2016 (3) TMI 172 - AT - Income Tax

Voluntary contributions towards special repair fund - whether charging of transfer fees has no element of trading or commerciality and the same was covered under the concept of mutuality ? - Held that - Commissioner of Income-tax (Appeals) was justified in deleting the addition on account of voluntary contributions towards special repair fund holding that charging of transfer fees has no element of trading or commerciality and the same was covered under the concept of mutuality. - Decided against revenue Carry forward and set off of unabsorbed depreciation and business loss - Commissioner allowed the claim - Held that - In the instant case the Assessing Officer has accepted that the assessee-society has been receiving transfer funds, which is governed by the principle of mutuality and the disallowance was limited to repair funds on the ground that it is in excess of the amount prescribed in the bye-laws whereas the learned Commissioner of Income-tax (Appeals) held that even that amount is governed by the principle of mutuality since it cannot be termed as transfer fees but amounts to sharing of the actual expenditure incurred for renovation work and hence it cannot be said to be in violation of the conditions prescribed in the bye-laws. In effect the Assessing Officer as well as the Commissioner of Income-tax (Appeals) admitted that the assessee-society is governed by the principle of mutuality and it is not carrying on any business. Such being the case it cannot be said, for the limited purpose of the claim of carry forward depreciation, that it was engaged in any business. Under these circumstances, of the view that the learned Commissioner of Income-tax (Appeals) was not justified in setting aside the matter for fresh consideration - Decided in favour of revenue

Summary

Issues:
1. Whether deletion of addition on account of voluntary contributions towards special repair fund was justified?
2. Whether carry forward and set off of unabsorbed depreciation and business loss was justified?

Analysis:

Issue 1:
The appeal pertains to the assessment year 2005-06, where the Revenue challenged the deletion of an addition of Rs. 13,00,000 on account of voluntary contributions towards a special repair fund by a cooperative housing society. The Assessing Officer contended that these contributions were not covered under the principle of mutuality as they exceeded the prescribed limit set by the society's by-laws. The Commissioner of Income-tax (Appeals) relied on precedents such as Sind Co-operative Housing Society v. ITO and Somerset Place Co-operative Housing Society to rule in favor of the assessee, stating that the contributions were indeed covered by the principle of mutuality. The Tribunal dismissed the Revenue's appeal, emphasizing the lack of effort by the Department to distinguish the case law cited by the Commissioner of Income-tax (Appeals).

Issue 2:
Regarding the second ground, the Revenue argued that the cooperative society, being a mutual benefit entity, was not engaged in any business activity and thus not entitled to claim depreciation. The Assessing Officer and the Commissioner of Income-tax (Appeals) both acknowledged the society's mutual benefit status but differed on the treatment of the contributions. While the Assessing Officer disallowed the excess contributions as repair funds, the Commissioner held that these amounts were also covered by mutuality principles. The Tribunal, however, disagreed with the Commissioner's decision, stating that since the society was not engaged in business activities, it could not claim depreciation benefits. Therefore, the Tribunal partly allowed the Revenue's appeal on this issue.

In conclusion, the Tribunal partly allowed the Revenue's appeal, upholding the decision on the deletion of the addition for voluntary contributions towards the special repair fund but ruling against the allowance of carry forward and set off of unabsorbed depreciation and business loss for the cooperative society.