Sind Coop. Hsg. Society v.ITO ITA NO. 931 OF 2004

Applicability of principle of mutuality qua transfer fee received by a Co-operative Housing Society governed by MCS Act, 1960 and Rules thereof The principle of mutuality will apply to a Co-operative Housing Society which has its predominant activity, the maintenance of the property of the society which includes its building or buildings and as long as there is no taint of commerciality, trade or business in such activity. HIGH COURT OF BOMBAY Sind Coop. Hsg. Societyv.ITO ITA NO. 931 OF 2004JULY 17, 2009RELEVANT EXTRACTS :** ** ** ** ** **  In all these appeals, the appeal is admitted on the following question :“Whether on the facts and in the circumstances of the case any part of transfer fees received by the assessee societies – whether from outgoing or incoming members – is not liable to tax on the ground of mutuality?”19. In C.I.T. Vs. Adarsh Cooperative Housing Society Ltd. (Guj) 213 ITR 677, the issue again was whether on transfer of lease, the amount received by the society from the member out of the premium received by him from the purchaser was exigible to tax. After considering the provisions of the Gujarat Cooperative Societies Act, 1961, the Gujarat High Court noted that the corpus of fund is not divisible as such pro rata between the members on the winding up of the society. However, 21 such surplus is to be devoted to any object or objects provided in the bylaws of the society if they specify that such a surplus shall be utilized for particular purpose. The court therefore, held that the right of the members to deal with the surplus was not destroyed and that did not detract from the concept of return of surplus to members which they had contributed. The court also noted that there was identity of contributors and beneficiaries. It was also reiterated that it is not necessary that the participants of the surplus need be the same individuals who have contributed but they must bear the same character, namely, contributor member.20. Considering these principles, the question is whether on the facts before us, the principle of mutuality would be attracted in respect of the transfer fee received by the Housing Cooperative Societies governed by the provisions of the M.C.S. Act and rules. In Walkeshwar Cooperative Housing Society (supra), the tribunal itself has held that the amount received from the transferor member would not be exgible to tax. It is only the amount received from the transferee, that is exgibile to tax. We have noted that in so far as Sind CHS and National CHS Ltd. their bylaws provide that the amount has to be paid by the transferor member. The issue therefore, of transferor or transferee for those assessees really does not arise. However, we will have to answer the issue considering what was considered in the case of Walkeshwar CHS and considering the model bye-laws which are now adopted by most housing societies. We have noted the bye-laws as also provisions under the Act and Rules. The transfer fee can be appropriated only if the transferee is admitted to membership. The fact that a proposed transferee may make payment in 22 advance by itself is not relevant. The amount can only be appropriated on the transferee being admitted as a member. As it is a transfer fee, if the transferee is not admitted as a member, the amount received will have to be refunded, as the amount is payable only on a transfer of rights of the transferor in the transferee. If it is held that payment of transfer fees is by a stranger, it will certainly be in the nature of gift and not income. If an amount is received more than what is chargeable under the bye-laws or Government directions, the society is bound to repay the same and if it retains the amount it will be in the nature of profit making and that specific amount will be exigible to tax. Considering the bye-laws, as the main activity of a housing cooperative Housing Society is to maintain the property owned by it and to render services to its members by way of usual privileges, advantages and conveniences, there is no profit motive involved in these activities. The amount legally chargeable and received goes into the fund of the society which is utilized for the repairs of the property and common benefits to its members.21. We may now deal with some other submissions advanced on behalf of the Revenue. It was contended that the class of members means, members such as permanent, temporary, honorary etc. This is based on the assumption that there can be different classes of members. In a Cooperative Housing Society there can be members and associate members. We have already quoted from the judgments where reference is to members as a class and that class may be diminished by members going out or increased by the members coming in. But the class remains the same. As already noted by the Supreme Court in Bankipur Club (supra), the 23 identity must be as a class of contributers and participants and it does not matter that the class may; be diminished or increased by members going out or coming in. Similarly it is not necessary that each member should contribute or each member should participate in the surplus and get back from the surplus what he has paid, as long as they have control over the surplus.22. It was also sought to be contended that the payment is not voluntary and at any rate the excess amount charged than what is permitted in the bye-laws will be exigible to tax. Firstly whether it is voluntary or not would make no difference to the principle of mutuality. Secondly payments are made under the bye-laws which constitutes a contract between the society and its members which is voluntarily entered into and voluntarily conducted as a matter of convenience and discipline for running of the society. If it is the case that the amounts more than permissible under the notification had been received under pressure or coercion or contrary to Government directions, then considering section 72 of the Contract Act, that amount will have to be refunded. At any rate if the society retains the amount in excess of binding Government notification or the bye-laws that amount will be exigible to tax as it has an element of profiteering.23. It was then sought to be contended that the premium charged is a profit. As we have already noted and considering the bylaws, the society is registered with the object principally of looking after the property including building thereon. There is no trading or business transactions. The members by adopting the bylaws agree amongst themselves that a fee for transfer of flat/tenement when it is sold would be 24 paid to the society. It may be that both incoming or outgoing member have to contribute to the common fund of the society. The amount paid however, is to be exclusively used for the benefits of the members as a class.  24. It was next contended that there is no legal bar for the assessee to earn profits. There can be no dispute on that proposition but the profit must come from a commercial activity in the nature of trade, business or the like in which event the assessee then will have to pay tax on such profits. Charging of transfer fees as per bye-laws has no element of trading or commerciality. There therefore being no taint of commerciality, the question of earning profits would not arise when the housing society from the funds received applies the moneys received towards maintenance of the society and providing the members with usual privileges, advantages and conveniences.25. It was also contended that the case should be covered by section 28(3) of the Income Tax Act. Section 28(3) would have no application to the facts of the case as it deals with the income derived by the member from professional or similar association from the specific services performed for its members. A cooperative society has no similarity whatsoever with a professional association. In CIT Vs. Apsara (supra) the Calcutta High Court there held that even if the case of member or professional association, general fees levied by the association on its members by way of entrance fees or periodical subscription or otherwise would not constitute business. Since these are not related to any specific services rendered by its members. We are in respectful agreement with that view.26. In so far as Section 80P is concerned, the deduction is available in respect of the charges from certain commercial activities by the cooperative housing society. That is not relevant for the issue being answered.  27. An argument has been advanced that the societies are charging more than the amount as notified or permitted by the Government Notification dated 9.8.2001. The cases before us are for the assessment years previous to that. Earlier notification of 20.12.1989 provided that only if the bye-laws were amended in terms of the notification dated 27.11.1989, then the society could not charge more than what was set out in the notification. We really would not be concerned therefore, in this group of cases with notification as now notified by the Government. If therefore, any amount has been received beyond the amount notified by the Government and that amount has not been refunded to the members to that excess amount as already held, the principle of mutuality will apply.  28. Let us now apply the various tests which are to be considered for applying the principle of mutuality to a case of a cooperative housing society based on our earlier discussion.(1) Is there any commerciality involved.This has to be found from the byelaws of the cooperative housing society. In case of the cooperative Housing society, admittedly there is no commerciality involved. Once there is no commerciality involved the first test of profitability does not exist. The first requirement of mutuality is therefore, 26 met.(2) From the moneys received are the services offered in the nature of profitsharing or privileges, advantages and conveniences. In case of a cooperative housing society, the only activities which it can carry out in terms of its bye-laws are basically maintenance of its property which includes building or buildings. The subscription and or contributions received by the members can only be expended for the purposes of maintenance and providing other privileges, advantages and conveniences to its members in terms of its bye-laws. Another test of mutuality is thus satisfied.(3) Are the participants and contributors identifiable and belong to the same classin the case of cooperative housing society. The class of members are clearly identifiable. Members are ordinary members or associate members. The participants and contributers are the members. The members may come in or go out. The fact that only some members from those who contributed may participate in the surplus, as held by the Supreme Court is irrelevant as long as the class is identifiable. This test is also satisfied in the case of a Housing Cooperative Society.  (4) Do the members have the right to share in the surplus and do they have a right to deal with its surpluses. In terms of the bye laws it is only the members who have a right to share in the surplus. Under the M.C.S. Act, no part of the funds, as provided in 27 section 64 can be paid by way of bonus or dividend or otherwise distributed among its members except as provided therein. Under Section 67, there is a limit on the dividend to be paid on liquidation. Under section 110 of the M.C.S. Act. The surplus can only be dealt with in the manner provided therein which includes any member or devoted to objects provided by the bye-laws or be transfered to another society with similar object. Rule 90 of the Rules provide how the surplus is to be divided. The surplus then can be distributed in terms of the bye-laws to members and or by operation of law to another society having the same objective. In other words yet another test of mutuality is satisfied.29. Once these tests are satisfied, in our opinion, there can be no doubt that the principle of mutuality will apply to a cooperative Housing Society which has its predominant activity, the maintenance of the property of the society which includes its building or buildings and as long as there is no taint of commerciality, trade or business.  30. For all the aforesaid reasons, the questions as framed will have to be answered in favour of the assessee and against the revenue.** ** ** ** ** **