2010 (2) TMI 11 - SC - Income Tax

Court affirms tax deduction denial for Assessee-Society, stresses Bye-laws scrutiny.

The Court did not interfere with the lower courts' findings regarding the Assessee-Society's claim of deduction under Section 80P(2)(a)(ii) and Section ... Deduction u/s 80P – Cottage industry - Assessee-Society is an Apex Society. It carries on the activity of manufacturing of cloth by supplying raw-material, i.e., yarn, to the weavers, who are the members of the primary societies, which, in turn, are the members of the Assessee-Society. The weavers produce cloth strictly in accordance with the directions given and under the control of the assessee. The assessee pays weaving charges to the weavers and thereafter markets and sells goods so produced. – whether the assessee can be said to be engaged in a Cottage Industry under Section 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 under Section 80P(2)(a)(vi) of the Act – held that - on both these questions, the Assessing Officer ought to have called for the Bye-laws. It appears that Bye-laws were not produced before the Assessing Officer. It appears that the Bye-laws have not been examined by the Assessing Officer. Further, it is not clear as to whether a weaver could or could have become a member of the Apex Society under the Bye-laws. Even to answer the question whether the assessee-Society is engaged in the Cottage Industry, the Department ought to have called for the Bye-laws. This exercise has not been done – matter remanded. Issues:1. Claim of deduction under Section 80P(2)(a)(ii) and Section 80P(2)(a)(vi) of the Income Tax Act, 1961.2. Whether the assessee-Society is engaged in a Cottage Industry under Section 80P(2)(a)(ii) or in the collective disposal of labor of its members under Section 80P(2)(a)(vi) of the Act.Analysis:The judgment dealt with the case of an Assessee-Society, an Apex Society involved in manufacturing cloth by supplying raw material to weavers who are members of primary societies under its control. The society then markets and sells the cloth produced. The Assessee claimed a deduction under Section 80P(2)(a)(ii) and Section 80P(2)(a)(vi) of the Income Tax Act, 1961 for the relevant assessment years.The primary issue for determination was whether the Assessee-Society could be considered engaged in a Cottage Industry under Section 80P(2)(a)(ii) or in the collective disposal of labor of its members under Section 80P(2)(a)(vi) of the Act. The Department contended that since weavers were members of primary societies, not the Apex Society, the Assessee was not entitled to the deduction under Section 80P(2)(a)(vi).The Court noted that the Assessing Officer should have examined the Bye-laws to determine membership eligibility and the nature of the business. However, since the Bye-laws were not produced or examined, the Court did not interfere with the lower courts' findings for the relevant assessment years. The Court clarified that the Order would not prevent the Department from making assessments for future years, emphasizing the importance of considering the Bye-laws to determine the applicability of Section 80P, including the entitlement of weavers to become members and the nature of the business.In conclusion, the civil appeals were disposed of with no order as to costs, highlighting the significance of examining the Bye-laws for future assessments to ascertain the applicability of Section 80P and the entitlement of weavers under the Janata Scheme of the Central Government for deductions under the Income Tax Act, 1961.