The meaning of cottage industry under section 80P of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of cottage industry.
Meaning of cottage industry defined by court
The phrase ‘cottage industry’ used in section 80P of the Income Tax Act came up before various high courts as detailed under :
1. Hon’ble Allahabad high court explained the meaning of ‘cottage industry’ while delivering judgment in District co-operative federation ltd. vs. CIT [1973] 87 ITR 639 (All.) as under :
Meaning : The expression ‘cottage industry’ contemplates an industrial activity of which a well-recognised feature is that it is commonly located in the cottages or homes of the artisans. It is carried out on a small scale, with a small amount of capital and a small number of workers, and has a turnover which is correspondingly limited. Those are its distinctive features.
2. Hon’ble Delhi high court explained the meaning of ‘cottage industry’ while delivering judgment in Addl. Cit vs. Indian co-operative union ltd. [1982] 134 ITR 108 (Delhi) as under :
Meaning : The number of persons working in a cottage industry and the amount of turnover are immaterial as long as the activity can be said to be a ‘cottage industry’. The term ‘cottage industry’ has not been defined in the act.
However, it is a term of every day use and its meaning is well understood. According to webster’s new international dictionary, ‘cottage industry’ means an industry based upon the family unit as labour force in which workers using their own equipment at home process goods. It is true 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.
The co-operative society can in a way be likened to a family constituted by 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 by its members is engaged in 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 obviously implies manufacture of certain articles and it cannot embrace a business of a mere purchase and sale of goods.
3. Hon’ble Kerala high court explained the meaning of ‘cottage industry’ while delivering judgment in CIT vs. Taj textile industries co-operative society ltd. [1988] 170 ITR 465 (Ker.) as under :
Meaning : A cottage industry is one carried on by persons in their homes. But the phrase ‘cottage industry’ used in section 80P has to be understood in the context of the act and in the background of the section. The concept of ‘cottage industry’ in the context of section 80P cannot be limited to industries carried on by families in their own houses.
Section 80P of Income Tax Act
Deduction in respect of income of co-operative societies.
80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in sub-section (1) shall be the following, namely :—
(a) in the case of a co-operative society engaged in—
(i) carrying on the business of banking or providing credit facilities to its members, or
(ii) a cottage industry, or
(iii) the marketing of agricultural produce grown by its members, or
(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or
(v) the processing, without the aid of power, of the agricultural produce of its members, or
(vi) the collective disposal of the labour of its members, or
(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members,
the whole of the amount of profits and gains of business attributable to any one or more of such activities :
Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:—
(1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;
(2) the co-operative credit societies which provide financial assistance to the society;
(3) the State Government;
(b) in the case of a co-operative society, being a primary society engaged in supplying milk, oilseeds, fruits or vegetables raised or grown by its members to—
(i) a federal co-operative society, being a society engaged in the business of supplying milk, oilseeds, fruits, or vegetables, as the case may be; or
(ii) the Government or a local authority; or
(iii) a Government company53 as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oilseeds, fruits or vegetables, as the case may be, to the public),
the whole of the amount of profits and gains of such business;
(c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,—
(i) where such co-operative society is a consumers’ co-operative society, one hundred thousand rupees; and
(ii) in any other case, fifty thousand rupees.
Explanation.—In this clause, “consumers’ co-operative society” means a society for the benefit of the consumers;
(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;
(e) in respect of any income derived by the co-operative society from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;
(f) in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22.
Explanation.—For the purposes of this section, an “urban consumers’ co-operative society” means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.
(3) In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ.
(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
Explanation.—For the purposes of this sub-section,—
(a) “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);
(b) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.
In this article, you can get guidance from high courts on the meaning of ‘cottage industry’ under section 80P of the Income Tax Act.
Updated up to Finance Act 2021