Amount Received From its members - How to test the mutuality before levying Income Tax on Transfer Fees Received From the members by the Co-operative Housing Society

Sind Coop. Hsg. Society Versus Income Tax Officer [2009 TMI - 34176 - BOMBAY HIGH COURT]

Question Before the High Court

"Whether on the facts and in the circumstances of the case any part of transfer fees received by the assessee societies - whether from outgoing or incoming members - is not liable to tax on the ground of mutuality?"

Decision of the Tribunal

The tribunal however, held that in so far as transferee is concerned, as at the time of effecting the transfer, the transferee being not a member, the amount received from the transferee would not be satisfying the test of mutuality and consequently is exigible to tax.

Test of Mutuality - High Court

Let us now apply the various tests which are to be considered for applying the principle of mutuality to a case of a cooperative housing society based on our earlier discussion.

(1) Is there any commerciality involved.

This has to be found from the byelaws of the cooperative housing society. In case of the cooperative Housing society, admittedly there is no commerciality involved. Once there is no commerciality involved the first test of profitability does not exist. The first requirement of mutuality is therefore, met.

(2) From the moneys received are the services offered in the nature of profit sharing or privileges, advantages and conveniences.

In case of a cooperative housing society, the only activities which it can carry out in terms of its bye-laws are basically maintenance of its property which includes building or buildings. The subscription and or contributions received by the members can only be expended for the purposes of maintenance and providing other privileges, advantages and conveniences to its members in terms of its bye-laws. Another test of mutuality is thus satisfied.

(3) Are the participants and contributors identifiable and belong to the same class in the case of cooperative housing society.

The class of members are clearly identifiable. Members are ordinary members or associate members. The participants and contributers are the members. The members may come in or go out. The fact that only some members from those who contributed may participate in the surplus, as held by the Supreme Court is irrelevant as long as the class is identifiable.  This test is also satisfied in the case of a Housing Cooperative Society.

(4) Do the members have the right to share in the surplus and do they have a right to deal with its surpluses.

In terms of the bye laws it is only the members who have a right to share in the surplus. Under the M.C.S. Act, no part of the funds, as provided in section 64 can be paid by way of bonus or dividend or otherwise distributed among its members except as provided therein. Under Section 67, there is a limit on the dividend to be paid on liquidation. Under section 110 of the M.C.S. Act. The surplus can only be dealt with in the manner provided therein which includes any member or devoted to objects provided by the bye-laws or be transfered to another society with similar object. Rule 90 of the Rules provide how the surplus is to be divided. The surplus then can be distributed in terms of the bye-laws to members and or by operation of law to another society having the same objective. In other words yet another test of mutuality is satisfied.

Decision of the High Court

Once these tests are satisfied, in our opinion, 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.

The questions as framed will have to be answered in favour of the assessee and against the revenue.

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Sind Coop. Hsg. Society Versus Income Tax Officer [2009 TMI - 34176 - BOMBAY HIGH COURT]