ORDER
P.I. Mohan Singh, Judicial Member
1. These appeals of the asses-see relate to the assessment years 1979-80 to 1982-83 and arise out of the orders of the Commissioner (Appeals), Nagpur, dated 30-1-1984. The aforesaid appeals involve a common issue and are, therefore, heard together and disposed of by a common consolidated order for the sake of convenience.
2. Though the assessee has taken several grounds of appeal, at the time of hearing of the appeals, the counsel for the assessee restricted the claim only to Section 80P(2)(a)(ii) deduction, of the Income-tax Act, 1961 (‘the Act’). The appeals filed by the assessee on the other grounds are, therefore, dismissed.
3. The facts of the case in brief are as under : The society was originally formed way back as a weavers’ society. In 1956 it acquired the status of a federal society representing Primary Weavers’ Co-operative Societies within the eight districts of Vidarbha. The members of this society are the primary weavers’ co-operative societies and the State Government. In the year ended 30-6-1981, the National Co-operative Development Corpn. has also become a shareholder. The authorised capital is Rs. 1 crore. The assessee has thus become an apex society. The assessee claimed exemption under Section 80P(2)(a)(ii), that is, profits and gains from cottage industry. The ITO disallowed the exemption claimed by the assessee following the decision of the Delhi High Court in the case of Addl. CITv. Indian Co-operative Union Ltd. [1982] 134 ITR 108. According to the ITO, the test to be applied is whether the assessee-society is engaged in the manufacture of any articles through its members either in the dwelling houses of the members or in the premises of the society. The emphasis is on the manufacture by the members. Applying this test to the assessee-society, the following facts are revealed : (i) from the beginning till the relevant previous year the society’s members are cooperative societies and the Maharashtra Government and the test required that the production must be by the families of the members cannot be fulfilled in this case, (ii) it is admitted that no production or manufacture is undertaken by the assessee-society, (iii) it is also an admitted fact that what the assessee-society does is that it purchases raw materials required for weaving and sell them to its member societies. It is, therefore, clear, according to the ITO, that the assessee-society neither owns rights to manufacture any sarees nor they get sarees manufactured by the individual members since the society has no individual members as such. It is also not possible as required by the assessee to hold that the members of the societies which are members of the assessee-society are to be treated as members of the assessee-society. He, therefore, held that the profits and gains of the assessee cannot be considered as arising from the cottage industry and hence the assessee is not entitled to the deduction under Section 80P(2)(a)(ii).
4. On appeal before the Commissioner (Appeals) the following submissions have been made by the learned counsel for the assessee :
(1) The ITO erred in holding that the assessee was not engaged in a cottage industry. The assessee’s only activity was in promoting the hand-loom industry, which was a cottage industry, in the districts of Vidarbha. The mere fact that the assessee operated through Primary Weavers’ Co-operative Societies would not disentitle the assessee from the benefit of the deduction.
(2) The assessee was certainly engaged in the collective disposal of the labour of its members. The assessee was the channel through which the handloom material products by the individual weavers were marketed and made available to the public. It was by these means that the individual weavers were guaranteed a certain fair margin of income for their livelihood. He strongly urged that the clause fully covered the assessee’s activities.
(3) The counsel relied upon the decision in the following cases : (i) CIT v. Tamil Nadu Co-operative Marketing Federation Ltd. [1983] 144 ITR 74 (Mad.), and (ii) Indian Co-operative Union Ltd.’s case (supra). He, therefore, contended that the assessee was entitled to the deduction under Section 80P(2)(a)(ii).
The ITO, who was present, reiterated that the assessee by itself was engaged only in a trading activity, viz., purchase and sale of yarn and sarees. It could not be said to be engaged in the collective disposal of the labour of its members as the labour was put in by the weaver members of the primary societies and not by the members of the assessee-society as such. After hearing the learned counsel for the assessee and the ITO, the Commissioner (Appeals) confirmed the order of the ITO for the reasons stated by him in his order. As against this order of the Commissioner (Appeals), the assessee is in appeal before us.
5. The learned counsel for the assessee contended that the two questions which require determination are (1) whether the exemption is available to the apex society in which the members are the Primary Weavers’ Cooperative Societies ; and (2) whether the activities of the assessee constitute cottage industry. He relied upon the decision of the Madras High Court in the case of Tamil Nadu Co-operative Marketing Federation Ltd. (supra). The counsel contended that in the case decided by the Madras High Court the assessee was a federation of primary co-operative societies. It purchased fertilisers and sold them to those primary societies who were its members. The assessee claimed benefit of Sub-clause (iv) of Section 80P(2)(a). The department rejected the claim on the ground that the supply was not to the members who carried on agricultural operations. Their Lordships of the Madras High Court have held that when the society is an apex society the members of its affiliated primary societies would also be its own members for the purpose of section SOP. In the light of the ratio laid down by the Madras High Court, the counsel contended, that the various weavers on the membership rolls of the primary societies also form the body of members of this apex society and the engagement by them in the cottage industry of manufacture of handloom fabrics amounts to such engagement by the assessee itself. To show that the activities of the assessee constitute cottage industry, the learned counsel for the assessee relied upon the decision of the Delhi High Court in the case of Indian Co-operative Union Ltd. (supra), wherein their Lordships of the Delhi High Court have held that primarily a pottage 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. A co-operative society can in a way be likened to a family constituted of 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 of its members is engaged in a cottage industry. However, the manufacture of its members will qualify for the exemption. From the above decision, the counsel contended, that it is clear that the members of the primary societies would equally be the members of this apex society. For the purpose of section SOP any engagement by them in cottage industry amounts to engagement by the assessee-society itself in the cottage industry. He, therefore, contended that on the facts and in the circumstances of the case, it stands established that the assessee is engaged in the cottage industry as envisaged in Sub-clause (ii) of Clause (a) of Sub-section (2) of section SOP. He, therefore, contended that the business income which is indisputably derived from cottage industry in its entirety is eligible for exemption. He further relied upon the following decisions in support of his contention that the activities of the assessee constitute cottage industry-CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 (Bom.), Addl. CITv. Chichli Brass Metal Workers Co-operative Society Ltd. [1978] 114 ITR 720 (MP) and Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC).
6. The learned departmental representative, on the other hand, supported the order of the Commissioner (Appeals). He contended that what is to be proved in this case is whether the assessee is engaged in the cottage industry. Since the members of the primary societies alone are engaged in the cottage industry, the assessee-society cannot claim exemption as those members who are actually involved in the manufacture are not the members of the assessee-society. Taking support from the decision of the Madhya Pradesh High Court in the case of Chichli Brass Metal Workers Co-operative Society Ltd. (supra), the learned departmental representative contended before us that the cottage industry cannot be limited to industry carried on by families in their cottages, but it implies an industry carried on by a society with the co-operation of its members in the premises of the society. According to him, only members who are able to assemble under the aegis of societies alone are eligible to exemption under Section 80P(2)(a)(i)- In this case, since it is impracticable for all the primary societies to come together being technical entities it cannot be said that the primary societies are engaged in the activity of industry. Therefore, the apex society, the members of which are primary societies, cannot claim the exemption under Section 80P(2)(a)(ii). He heavily relied upon the decision of the Delhi High Court mentioned supra and supported the order of the Commissioner (Appeals).
7. We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both sides. The Commissioner (Appeals) in coming to the conclusion that the assessee is not entitled to the exemption under Section 80P(2)(a)(ii) relied heavily on the decision of the Delhi High Court in case of Indian Co-operative Union Ltd. (supra). In this case, their Lordships of the Delhi High Court have held 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. A cooperative society can in a way be likened to a family constituted of 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 of 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 implies manufacture of certain articles and cannot embrace a business of mere purchase and sale of goods. Therefore, the activities of a co-operative society to the extent of its buying and selling products of other societies or individuals will not qualify for exemption under Section 81 (i)(b) of the Act. Following the ratio laid down in the aforesaid case, the Commissioner (Appeals) held that the assessee-society cannot be said to have engaged in a cottage industry inasmuch as the activity of the assessee-society constituted of mere purchases and sale of goods. If we read the facts of the case in Indian Co-operative Union Ltd.’s case (supra) carefully, it is seen that the ITO has given a finding of fact that the assessee-society was engaged only in selling what is bought from outsiders though some of the suppliers were co-operative societies which did manufacture. From this it would be clear that what was bought by the assessee is from outsiders and secondly though some of the suppliers were co-operative societies we do not know whether these societies are the members of the assessee-society. In the same case mentioned supra, their Lordships have further held that, however, the manufacture and sale of its own products are the products of its members will qualify for exemption. This finding of their Lordships has not been considered by the Commissioner (Appeals). In the case under consideration before us, the assessee-society purchases raw materials for production of handloom goods and gets the cloth manufactured by weavers working on looms, in their cottages and the goods so manufactured are marketed by the assessee. It reaches and deals with weavers for this purpose through its member primary societies. Since what was purchased by the apex society from the members of the primary societies is through the primary societies who are its members, the assessee, in our opinion, is entitled for exemption. From the object clauses of the society it is very clear that it is the apex society that is mainly responsible for organising the primary societies in weaving centres of persons carrying on the profession of weaving and in affiliating such societies to the apex society and financing and subsidising them and generally supervising their working. It further purchases raw materials and appliances as may be required for the industry and sell the same to members carrying on the manufacture of cloth as cottage industry. Further the goods manufactured in the cottage industry are marketed by the apex society. From this it is seen that all three organs, viz., the apex society, primary society and the weaver members are inter-connected with each other, in the sense that without one organ there cannot be any industry. We are, therefore, of the opinion that the apex society is engaged in the cottage industry as contemplated under Section 80P(2)(a)(ii) and is entitled to the exemption under the aforesaid provision. Now the question arises as to whether the exemption could be granted in the hands of the apex society as the weaver members are not the members of the apex society. It is an admitted fact that the weaver members are the members of the primary society and the primary societies are the members of the apex society. Their Lordships of the Madras High Court in the case of Tamil Nadu Co-operative Marketing Federation Ltd. (supra) have held that the language of Sub-section (1) of section SOP enables any co-operative society to claim the benefit of deduction if the conditions specified in Sub-section (2) are fulfilled. The expression ‘co-operative society’ occurring in Section 80P(1) covers any co-operative society whether it is a primary society or an apex society and, hence, the reference to members in Sub-clause (iv) of Section 80P(2)(a) can be taken to refer to the members of a primary society or members of an apex society, as the case may be. In the aforesaid case, the assessee co-operative society, a federation of primary co-operative societies, purchased fertilisers and sold them to various member societies and not to the actual agriculturists who carried on agricultural operations. The claim of the assessee for exemption from income-tax was negatived by the ITO, but upheld by the AAC and the Tribunal. The application of the revenue for reference of certain questions of law for the opinion of the High Court having been rejected, the department filed an application to the High Court for directing the Tribunal to stage a case and refer the questions of law : Held, that the Tribunal was justified in its view that the benefit of section SOP would be available to the assessee and, hence, no question of law could be said to arise out of the order of the Tribunal. On the basis of the ratio laid down in the aforesaid case, we are of the opinion that though the weaver members are not the members of the apex society, since they are the members of the primary societies who are in turn members of the apex society, the assessee is entitled to exemption under Section 80P(2)(a)(ii).
8. In the result, the appeals filed by the assessee are allowed in part.