2018 (3) TMI 675 - SC - Income Tax

Doctrine of mutuality - receipts by cooperative societies, from its members i.e. non-occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax - Contribution to the common amenity fund - Held that - The charges are utilised only for the common benefit of facilities and amenities to the members. Contribution to the common amenity fund taken from a member disposing property is similarly utilised for meeting sudden and regular heavy repairs to ensure continuous and proper hazard free maintenance of the properties of the society which ultimately enures to the enjoyment, benefit and safety of the members. These charges are levied on the basis of resolutions passed by the society and in consonance with its byelaws. The receipts in the present cases have indisputably been used for mutual benefit towards maintenance of the premises, repairs, infrastructure and provision of common amenities. Any difference in the contributions payable by old members and fresh inductees cannot fall foul of the law as sufficient classification exists. Membership forming a class, the identity of the individual member not being relevant, induction into membership automatically attracts the doctrine of mutuality. If the society first inducts new members who are required to contribute to the common fund for availing common facilities, and then grants only occupancy rights to them by draw of lots, the ownership remaining with the society, the receipts cannot be bifurcated into two segments of receipt and costs, so as to hold the former to be outside the purview of mutuality classifying it as income of the society with commerciality. In the exercise of the powers conferred upon the State Government under Section 79A of the Maharashtra Cooperative Societies Act, 1960 following orders are hereby issued in the larger interests of the people in the State - The rate of premium to be charged for the transfer Flat/Premises as well as the rights and share in the share capital/property of the Cooperative Housing Society by a member in favour of another, should be determined at the General Meeting of the Society. No reason to take a view different from that taken by the High Court, that the notification dated 09.08.2001 is applicable only to cooperative housing societies and has no application to a premises society which consists of non-residential premises. - Decided against revenue

Issues Involved:
1. Taxability of receipts by cooperative societies from members.
2. Application of the doctrine of mutuality to such receipts.
3. Validity and applicability of the government notification dated 09.08.2001.
4. Taxability of non-occupancy charges, transfer charges, and common amenity fund charges.
5. Economic participation and its restriction to members.

Detailed Analysis:

1. Taxability of Receipts by Cooperative Societies from Members:
The central issue was whether certain receipts by cooperative societies from their members, such as non-occupancy charges, transfer charges, and common amenity fund charges, are exempt from income tax based on the doctrine of mutuality. The challenge was based on the premise that these receipts are in the nature of business income, generating profits and surplus, thus having an element of commerciality and therefore exigible to tax.

2. Application of the Doctrine of Mutuality:
The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself cannot be regarded as income and taxable. The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus, and the participators in the surplus are contributors to the common fund. The principle postulates that what is returned is contributed by a member. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities.

3. Validity and Applicability of the Government Notification Dated 09.08.2001:
The notification dated 09.08.2001 issued under Section 79A of the Maharashtra Cooperative Societies Act, 1960, was discussed. It was argued that the notification was applicable only to cooperative housing societies and did not apply to premises societies. The High Court had set aside the finding that payment by the transferee member was taxable while upholding the taxability of the receipt beyond that specified in the government notification. The Court concluded that the notification dated 09.08.2001 is applicable only to cooperative housing societies and has no application to a premises society which consists of non-residential premises.

4. Taxability of Non-Occupancy Charges, Transfer Charges, and Common Amenity Fund Charges:
The Court held that non-occupancy charges were levied for the general maintenance of the premises of the Society and provision of other facilities and general amenities to the members. The fact that such members who were not in self-occupation may have had to pay at a higher rate was irrelevant so long as the receipts were utilized for the benefit of the members as a class. Transfer charges are payable by the outgoing member, and if for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount is appropriated only after the transferee is inducted as a member. Contribution to the common amenity fund taken from a member disposing of the property is similarly utilized for meeting sudden and regular heavy repairs to ensure continuous and proper hazard-free maintenance of the properties of the society, which ultimately enures to the enjoyment, benefit, and safety of the members.

5. Economic Participation and Its Restriction to Members:
Economic participation had to be restricted to members and had no application to a transferee who was not a member, rendering receipt from them sans mutuality taxable. The Court emphasized that the principle of mutuality could not be invoked to prevent taxability of high-value receipts by a society selling properties and then inducting such purchasers as members.

Conclusion:
The Court dismissed all appeals preferred by the Revenue and allowed the appeal preferred by the assessee society, concluding that the receipts in question were not exigible to tax as they fell under the doctrine of mutuality. The Court upheld the principle that so long as the receipts were utilized for the common benefit of the members, they were not taxable.

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