2012 (7) TMI 76 - HC - Income Tax

Applicability of principle of mutuality - consumer co-operative society, engaged in trading in consumer goods to its members as well as non-members - Held that - Principles of mutuality have been recognized in the Act in relation to trade, professional or similar associations which are not profit making bodies. A consumer co-operative society, which sells commodities of daily use to members and nonmembers at the same price and makes profits out of such business, cannot be brought u/s 44A. Such associations would be covered u/s 80P for exemption of income, when it fulfills the criteria mentioned in section 80P. In present case, assessee is involved in commerciality and that from the moneys received from the members, services are offered to members and non-members, in the nature of profit sharing by the members and not for the purposes of any conveniences to the members. The amount which comes to the society is distributed amongst the members as dividend. The doctrine of mutuality cannot be applied to the Assessee. Order of Tribunal set aside and quashed.

Issues Involved:
1. Applicability of the principle of mutuality to a Co-operative Society.
2. Eligibility for exemption under Section 80P of the Income Tax Act.
3. Validity of the Income Tax Appellate Tribunal's (ITAT) findings in light of the Supreme Court's decision in CIT v/s. Bankipur Club Ltd.

Issue-wise Detailed Analysis:

1. Applicability of the Principle of Mutuality to a Co-operative Society:

The respondent, a Co-operative Society, claimed exemptions on income derived from transactions with its members based on the principle of mutuality. The Assessing Officer and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this claim, asserting that the society engages in profit-making activities by trading with both members and non-members. The ITAT, however, reversed these findings, holding that the principle of mutuality applies and exempts the income earned from members. The High Court, upon review, concluded that the doctrine of mutuality, as outlined in Section 44A of the Income Tax Act, applies only to trade, professional, or similar associations that are non-profit and derive income from subscriptions. The court emphasized that a consumer co-operative society selling goods to both members and non-members at a profit does not qualify under this section. Consequently, the principle of mutuality does not apply to the respondent society.

2. Eligibility for Exemption under Section 80P of the Income Tax Act:

The respondent also sought exemption under Section 80P(2)(c)(i) of the Income Tax Act, which pertains to consumer co-operative societies. The High Court clarified that this section applies to societies engaged in activities like purchasing agricultural implements or other articles intended for agriculture and supplying them to members. Since the respondent society did not engage in such activities but instead made profits from selling consumable goods to both members and non-members, it did not qualify for the exemption under Section 80P. The court highlighted that the income earned, which was distributed as dividends among members, indicated profit-making activities incompatible with the criteria for exemption under Section 80P.

3. Validity of the ITAT's Findings in Light of the Supreme Court's Decision in CIT v/s. Bankipur Club Ltd.:

The High Court scrutinized the ITAT's reliance on the Supreme Court's decision in CIT v/s. Bankipur Club Ltd. The Supreme Court had established that if an entity engages in a business with both members and non-members with a profit motive, the resultant surplus is taxable. The High Court noted that the ITAT misconstrued this principle, as the respondent society's activities involved commercial transactions with both members and non-members, thereby tainting the dealings with commerciality and profit motive. The court reiterated that the doctrine of mutuality could not be applied to the respondent society, as the income earned from members and non-members was distributed as dividends, indicating profit-sharing rather than mutual convenience.

Conclusion:

The High Court concluded that the ITAT erred in applying the principle of mutuality to the respondent society. It held that the society's activities were commercial, involving profit-making from transactions with both members and non-members. The court answered the first substantial question of law in the negative, indicating that the ITAT was not justified in holding that the income earned from members is exempt under the principle of mutuality. The second question was answered in the affirmative, affirming that the ITAT's findings were invalid in light of the law laid down by the Supreme Court in CIT v/s. Bankipur Club Ltd. Consequently, the appeals were allowed, and the ITAT's orders were quashed.

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