607. Clarification regarding criteria required to be satisfied by any co-operative society engaged in cottage industry for availing benefits under section 80P(2)(a)(ii)
Circular No. 722 was issued by the Central Board of Direct Taxes on 19 September 1995. Its subject is 607. Clarification regarding criteria required to be satisfied by any co-operative society engaged in cottage industry for availing benefits under section 80P(2)(a)(ii).
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Sets out the criteria a co-operative society must satisfy to be treated as engaged in a cottage industry for the deduction under section 80P(2)(a)(ii). The industry must be carried on on a small scale with small capital, a small number of workers and correspondingly limited turnover; it must not be liable to registration under the Factories Act; it must be owned and managed by the society; the work must be done by the members and their families, with no outside hired labour, a family being self, spouse, parents, children, spouses of children and any other relative customarily living with the member; a member means a shareholder of the society; the place of work may be an artisan shareholder's residence or a common place provided by the society; and the society must manufacture, produce or process, not merely buy and sell the same commodity. It then answers the weavers' point directly: so long as the weaving itself is done by members at their residences or at a common place provided by the society without outside labour, payments to outside agencies for dyeing, bleaching or transport do not by themselves destroy the deduction.
A large number of weavers' co-operative societies had represented that the deduction was being denied merely because they had made payments to outside agencies for dyeing, bleaching and transport.
607. Clarification regarding criteria required to be satisfied by any co-operative society engaged in cottage industry for availing benefits under section 80P(2)(a)(ii)
1. Under section 80P(a )(ii), a co-operative society engaged in a cottage industry is eligible for deduction of the whole of the amount of profits and gains of business attributable to cottage industry.
2. The Board has received representations from a large number of weavers’ co-operative societies that deduction under section 80P(2)(a)(ii ) has been denied to them merely because some payments have been made by them to outside agencies for dyeing, bleaching and transport arrangements.
3. What constitutes a ‘Cottage Industry’ has been the subject-matter of discussion in a number of cases decided by various courts. Based on the ratio of these decisions, a co-operative society engaged in cottage industry is required to satisfy the following criteria for availing of the benefits under section 80P(2)(a )(ii) of the Income-tax Act, 1961 :—
(a) a cottage industry is one which is carried on on a small scale with a small amount of capital and a small number of workers and has a turnover which is correspondingly limited;
(b) it should not be required to be registered under the Factories Act;
(c) it should be owned and managed by the co-operative society;
(d) the activities should be carried on by the membership of the society and their families. For this purpose, a family would include self, spouse, parents, children, spouses of the children and any other relative who customarily lives with such a member. Outsiders (i.e., persons other than members and their families) should not work for the society. In other words, the co-operative society should not engage outside hired labour;
(e) a member of co-operative society means a shareholder of the society;
(f) the place of work could be an artisan shareholder’s residence or it could be a common place provided by the co-operative society;
(g) the cottage industry must carry on activity of manufacture, production or processing; it should not be engaged merely in trade, i.e., purchase and sale of the same commodity.
4. It is further clarified that in the case of a weaver’s society, so long as weaving is done by the members of the society at their residences or at a common place provided by the society, without any outside labour, such a society will be eligible for deduction under section 80P(2)(a)( ii) even if certain payments have been made to outside agency for dyeing, bleaching, transport arrangements, etc., provided it satisfied all other conditions necessary for availing deduction under section 80P(2)(a)( ii) of the Income-tax Act, 1961.
Circular : No. 722, dated 19-9-1995.
In an assessment or appeal where a society's section 80P(2)(a)(ii) deduction is disallowed on the footing that outside agencies were used.
A weavers' society whose members weave cloth at their own homes sends the woven cloth to an outside dyer and pays a transporter to move it. Because the weaving, the manufacturing activity, is done wholly by members and their families, and the society is not registrable under the Factories Act, the deduction under section 80P(2)(a)(ii) is not lost by reason of the dyeing and transport payments, provided the other conditions in paragraph 3 hold.
Source: the Income Tax Department’s own published text — its page for this instrument.
