Cottage industry exemption for a co-operative society turns on home-based manufacture by members without outside labour.

A co-operative society qualifies as being engaged in a cottage industry where its members themselves manufacture goods in their own homes or dwelling houses without employing outside labour. The ordinary meaning of "cottage industry" governs the exemption under section 81(i)(b) of the Income-tax Act, 1961; the number of workers is not decisive, and the mere use of power or small machines does not, by itself, take the activity outside the exemption. The definition of "factory" under the Factories Act does not control this interpretation. On that basis, the society's income was treated as exempt under section 81(i)(b).

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Issues: Whether a co-operative society whose members manufacture metal utensils at their own homes without employing outside labour is a society engaged in a cottage industry and entitled to exemption under section 81(i)(b) of the Income-tax Act, 1961.

Analysis: The expression "cottage industry" is not defined in the Act and must be understood in its ordinary sense. For a co-operative society, the relevant inquiry is whether the members themselves carry on the manufacturing activity in their cottages or dwelling houses, without outside labour. The number of workers is not decisive. The use of power is also not decisive, because the essential feature is the manner and place of carrying on the industry, not the mere presence of electricity or small machines. The reference to the definition of "factory" under the Factories Act does not control the meaning of "cottage industry" for the purpose of the exemption.

Conclusion: The society was engaged in a cottage industry and its income was exempt under section 81(i)(b) of the Income-tax Act, 1961.

Ratio Decidendi: For the purpose of section 81(i)(b), a co-operative society is engaged in a cottage industry if its members themselves manufacture goods in their own homes without outside labour; the use of power does not by itself negate the character of a cottage industry.

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