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.
