Co-operative society — Whether the society could be said to be engaged in a cottage industry or whether it could be said to be engaged in a collective disposal of labour of its members — Though Court did not interfere in the matter in absence of material,

[CIT v. Rajasthan Rajya
Bunker S. Samiti Ltd., (2010) 323 ITR 365 (SC)]

The assessee-society, an
apex society carried on the activity of manufacturing of cloth by supplying raw
material, i.e., yarn, to the weavers, who were the members of the primary
society. The weavers produced cloth strictly in accordance with the directions
given and under the control of the assessee. The assessee paid weaving charges
to the weavers and thereafter marketed and sold the goods so produced. During
the relevant assessment years, cloth was manufactured and sold under the Janata
Cloth Scheme of the Government of India.

For the relevant assessment
years, the assessee claimed a deduction u/s.80P(2)(a)(vi) and u/s.80P(2)(a)(ii)
of the Income-tax Act, 1961 (‘Act’, for short).

The narrow question which
arose for determination before the Supreme Court in those cases was — whether
the assessee-society could be said to be engaged in a cottage industry
u/s.80P(2)(a)(ii) of the Act or whether it could be said to be engaged in the
collective disposal of labour of its members u/s.80P(2)(a)(vi) of the Act ?

It was the contention of the
Department that the weavers were not the members of the apex society. They were
the members of the primary societies. Therefore, the assessee was not entitled
to claim the benefit of deduction u/s.80P(2)(a)(vi) of the Act.

According to the Supreme
Court on both these questions, the Assessing Officer ought to have called for
the bye-laws. It appeared that the bye-laws were not produced before the
Assessing Officer. It appeared that the bye-laws had not been examined by the
Assessing Officer. Further, it was not clear as to whether a weaver could or
could not have become a member of the apex-society under the bye-laws. Even to
answer the question whether the assessee-society was engaged in the cottage
industry, the Department ought to have called for the bye-laws. This exercise
had not been done. In the circumstances, for the relevant assessment years, the
Supreme Court did not interfere with the findings given by the lower courts.
However, the Supreme Court made it clear that this order would not come to the
way of the Department in making assessment for the future assessment years.
However, in such an event, the Department will decide the applicability of S.
80P of the Act [including the proviso to S. 80P(2)] keeping in mind the
provisions of the bye-laws. The said provisions of the bye-laws would point to
the nature of the business of the assessee as also entitlement of the weavers to
become members of the apex society. The Department will examine the Janata
Scheme of the Central Govt. to decide whether the payments made thereunder would
be entitled to deduction u/s.80P(2)(a)(ii) and u/s.80P(2)(a)(vi) of the Act.