 (calculated at 20% of the sale price). Thus, the major source of income of the assessee-societies was their marketing activities.
(d) The ratio of the Allahabad case of U.P. Co-operative Cane Union (supra) was applicable to this case.
10. The CIT (A) rejected the assessee's claim under Section 80P(2)(a)(ii) on the following grounds : (i) To be entitled to any deduction under the said section, 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.
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 "to advance loans to members on the pledge of finished products". Explaining the modus operandi followed by the societies and their members, Shri Janardhana Raja pointed out that immediately on the members' depositing the finished products with the societies,they are paid loans at nominal interest. The granting by the societies of such loans is authorised by bye-law No. 40. True the amount of the loan sanctioned is but a part of the sale/tag price fixed by the society. Even so, it could not be denied that the assessee- societies were advancing loans to their members on the pledged products. In this regard, he drew our attention to the details of loans given by the societies to their members, which have been included in the paper-book filed by him. He also drew our attention to the fact that the assessees before us had, in their turn, borrowed money from the Kancheepuram Central Co-operative Bank Ltd., Kancheepuram, for this purpose. According to him, it should follow that the assessees are engaged in the business of providing credit facilities to their members.
Shri Janardhana Raja admitted that the assessee societies are also engaged in the business of marketing the sarees etc. produced by their members and are receiving commission at a stipulated rate. Even so, the main activity of the societies before us was one of moneylending, and that consequently, the income earned by the assessee-societies are not chargeable to tax under Section 80P(2)(a)(i) of the Act.
15. In the course of the hearing the Bench invited Shri Janardhana Raja's response to a specific query. namely, did the societies use to advance loans to its members for purchase of raw materials, even before the members deposited with the societies the finished goods produced by them In other words, was there any instance in which the granting of the loan was not conditional on the finished products being deposited with the societies? Shri Janardhana Raja responded by contending that the time factor was not relevant at all. To be eligible to the benefits of Section 8OP(2)(a)(0, all that the assessees have to show is that they are providing credit facilities to their members. And, in the case before us, the assessees did in fact provide such facilities to their members. Consequently, the cases of the assessees before us are fully covered by the said section.
In this regard, he referred to and relied upon the Madras case of CJTv.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 Cooperative 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 the benefit of Section 80P(2)(a)(ii). In this regard, he referred to and relied upon the following cases : (a) Addl CIT v. Chichli Brass Metal Workers Co-operative Society Ltd. [1978] 114ITR 720 (MP) particularly the observations at page 725 of the report.
(b) Addl. CIT v. Indian Co-operative Union Ltd. 11982] 134 ITR 108 (Delhi).
(c) ITO v. Quilon Central Coir Marketing Co-operative Society Ltd. [1993] 112 Taxation 1 (Cochin) (Trib.).
17. Shri Janardhana Raja's final thesis was that the income of the assessees is exempt under Section 80P(2)(e) also. According to him, the societies are providing godown facilities to their members (see bye-law No. 38). Thus, the sarees deposited with the societies by the members are kept in the godowns of the societies, or as the case may be, displayed in the show-rooms belonging to the assessees. And the commission charged by the societies is inclusive of the rent towards storage of the sarees etc. deposited by the members. In this regard, drawing our attention to the details of the expenditure incurred by the societies, he contended that the assessees were incurring expenditure not only under the head "rent" but also under the head "repairs to buildings".
18. In view of the foregoing, therefore, contended Shri Janardhana Raja, the assessees are entitled to succeed.
19. Shri P.A. Iyengar, the learned departmental representative, strongly supported the impugned orders of the lower authorities.
Questioning seriously the contention of Shri Janardhana Raja that the assessees are engaged in the business of providing credit facilities to their members, Shri Iyengar contended that the assessees are mere marketing societies. In this regard, drawing our attention to page 3422 of Sampath Iyengar's Commentary on Income-tax (8th Edition), Shri.
Iyengar vehemently argued that the deduction available under Section 80P(2)(a)(i) of the Act is available not to a category of income but to a category of assessees, namely, a co-operative society, answering the description of a society engaged in carrying on the business of providing credit facilities to its members. According to Shri Iyengar, the term "providing credit facilities to its members" must be understood ejusdem generis, because it finds a place along with the business of banking mentioned in that section. It is not the case of the assessees that they are engaged in the business 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. (supra) 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 the members weave the sarees in their looms, and deposit the sarees with the societies for the limited purpose of selling them.
21. Thirdly, according to Shri Iyengar, the requirement that each member should not own more than 5 looms was done away with.
Consequently, the question of regarding the assessees as engaged in a cottage industry does not arise.
Adverting to Shri Janardhana Raja's contention that because the weaver members were engaged in cottage industry in their homes, the assessees must be regarded as engaged in a cottage industry, Shri Iyengar vehemently contended that no data was placed either before the Assessing Officer or before the CIT(A) or even before us in support of such a claim.
22. Turning next to the assessees' contention that they are entitled to the benefit of Section 80P(2)(e), Shri Iyengar contended that the assessee was having show-rooms only as an integral part of their marketing activities. Even if they had taken on rent extra space to store the sarees deposited with them, they would be doing so only in the course of their marketing activities. In any event, the assessee had not charged any separate fee as and by way of godown/warehouse charges and the assessees' contention that the commission charged by them is inclusive of an element of rent, is fit to be rejected.
23. In view of the foregoing, therefore, contended Shri Iyengar, the impugned orders of the first appellate authority do not invite any interference.
24. We have looked into the facts of the case. We have considered the rival submissions.
25. We may clear the decks as it were by first dealing with Shri Janardhana Raja's contention that the assessees are entitled to exemption under Section 80P(2)(e). It is a matter of record that this issue was not canvassed either before the Assessing Officer or before the CIT(A). Not unnaturally, therefore, the lower authorities did not have any occasion to inquire into this issue. Having regard to the fact that the resolution of this issue entails inquiry into facts, we decline to permit the assessees to raise the related grounds.
Accordingly, we dismiss the related grounds in limine.
26. To turn now to the merits of the case. For well nigh for decades the I.T. Act has been extending concessional treatment to co-operative societies of certain categories. The categories are no doubt selected as a matter of State Policy. 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 80Pwas 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. (19831 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 only footing that the assessee-societies advanced to its members a part of the sale/tag price of the sarees deposited by the members with the societies.
80P(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there 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: (a) in the case of a co-operative society engaged in (i) carrying on the business of banking or providing credit facilities to its members, or The validity of Shri Janardhana Raja's first thesis needs to be examined in the light of the aforesaid provisions.
30. The provisions of Section 80P(2)(a)(i) have come up for consideration in a number of cases. In the case of Kerala Co-operative Consumers' Federation Ltd. v. C7T[1988] 170 ITR 455 (Ker.), the assessee, an apex cooperative society, was engaged in the business of purchase and sale of consumer goods. In the course of its business, the assessee had effected credit sales to its members. Relying on the said fact, the assessee claimed the benefit of deduction under Section 80P(2)(a)(i) of the Act, The assessee was unsuccessful before the Assessing Officer, the first appellate authority, and the Income-tax Appellate Tribunal. The matter then reached the Kerala High Court.
Answering in the affirmative and against the assessee the question of law referred to it at the instance of the assessee, the court observed: It is settled law that every word in a statute should be construed in the context, in which it occurs in order to discover its appropriate meaning. A word is known by the company it keeps. When two or more words which are susceptible of analogous meaning are coupled together, they should be understood in their cognate sense.
These principles are well-settled. The matter has been dealt with adverting to the relevant decisions on the subject in a Division Bench decision of this Court in CITv. Parukutty Mooppilamma [ 1984] 149ITR131 (Ker.), We are of the view that the words 'providing credit facilities' occurring in Section 80P(2)(a)(i) of the Income-tax Act, should be construed as 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 (supra), 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, (io) 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 811(a) - (analogous to Section 80P(2)(a)(t] 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. According to the Tribunal, credit facilities can be provided not merely by advancing loans but also by supplying goods on credit, and, therefore, the income from the printing press was exempt under Section 81(i)(a). On a reference, inter alia, on this issue at the instance of the Department, the High Court observed : In our opinion, the income which is exempt from tax: is income arising from a business of providing credit facilities and not merely of selling goods on credit. A person who sells goods on credit cannot be said to be carrying on the business of providing credit facilities. His business will be the business of purchase and sale of goods which he supplies. Banking business is a vvide term and includes many activities like discounting bills, hundis, cheques, accepting deposits and advancing loans, etc. Thus, it includes the providing of credit facility. A person or a society may not: be a banker in that wide sense yet he may be providing credit facilities which is a part of a banking business. The expression 'providing credit facility' thus takes its colour from the activity of banking. In. order that a banking or providing of credit facility may constitute a business, it is necessary that these activities must be the chief source of income. Aperson who advances loans or supplies goods on credit in connection with and in the course of some other business of manufacture or purchase or sale of goods, etc., cannot, be said to be carrying on the business of banking or providing credit facilities. In Of Uer that a person may be engaged in the business of providing credit facilities, it must be shewn that the providing of credit facility is his business in the sense that the interest earned by him is the main source of his income. A trader may also earn interest from his customers to whom goods are supplied on credit but that is incidental to the main business he carries on. The intention of the Legislature was to grant exemption to the income of co-operative societies engaged in the businesses enumerated in Clauses (a) to (f) of Section 81(i). These are the only kinds of businesses which are exempt. To hold that a co-operative society which sells goods on credit to its members is engaged in the business of providing credit facilities would amount to extending the exemption to businesses other than those mentioned in Clauses (a) to (f) of the Act. A society may 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(r)(a) of the Act.
32. In the case of Rodier Mill Employees' Cooperative Stores Ltd. v.CIT [19821 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. It may be that in a broad sense there is a provision of credit in every transaction of sale on credit. But, it cannot be said that a cooperative society which is engaged in selling or distributing consumer goods or other goods to its members for deferred consideration can be said to be extending credit facilities merely because it does not insist on cash payment but prefers to collect the consideration after a time.
In the literature of law relating co-operative societies there is well-merited distinction between credit societies, on the one hand, and consumer societies, on the other, not to speak of societies engaged in various productive activities. When the section refers to a co-operative society engaged in providing credit facilities to its members it really refers to a credit society, whose primary object is the provision of loans or other credit facilities to its members.
It does not include any society whose primary object is something other than the provision of loans or other credit facilities, such as a consumer to-operative society.
33. The same issue came to be considered in greater detail by the Madras High Court in the case of Madras Autorickshaw Drivers' Co-operative Society Ltd. (supra). In that case, the assessee- society was constituted with a view to promoting "the economic interest, of the members of the society by purchasing autorickshaw vehicles and selling them on hire-purchase terms to the members". The assessee's case was that it was carrying on the business of providing credit facilities to its members. The High Court answered the reference made to it at the instance of the Department, in the negative and against the assessee.
In that regard the High Court made the following observations : (a). . . (A)n inquiry into the applicability or non-applicability of Section 8OP(2)(a)(0 of the Income-tax Act, is not quite properly undertaken by considering the nature of the transactions of the society either individually or in the gross. What we have to consider is whether the society is really engaged in carrying on the business of providing credit facilities to its members. This has to be considered by examining the nature of the trade as such rather than by concentrating our attention on the terms and conditions of individual transactions dealt with by the society in the course of its trade. In other words, we have to consider the eligibility 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 ofa 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 IIofl912 (The Cooperative 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 the Rules made thereunder, co-operative societies fall under many distinct classifications. One such classification refers to a credit society. Without exhausting the entire classification of societies under the relevant rules, we may point out that that a credit society is distinct from a distributive society and a marketing society. Credit society, as defined in the relevant rule, refers to a society which has as its principal object, the raising of funds to lend to its members primarily for production or for any useful purpose. The description 'co-operative society engaged in providing credit facilities to its members' occurring in Section 80P(2)(a)(i) of the Income-tax Act is, in our opinion, merely a shorthand way of referring to a credit society as described or defined in the Tamil Nadu Cooperative Societies Rules, 1963.
(d) The tax relief under Section 8OP(2)(a)(i) is a grant by Parliament not to a category of income but to a category of assessee, namely, a co-operative society answering the description of a society engaged in carrying on the business of providing credit facilities to its members. If the society in question does not answer this description, it is not entitled to the relief. For invoking or applying this provision, it is not permissible to make a breakup of the income of the society as so much derived from the provision of credit facilities and so much from other income, if the society itself, in its true nature and object, is not a society engaged in the business of providing credit facilities.
34. This directly brings us on to the provisions of Madras Co-operative Societies Act, 1961, the Tamilnadu Co operative Societies Act, 1983, and the Rules made there under. Section 15 of the Madras Co-operative Societies Act, 1961 (corresponding to Section 16 of the Tamilnadu Co-operative Societies Act, 1983) empowers the Registrar to classify and categorise, in accordance with the relevant Rules, co-operatives with reference to their objects, area of operations, membership or any other matters specified in the Rules.
35. Rule 11 of the Madras Co-operative Societies Rules, 1963, classified co operative societies, inter alia, as 'credit society', 'distributive society', 'marketing society', and the like. Rule 11(2)(b) defines 'credit society' as a society which has as its principal object the raising of funds to be lent to its members 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 cooperative 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 there under 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 corporate bodies, and are governed by special statutes, the provisions of those statutes relating to classification or categorisation of societies become relevant.
(iii) The Madras Co-operative Societies Act, 1961 as also such other statutes, and the Tamilnadu Co-operative Societies Act, 1983 have enjoined on the Registrar of Co-operative Societies to classify or categorise the societies with reference to their main objects.
(iv) In the case before us the Registrar of Co-operative Societies has classified the assessce as marketing societies.
(v) There is a well merited distinction between credit societies on the one hand and the marketing societies on the other.
(vi) The bye-laws of the societies are obviously designed with a view to regulating, inter alia, the manner in which the societies shall transact business with its members and others and the terms and conditions governing such business. For purposes of classifying societies, the emphasis should be on the principal objects of the societies rather than on a particular bye-law, which regulates the manner in which the societies' business shall be done. In other words, not the mode and mechanics of the conduct of the societies' business but the main object of the society should be the deciding factor.
39. Now, what are the facts of the case before us? First, it cannot be disputed that the societies before us have been classified as marketing societies under the Madras/Tamilnadu Co-operative Societies Act. The assessee-society in ITA No. 2216/Mds/92 was registered as such under the Madras Co-operative Societies Act of 1932; while the assessee-society in ITA No. 2323/Mds/92 was registered as such under the Tamilnadu Cooperative Societies Act. Since under the aforesaid Acts the Registrar of Cooperative Societies is empowered to classify societies with reference to their main or principal objects and since that authority had classified the societies before us as marketing societies and not as credit societies, we would be justified in treating the societies as marketing societies simpliciter.
40. Secondly, while treating the assessee -societies as marketing societies and not as credit societies, the lower authorities have, inter alia, taken into account the fact that the commission earned by the societies on the sale of the products of their weaver members was much higher than the interest received 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.
42. Fourthly, as already pointed out, the Bench wanted to know specifically whether the societies used to advance monies to their members without insisting on the deposit by the members of finished products; and the response of the learned counsel for the assessees that the timing of the loan is not a relevant consideration. We arc unable to agree. If the assessees were true credit societies, one would have expected them to grant loans to their members to enable them to purchase, to start with, the necessary inputs. What security the societies would insist upon is a different matter altogether. The assessees before us advanced sums to their members only when the latter deposited the finished goods with themgoods produced by them at their own cost. Given the facts, the lower authorities cannot be faulted in coming to the conclusion that all that the assessee-societies had essentially done was to advance to their members a part of the tag price of the sarees, which the members had deposited with them.
43. There is yet another aspect of the matter that is noteworthy. It is ex facie clear from bye-law 38 that the assessee-societies were acting merely as agents of the members and that any loss arising out the transactions shall be borne by the members concerned and not by the societies.
The significance of the said provision is that the assessees before us are just commission agents. And it is not uncommon for such agents to advance money to their principals from time to time and collect interest from, or, as the case may be, pay interest to their principals. And this is exactly what has happened in the cases before us. Simply because the assessees charged interest in the course of their ordinary business, it does not follow that they somehow become credit societies.
44. Before taking leave of this issue, we may notice the Madras case of Pondicherry Co-operative Housing Society Ltd. (supra), referred to and relied upon by the assessee's counsel. There the assessee had claimed the benefit of Section 80P(2)(a)(i) on the ground that it was providing credit facilities to its members. The Assessing Officer negatived the assessees' claim on the ground that the advances made by the assessee-society to its members for purposes of construction of houses cannot be regarded as provision of credit facilities to its members.
The first appellate authority allowed the assessee'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 Clauses 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 of the assessee. And it was in that context that the High Court held that a liberal construction should be given to the language employed in the provisions of the section concerned.
Referring to the Madras case of Madras Autorickshaw Drivers' Cooperative Society Ltd. (supra), on which reliance was placed by the revenue, the High Court held that the said case cannot avail the revenue because there the finding was that the object of the society was purchase of autorickshaws and that the society had come into being only for that purpose. The entering into of hire-purchase agreements for the purpose of sale of autorickshaw could not be regarded as providing credit facilities, but only as a means to further the sole object of the society, namely, purchase and sale of autorickshaws by the society. Clearly, the decision in the aforesaid case of Pondicheny Co-operative Housing Society Ltd. (supra) is distinguishable on facts where the finding was that the providing credit facilities to its members was an independent and distinct object of the society. In other words, the advancing of loans by the society could not be regarded merely as transactions entered into by the society in the course of pursuing its objects. In the case before us, however, as demonstrated earlier, the assessees are essentially marketing societies. They came to advance loans to their members (on the deposit of the sarees etc.
produced by the latter) in the ordinary course of their business of marketing the sarees etc. produced by their members. Hence, as we see it, the said case cannot avail the assessees.
45. In view of the foregoing, therefore, we hold that the assessee-societies before us can only be regarded as marketing societies simpliciter and not as credit societies properly so called, and that, by the same token, the provisions of Section 80P(2)(a)(i) cannot avail them. We, therefore, decline to interfere in the matter.
47. To turn now to Shri Janardhana Raja's second thesis, namely, that the assessees before us are engaged in cottage industry and that consequently they are entitled to deduction under Section 80P(2)(a)(i).
80P(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there 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: 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)(0(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 subsidiary occupation provided to agriculturists and where the scale of operation was small.
(ii) The assessee, on the contrary, had as many as 182 brick-kilns, with a very large turnover.
(iv) The brick-kilns were being worked by others on the basis of agreements entered into by them with the assessee.
51. Answering the reference against the assessee, the High Court observed : ... The expression "cottage industry" contemplates an industrial activity of which a well-recognised feature is that it is commonly located in the 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.
Those are its distinctive features. The activity in which the assessee is engaged does not possess those distinctive features.
There are as many as 182 brick-kilns, The turnover is very large. A large number of people are employed. Moreover, the Tribunal has also found that the brickkilns are worked not by the assessee, but by others on the basin of agreement between the assessee and them. We are not satisfied that the activity in question can be described as 'a cottage industry'. The claim to deduction has been rightly ejected.
52 The same issue arose again before the Allahabad High Court in the case of District Co-operative Development Federation Ltd. v. CIT[l973] 88 ITR 330. In that case also the assessee carried on the business of manufacturing bricks at. its brick-kilns, employing a large number of workers. The assessoc's claim for exemption under Section 14(3)(i)(b) of the old Act was negatived by the Assessing Officer, the first appellate authority, and also by the income-tax Appellate Tribunal.
Thereafter, the assessee moved the High Court contending that it was a cottage industry as defined in Webster's New International Dictionary,which runs as under: 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.
... The definition shows that an industry to be cottage industry must utilise the labour force of the workers who use their own equipment and the process 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 hence the activity of the assessee cannot be termed as 'cottage industry'.
58. The issue came up before the Allahabad High Court once again but in the context of the analogous provisions of Section 81(f)(b) of the Income-tax Act, 1922, in the case of Hastkala Pital Udyog Sahkari Samiti Ltd. (supra). There, the assessee, a registered co-operative society, had 120 artisan members. It purchased various metals like copper, zinc, brass, etc. as well as coal and supplied the raw material and coal to its members, who in turn manufactured household utensils like Lota, Katora, etc., and supplied them to the assesses-society, which in its turn, sold the articles in the market. The assessee claimed exemption under Section 81(i)(b) on the ground that it was a co-operative society engaged in cottage industry. The Assessing Officer rejected the assessee's claim on two grounds, namely, (i) the assessee employed outside labourers, and (ii) carried on manufacturing work with the aid of power. The first appellate authority declined to interfere in the matter. The Income-tax Appellate Tribunal allowed the asscssee's claim for the following reasons : (ii) The assessee supplied the raw materials to its members who manufactured utensils and supplied them to the society.
(iii) The 1.20 members were paid according to the quantum of work done by each of them.
(v) The assessee-society was not engaged in the manufacture of utensils with the aid of power, inasmuch as electricity expenses claimed by the assessee were in fact the expenses of elecricity consumed in the society's office.
54. While answering the reference made to it at the instance of the Department in the affirmative and in favour of the assessee and against the Department, the High Court observed as follows : 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 a mere sale and purchase of goods, so that the first two requirements of law are satisfied, namely, that the assessee is a cooperative 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.
55. We then have the Madhya Pradesh case of Chichli Brass Metal Workers Co-operative Society Ltd. (supra). The facts of that case were identical with those of the Allahabad case of Hastkala Pital Udyog Sahkari Samtti Ltd. (supra). Thus (i) The members of the society were all artisans. The utensils were manufactured by the members by using wooden hammers only. The members worked under one common roof in a building of the society.
(iii) The capital of the society did not exceed Rs. 15,000. The accumulated profits of the society were more than Rs. 1,00,000 essentially be-ca use there was a restriction under the Co-operative Societies Act on the distribution of dividend.
Applying the ratio of the Allahabad case of Hastkala Pital Udyog Sahkari Samiti Ltd. (supra), the Madhya Pradesh High Court answered the reference against the Department and in favour of the society. In this regard, the High Court observed, inter alia, that"... A co-operative society can be regarded as a family consisting of its members and the premises belonging to the society can be regarded as its home or cottage".
56. In the case of Co-operative Typewriter Services Ltd. v. CIT [1979] 118 ITR 512, the Bombay High Court had an occasion to consider the provisions of Section 81(i)(b) of the Act. There, when Voltas Ltd. closed down its typewriter agency department, all the retrenched employees of that department came together and formed a co-operative society to do business of the former typewriter section of Voltas Ltd. The society did the following work: (1) Servicing of typewriters on monthly/yearly contracts. This denoted oiling, cleaning, adjustment, etc., of typewriters once a month at the client's place; (2) Repairing of typewriters. This denoted major and minor repairing, the former at the society's premises and the latter at the client's place, inclusive of the supply of such parts which are broken and/or unserviceable; (3) Rebuilding of typewriters. This denoted putting into working order typewriters which had completely broken down and were no longer in a working condition and included major and heavy replacements of many parts, overhauling, realigning, etc., and selling such rebuilt typewriters; and (4) Sales of typewriter ribbons, felts, covers, etc. This denoted sales of such 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 declined to interfere in the matter.
58. The High Court answered the reference against the assessee. The observations made by the High Court may be summarised as follows : (1) The definition to be found in the Maharashtra State Aid to Indust ries Act, 1960, and the Rules made thereunder must be regarded as artificial definitions for the purpose of qualifying certain persons, institutions, or industries for State aid. One cannot, therefore, turn to this definition for light.
(2) What was relevant was the ordinary connotations of the concept of 'cottage industry'.
(3) The assessee before it did not satisfy the criteria of "cottage industry" as commonly understood. Thus, the assessee was not carrying on any industry. Nor was any activity carried on at or near the homes of the members constituting the assessee-society.
59. We may now notice the Delhi case of Indian Co-operative Union Ltd. (supra) in which the provisions of Section 14(3)(i)(b) of the old Act and Section 81(i)(b) of the new Act came to be considered. There, the assessee 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 was to work for the organisation and development of producers, consumers, educational, housing and multipurpose societies.
60. By and under an agreement dated 13-10-1952, which the assessee-society entered into with the President of India, it took over an establishment known as the Central Cottage Industries Emporium. The said Emporium was engaged in the business of marketing the products of cottage industry.
61. The Assessing Officer negatived the assessee's claim for exemption under Section 14(3)(i)(b) of the old Act on the ground 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 the State. According to him, the assessee was only engaged in selling what it bought from outsiders though some of the suppliers were co-operative societies which did manufacture the products sold by them to the assessee-society.
62. The first appellate authority allowed the assessee's claim. In this regard the following factors weighed with him : (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 assessee 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 8 l(i)(b) of the Income-tax Act, 1961, as the case may be 64. On an examination of the issues involved in the case, the High Court held that "the activities of the assessee-society to the extent of its buying and selling products of other societies or individuals cannot qualify for exemption under Section 14(3)(i)(b) of the 1922 Act or Section 81(i)(b} of the I.T. Act, 1961". In that regard, it observed as follows : ... 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 equipmentat 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 not 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 12of 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.
It is of interest to note that referring to the Allahabad cases of District Cooperative Federation Ltd. (supra) and District Co-operative Development Federation Ltd. (supra), 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 cottage industry'.
65. One more decided case needs to be noticed and that is the Kerala case of CIT v. Taj Textile Industries Co-operative Society Ltd. [1988] 170 ITR 465. There the assessee was a co-operative society engaged in the manufacture and sale of handloom cloth. The members of the society were artisans weaving handloom cloth. The society used to purchase raw materials for the manufacture of cloth and to entrust the material to the members who carried out the work in thatched sheds belonging to the society. The looms were also kept in the thatched sheds. The members were remunerated at piece rates. They were also provided with bonus and other compensation. On these facts, the Income-tax Appellate Tribunal upheld the assessee's claim under Section 80P(2)(a)(ii) of the Act.
66. The Kerala High Court, following the Allahabad case of HastkalaPital Udyog Sahkari Samiti Ltd. (supra) and the Madhya Pradesh case of Chichli Brass Metal Workers Co-operative Society Ltd. (supra), held that the decision of the Income-tax Appellate Tribunal was justified in law. It accordingly answered the question referred to it in the affirmative, in favour of the assessee and against the revenue.
67. From an analysis of the foregoing reported cases, it is possible for us to deduce the essential attributes of "cottage industry" in general and in particular of a "co-operative society engaged in a cottage industry". In relation to a co-operative society engaged in a cottage industry, the attributes are : (ii) The society must be engaged in an industry. That is to say, it must be engaged in the business of manufacturing certain articles or things. The mere buying and selling of even goods of cottage industries cannot be said to cover by the expression "engaged in cottage industry", as no industrial activity is involved therein.
The said principle applies with equal, if not greater, force to a society which arranges for purchase and sale of articles or things in the capacity of a commission agent, the profit or loss arising out of the transactions enjoyed or, as the case may be, borne by the members.
(iii) A society can properly be regarded as one engaged in the business of manufacturing certain articles or things only if it is shown- - that the society purchased and supplied to its members the necessaiy inputs; - that it recompenses its 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 the facts of the cases before us? The assessees before us are no doubt co-operative societies. It is also not disputed that artisans, namely, weavers are their members. But, as we see it, the assessees fail the test of being engaged in the production or manufacture of goods or articles. The assessees before us are marketing societies whose main object is to arrange the sale of the goods manufactured by the members on commission basis. For a fact, as pointed out earlier, bye-law No. 38 states that the Board of Directors, ". . .
In arranging for the sale . . . shall act only as the agent of the members concerned and shall not do business as owner on behalf of the society. Any loss arising out of transactions shall be borne by the members concerned and not by the society. . .". Thus, the assessees before us have not only been classified or categorised as marketing societies under the Madras Co-operative Societies Act, but also - this is more significant - while marketing the goods produced by the members, they act merely as commission agents properly so called.
69. Again, the assessees do not purchase the inputs and supply them to their members. For a fact, they do not even advance any sums to their members before silk sarees etc. are produced by the members and deposited with the societies. Nor do they pay any wages to the members.
70. On the above facts taken in conjunction with the further fact that the societies do not own either a workplace or even looms, the conclusion is irresistible that the assessee societies before us are merely commission agents simpliciter. Neither in law nor in logic can they be regarded as cooperative societies engaged in a cottage industry.
71. In view of the foregoing, therefore, we hold that the lower authorities were justified in rejecting the contention that the assessees before us are engaged in a cottage industry. We, therefore, decline to interfere in the matter.
72. Finally, a word or two about the ITAT Cochin case of Quilon Central Coir Marketing Co-operative Society Ltd. (supra) referred to and relied upon by the assessees' counsel. We have perused the said order. A rather short order, it does not. contain the full facts of the case. It is, therefore, not possible for us to see whether the facts of the two cases before us are identical with those of the aforesaid Cochin case.
Secondly, and more significantly, the said Cochin case proceeded on the basis of the common ground that the issue involved therein stood squarely governed by "the decision of the Tribunal relied on by the CIT(A) and also in the case of Quilon Central Coir Marketing Co-op.
Society Ltd. v. ITO, B-Ward, Quilon [IT Appeal No. 79 (Coch.) of 1985, dated 11-8-1989]".
In view of the foregoing, therefore, we hold that the said decision of the Tribunal cannot avail the assessees.