2015 (7) TMI 877 - HC - Income Tax

Taxability of the receipts by a cooperative housing society from a portion of sale consideration received by its member at the time of transfer of the plot - Addition on account of premium account received for transfer of plots - Held that - It could be seen that in various decisions, this Court as well as Bombay High Court consistently held that contribution made by the members to the general fund of the society in various forms would be governed by the principle of mutuality. Particularly, in case of premium collected by the society from its outgoing member from out of a portion of his profit, the principle of mutuality would apply and the receipt would not be taxable as income of the society. The Supreme Court in case of Chelmsford Club (2000 (3) TMI 4 - SUPREME Court , further held that surplus of a club which provided recreational and refreshment facilities etc. to its members and guests cannot be taxed on the principle of mutuality since such surplus would be used for maintenance and development of the club. Individual plots are allotted to its members who enjoy occupational right, but ownership of the land always remains with the society. On the plots of land so allotted, the member would be allowed to construct his residential unit. Upon transfer of the plot by a member, the society would collect 50% of the excess or popularly referred to as premium . The fund so collected would be appropriated in the common fund of the society to be utilised as per the byelaws which envisage development of common facilities and expenditure for common amenities. A part of the surplus would be diverted to the reserve fund of the society. Surplus could also be utilised for waiver of the lease amount or for the health, education and social activities of the members. It can thus be seen that there is total identity of contributors of the fund and recipients from the fund. The contribution comes from the outgoing member in the form of a portion of the premium and it is utilised for the common facilities and amenities for the members of the society. Different modes of application of the funds make it clear that the funds would be expended for common amenities or for general benefit of the members; or be distributed amongst the members in the form of dividend or lease rent waiver. It can thus be seen that it is impossible for the contributors to derive profit from contribution made by themselves to a fund since such fund could only be expended or returned to them. Creation of the society was primarily for the convenience of the members to create a housing society where individual members could construct their residential units and common facilities and amenities could be provided by the society. It was essential thus that a combined activity is carried on by a group of persons who would be the members in the cooperative society. All the tests referred to in the Privy Council decision in case of The English & Scottish Joint Cooperative Wholesale Society Ltd. (1948 (4) TMI 2 - PRIVY COUNCIL ), stand fulfilled. Decided in favour of the assessee

Issues Involved:
1. Taxability of receipts by a cooperative housing society from a portion of the sale consideration received by its member at the time of transfer of the plot.
2. Application of the principle of mutuality in the context of cooperative housing societies.

Issue-wise Detailed Analysis:

1. Taxability of Receipts by Cooperative Housing Society:
The main issue was whether the portion of the sale consideration received by a cooperative housing society from its member at the time of transfer of the plot constitutes taxable income. The Revenue argued that such receipts should be taxed as income under the Income Tax Act, while the assessees contended that these amounts were not revenue receipts and should not be taxed.

The Assessing Officer initially held that the society was an association of persons engaged in business and added the premium amount as income. However, the CIT(A) and the Tribunal, following the decision in *Adarsh Cooperative Housing Society Ltd.*, ruled that the amount was not taxable due to the principle of mutuality. The Tribunal's decision was challenged, leading to a larger Bench being constituted to address the issue.

2. Application of the Principle of Mutuality:
The principle of mutuality was central to the case. The assessees argued that the amounts collected were for the common benefit of the members and should not be taxed. They relied on various judicial precedents, including the Supreme Court's decision in *Bangalore Club v. Commissioner of Income-tax*, which outlined the limitations of the mutuality principle.

The court examined the byelaws of the societies, which stipulated that the collected amounts were used for development and maintenance of common facilities, thus benefiting the members. The court noted that there was a total identity of contributors and recipients of the fund, fulfilling the conditions of mutuality.

Relevant Judicial Precedents:
- The Royal Western India Turf Club Limited: The Supreme Court held that there was no mutuality between members interse, and the principle of mutuality was not applicable.
- Commissioner of Income-tax v. Bankipur Club Ltd.: The Supreme Court held that excess over expenditure received by a club from facilities extended to members was not taxable due to mutuality.
- Chelmsford Club v. Commissioner of Income-tax: The Supreme Court applied the triple test for mutuality and held that the club's business was governed by mutuality.
- Bangalore Club v. Commissioner of Income-tax: The Supreme Court highlighted the limitations of mutuality, emphasizing the need for a complete identity between contributors and recipients.

Court's Conclusion:
The court concluded that the principle of mutuality applied to the cooperative housing societies in question. It held that the funds collected from members were used for their common benefit, and there was no scope for profiteering by the members. The court found that the decisions in *Adarsh Cooperative Housing Society Ltd.* and *Manekbaug Cooperative Housing Society Ltd.* correctly applied the principle of mutuality.

The court also distinguished the case from the Bombay High Court's decision in *Presidency Cooperative Housing Society Ltd.*, noting that the principle of mutuality was not considered in that case.

Final Judgment:
The court answered the question in the affirmative, ruling against the Revenue and in favor of the assessees. The court held that the amounts collected by the cooperative housing societies from their members at the time of transfer of plots were not taxable as income due to the principle of mutuality. All references were disposed of accordingly.

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