2012 (6) TMI 292 - HC - Income Tax

Principle of Mutuality - Co-operative Housing Society, deriving income for hiring of hall, catering services, commission etc - dis-allowance of expenses on ground that income is derived from other sources - dis-allowance of transfer fee - Held that - Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. By applying the aforesaid principles to the facts of the present case, it is held that dis-allowance of transfer fees stand deleted and since no part of other expenditure are in nature of capital expenditure, hence 100% of expenses are allowed as deduction. Also, net surplus of income over expenditure will not be taxable because the income of the assessee by way of interest from co-operative bank is exempt u/s 80P ii - Decided against the Revenue

Summary

Issues Involved:
1. Deletion of disallowance of expenses claimed by the assessee.
2. Deletion of addition on account of transfer fee received by the assessee.
3. Maintainability of the appeals based on the tax-effect threshold as per CBDT Instruction No. 5 of 2008.

Detailed Analysis:

1. Deletion of Disallowance of Expenses Claimed by the Assessee:

The Revenue questioned whether the Income Tax Appellate Tribunal (ITAT) was correct in confirming the order of the Commissioner of Income Tax (Appeals) [CIT(A)] in deleting the disallowance of expenses claimed by the assessee. The Assessing Officer (AO) had initially disallowed expenses on the grounds that the income should be treated as "income from other sources" rather than "income from business." The CIT(A) partially allowed the appeal, permitting 90% of certain expenses against the income from Sanskrutik Hall instead of the 50% allowed by the AO. This decision was upheld by the ITAT, which dismissed the Revenue's appeal and allowed the assessee's cross-objection, asserting that the income was not taxable due to the principle of mutuality and exemption under Section 80P(ii) of the Act.

2. Deletion of Addition on Account of Transfer Fee Received by the Assessee:

The Revenue also challenged the deletion of an addition of Rs. 2 lakhs made by the AO on account of transfer fees received by the assessee. The CIT(A) had deleted this addition, and the ITAT upheld this decision. The court referenced the principle of mutuality, as established in the case of Commissioner of Income Tax v. Adarsh Cooperative Housing Society and Chelmsford Club v. Commissioner of Income-tax. The court concluded that the cooperative society, being a mutual concern, should not be taxed on the transfer fees received from its members, as all three conditions of mutuality were satisfied.

3. Maintainability of the Appeals Based on the Tax-Effect Threshold as per CBDT Instruction No. 5 of 2008:

A preliminary objection was raised by the respondent regarding the maintainability of the appeals based on the tax-effect threshold stipulated in CBDT Instruction No. 5 of 2008. The instruction prohibits the Revenue from filing appeals where the tax-effect is less than Rs. 4 lakhs. The court noted that if the total tax-effect of both appeals is considered, it exceeds Rs. 4 lakhs. Therefore, the court overruled the preliminary objection, stating that the intention of the CBDT was to consider the total tax-effect for the relevant assessment year, irrespective of whether it is challenged in one appeal or multiple appeals.

Conclusion:

The court dismissed the appeals filed by the Revenue, finding no substantial question of law justifying interference. The court upheld the ITAT's decision to dismiss the Revenue's appeal and allow the assessee's cross-objection, affirming that the assessee's income was not taxable due to the principle of mutuality and exemption under Section 80P(ii) of the Act.