2009 (7) TMI 15 - HC - Income Tax

Concept of Mutuality Taxability of Income received from its members Co-operative Housing Society - High Court held that concept of mutuality can be tested considering the followings (1) Is there any commerciality involved. (2) From the moneys received are the services offered in the nature of profit sharing or privileges advantages and conveniences. (3) Are the participants and contributors identifiable and belong to the same class in the case of cooperative housing society. (4) Do the members have the right to share in the surplus and do they have a right to deal with its surpluses. - Once these tests are satisfied 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 Transfer fee received from its members it not taxable.

Issues Involved:
1. Taxability of transfer fees received by cooperative housing societies from outgoing or incoming members.
2. Application of the principle of mutuality.
3. Commerciality and profit motive in cooperative housing societies.
4. Compliance with bylaws and government notifications regarding transfer fees.

Issue-wise Detailed Analysis:

1. Taxability of Transfer Fees:
The primary question addressed was whether transfer fees received by cooperative housing societies from outgoing or incoming members are liable to tax. The tribunal had previously held that transfer fees paid by the transferor member are not taxable due to the principle of mutuality, but fees from the transferee are taxable since the transferee is not a member at the time of payment.

2. Application of the Principle of Mutuality:
The principle of mutuality was extensively discussed. For mutuality to apply, contributors to a common fund and participants in the surplus must be identical as a class. The court noted that cooperative societies, even with fluctuating membership, maintain this identity. The transfer fees paid by incoming members are akin to admission fees in clubs, which are not considered income. The court cited several judgments, including the Supreme Court's ruling in Bankipur Club Ltd., which emphasized that mutuality applies if there is no profit motive and the surplus is controlled by members.

3. Commerciality and Profit Motive:
The court examined whether cooperative housing societies have a commercial motive. It was concluded that the main activity of such societies is to maintain property and provide services to members, without a profit motive. The court reiterated that the principle of mutuality applies as long as there is no taint of commerciality, trade, or business. The court also noted that excess amounts charged beyond what is permitted by bylaws or government notifications would be taxable as they indicate profiteering.

4. Compliance with Bylaws and Government Notifications:
The court reviewed the relevant bylaws of the Sind Cooperative Housing Society and National Cooperative Housing Society, which specify the conditions under which transfer fees are charged. It was noted that transfer fees can only be appropriated if the transferee is admitted as a member. The court also referred to government notifications that set limits on transfer fees. If societies charge more than these limits, the excess amount must be refunded; otherwise, it would be considered profit and taxable.

Conclusion:
The court concluded that the principle of mutuality applies to cooperative housing societies for transfer fees received from both outgoing and incoming members, provided there is no commerciality involved. The societies must comply with bylaws and government notifications regarding transfer fees. The questions framed were answered in favor of the assessee (cooperative societies) and against the revenue (tax authorities).

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