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TMI Blog2003 (4) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... that this receipt of ₹ 25,000 was not by way of transfer fees but, in reality receipt of premium on transfer of occupancy rights over the flat. The transfer fee was collected under clause 7(g) of the bye-laws of the assessee s-society. There was no disallowance on account of transfer fee. However, by mistake the premium on transfer fee was treated as transfer fee. We have examined the records. We find that the addition was on account of premium on transfer. We, therefore, proceed to decide this issue in respect of premium on transfer. Shri V. H. Patil, learned counsel for the assessee appeared before us. It was submitted that the assessee received an amount of ₹ 25,000 towards the premium on transfer on the sale of flat in the society. It was alleged that this receipt is not exigible to tax on the ground of mutuality. The assessee received this amount on May 23, 1996, from the outgoing member, Shri Pushkar G. Ramwala and the incoming member, Smt. Neelam A. Sanghvi. Both the incoming and outgoing members contributed ₹ 12,500 each. NOC was issued by the society in accordance with the resolution passed by the managing committee on May 22, 1996. The transfer charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re also part of the same co-operative movement. The object of the co-operative housing society is to provide to its members open plots for housing or dwelling houses or flats and also to provide the members common amenities and services. Shri Patil read the decision of the apex court rendered in the case of Ramesh Himmatlal Shah v. Harsukh Jadhavji Joshi, AIR 1975 SC 1470. The relevant portion is reproduced here as under (page 1476) : Multi-storeyed ownership flats on co-operative basis in cities and big towns have come to stay because of dire necessity and are in the process of rapid expansion for manifold reasons. Some of these are ; ever growing needs of an urban community necessitating its accommodation in proximity to cities and towns, lack of availability of land in urban areas, rise in price of building material, restrictions under various rent legislations, disincentive generated by tax laws and other laws for embarking upon housing construction on individual basis, security of possession depending upon fulfilment of the conditions of membership of a society which are none too irksome. Taking us through the decision of the jurisdictional High Court rendered in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. In other words, there must be complete identity between the contributors and participators. If this requirement is satisfied, the particular form which the association takes is immaterial. This principle was laid down in the case of Municipal Mutual Insurance Ltd. v. Hills [1932] 16 Tax Cases 430, 448 (HL). Shri Patil argued that the contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. According to Shri Patil, what is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve for development and for providing better amenities to the members. To buttress this proposition, reliance was placed on various precedents, which are discussed hereina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mutuality is not satisfied. In the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97 (SC), it was held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. Shri Patil submitted that in view of the decision of the jurisdictional High Court rendered in the case of Surat District Cotton Dealers Association v. CIT [1959] 35 ITR 121 (Bom) and of the apex court in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97, the decision rendered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that the issue involved in the present appeal stands squarely covered by the decision of the hon ble Gujarat High Court rendered in the case of CIT v. Adarsh Co-operative Housing Society Ltd. [1995] 213 ITR 677 (Guj). In this case the hon ble Gujarat High Court has held that where the assessee is found to be a mutual concern, the income which it receives from its members is not liable to tax. This is founded on the principle that no one can make a profit by transacting with oneself. The primary condition of mutuality between the assessee and its members is that the assessee which collects money from its members, must apply the same for their benefit not as shareholders having an interest in its profits but as persons themselves who have put up the fund by contributing to it. There must be a thread of agency for acting for the contributors for achieving the objectives. The identity of individuals as contributors and participants is not essential but what is essential is the identity of character of contributors and participants. Reference was also made to the decision of the jurisdictional High Court rendered in the case of CIT v. Bombay Oilseeds and Oil Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C dated August 9, 2001, issued by the Co-operative Textile Department, Government of Maharashtra, Mantralaya, Mumbai-400 032. By this circular, the earlier circular dated November 27, 1989, was cancelled. It is stipulated in the circular that while transferring the flat/tenement of the member of the co-operative housing society and also transferring his/her shares and rights in the share capital/property of the society to another person, rate of premium to be charged should be fixed in the general body meeting. However, the rate of premium decided by the general body meeting of the society, in any circumstances should not be more than ₹ 25,000 in respect of municipal corporation and authority area. It was stated that this step was taken by the Government to arrest the profit earning qua the co-operative housing society. The learned Departmental Representative relied on the decision of the Andhra Pradesh High Court rendered in the case of CIT v. West Godavari District Rice Millers Association [1984] 150 ITR 394. In this case it was held that a mutual association is an association of persons who agree to contribute funds for some common purpose mutually beneficial and rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir flats/ offices were transferred. Therefore, the question of contributors to the common fund must be entitled to participate in the surplus did not arise. The issue was decided in favour of the Department. Shri Korde further invited our attention on the decision of the Special Bench of the Tribunal rendered in the case of Jai Hind Co-op. Housing Society Ltd. v. Sixth ITO [1983] 3 ITD 625 (Bom). In this case the Tribunal held as under: So what we have to see in the present case is whether the payment made to the assessee, pursuant to the lease agreements, by its members on sale of their plots to others, could be regarded as having an origin in what might be called the real source of income. On the facts found in the present case, we have no hesitation in coming to the conclusion that the payments are referable to the real source of income. The payments in this case were not voluntary or ex gratia payments and did not depend on the whims and caprices of the members and the assessee could legally enforce its right to get 50 per cent of the premium from its members on transfer of their plots. It is, therefore, not necessary that the assessee should have carried on any activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt by a member on transfer of his interest, the society was entitled to half of this excess. It is true that there was no regularity about the receipt of such an amount. But this by itself is not sufficient to take away from the receipt the character of income. Even a payment which may be received occasionally can be income. For example, a professional may receive fees only occasionally as and when he gets work. It nevertheless is his income. There is no certainty about the receipt of this amount. Whenever such amount is received by a member, the society is bound to get half of the portion. Shri Korde submitted that it is necessary to see that in what capacity the member is making the payment. Dealing with the identity of class of members, it was stated that the character of the member who is making the payment should be the same. Shri Korde further submitted that the contribution to the common objective has to be made by all. Reference was made to the decision of the apex court rendered in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241, 247. The apex court held as under : It seems to us that the test applied by the High Court is not sound. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns going out of the scheme or that others may come in their place in the future . It was stated by Shri Korde that the members may come, they may go ; but they take the position of the member at a particular point of time. The case of a housing society cannot be equated with a club. Adverting our attention to the transfer form and the receipt issued by the society with reference to the resolution passed, it was stated that the first approval of transfer payment follows that payment is made after the member has gone out. The transferor assigned all rights to the transferee in essence. The transferor cannot be construed to be a member. There was no identity between the contributor and the participator as the payment is made not as a member but as a transferor subsequent upon the surrender of his rights. In essence it cannot be said to be a voluntary payment. It is a conditional payment. It does not satisfy the test of mutuality. The procedure of transfer was explained with reference to clause 24 of the bye-laws. To supplement the arguments of Shri Korde ; Shri Dave, Commissioner of Income-tax Departmental Representative argued the case. At the outset Shri Dave submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scussed the concept of common identity. Shri Dave read out the various provisions of Maharashtra Ownership Flats Act, 1963 (hereinafter called MOFA) and MCS Act, to inculcate that premium was not paid out of the volition or free will. It was not a voluntary payment. It was a compulsory exaction. De hors such payment, transfer was not possible. It was stated that creation of a co-operative society is a condition precedent for sale of flats. As soon as promoter sells out ten flats, it is mandatory on his part to form a co-operative society. Remaining flats he can keep for himself. The obligation to form a co-operative society is mandatory in terms of section 10 of the MOFA. Ownership of flats vests in the co-operative society and not with flat owner. Further it was argued that for the sake of mutuality it is essential that the member should join the society voluntarily. It was submitted that sections 4 and 10 of the MOFA makes it obligatory for a person to join the co-operative society in case he is willing to purchase a flat in multi-storeyed building. There is statutory compulsion to join the society. Our attention was invited on the model bye-laws. Various clauses were refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt rendered in the case of H. M. T. House Building Co-operative Society v. M. Venkataswamappa, AIR 1995 SC 2253. It was submitted that abrasions in the cooperative movements were taken care of by the highest court of the land. In this case allegations were made against the society regarding collection of huge amounts from different applicants for site who were not even members of the society. Shri Dave discussed various modes by which the society can raise funds. Voluntary donation is one of such mode. It is pertinent to note that as per 2001 model bye-laws, voluntary donations cannot be charged from transferor or transferee. The society can earn profit while effecting the transfer. It cannot earn profit when a member resigns, when a member is expelled, and from nominee and legal heir. Subsequent upon the resignation of the member, the title of the flat will vest with the society. Various clauses of the bye-laws were referred to. Clause 33 deals with acquisition of shares by the society. Clause 68 deals with payment of value of shares. Clause 57 deals with acquisition of shares by the expelled member. In respect of nominee and expelled member, the procedure is same. The highest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments are made. It was submitted that a person cannot become a member, unless the application for membership is granted by the managing committee of the society. Mere payment of fees of membership to the secretary or even entering the applicant s name in the register of members does not make him a member. Rule 19 of the Maharashtra Co-operative Societies Rules, 1961, requires various conditions to be complied with for admission for membership. It was submitted that the transferee cannot be construed to be a member. As such, the transfer premium received from the transferee is exigible to tax. The principles of mutuality cannot be invoked in the facts and circumstances of the case, as the basic requirements of mutuality are missing. We have heard the rival submissions in the light of the material placed before us and precedents relied upon. The short question, which arises for our consideration in this appeal is whether the income received by the assessee, which is a co-operative housing society, by way of premium on transfer of flat is exigible to tax or is exempt on the principle of mutuality ? The principle of co-operation is enunciated in our scripture. In Kathopanishad, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... England can be said to be the motherland of the co-operative activity. The first society or organisation based on co-operative principles came into existence in England in or about the middle of the 19th Century. This society was known as Rochdale Pioneers. It was formed by a group of weavers. Rochdale Pioneers became the founders of co-operative movement. The next pioneers were Germans where the co-operative movement spread on a large scale and in course of time the movement spread almost throughout the World. The very basis of co-operative movement which owes its impetus to Rochdale Pioneers of England is constituted by the following principles : (i) Voluntary association ; (ii) Democratic management ; (iii) Self help and mutual help ; (iv) No profit motive ; (v) Open door policy ; (vi) Publicity ; (vii) Neutrality ; and (viii) Equality. These principles have been recognised by a Full Bench of the Madhya Pradesh High Court in the case of Collective Farming Society Ltd. v. State of M. P., AIR 1974 MP 59. The Bombay High Court also recognised the aforesaid principles in the case of St. Anthony s Co-operative Society Ltd. v. Secretary (Co-operation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e requirement for getting the registration done. Once the registration is granted, it can be presumed that the Registrar of Co-operative Societies in Mumbai found this to be a voluntary association. Co-operative movement is peoples voluntary movement. It is to be utilised for the normal needs of the people. In the arena of housing it is a blessing to the society. In order to arrest the evil of capitalism some norms are fixed to promote the movement in a healthy way. Section 10 of the MOFA makes it mandatory for the promoter to form a society as soon as minimum number of persons required to form a co-operative housing society have taken place. Members join the society out of their free choice. There is no compulsion to join the society. There is no compulsion to continue having joined once. The members are free to take advantage of the services of the society to the extent considered necessary by them. They do all that out of their own volition. The MOFA is enacted to buttress the cause of co-operative movement and not to defeat it. As such, it cannot be said that the member who purchases a flat in a co-operative housing society does so out of compulsion. As such, we are not inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members only. To protect the co-operative movement, the apex court declared in the aforesaid decisions that the co-operative societies may earn profits. Earning of profit is different from profiteering. Just because the profit is earned, it cannot be said that the motive was there to earn profit. It could just be a natural consequence in the direction of achieving the goal of Co-operative movement. Clause 3(xii) of the bye-laws defines premium on transfer of shares to mean and include the amount payable to the society by the member, transferring his shares and interest in the capital/property of the society, in addition to the transfer fee as provided under clause 40(d)(vii) of the bye-laws. Clause 40(d)(vii) of the bye-laws reads as under : 40. (d) If the Committee is satisfied that the member is prima facie eligible to transfer his shares and interest in the capital/property of the society, the Committee shall direct the Secretary of the society to inform the member within three days of the decision of the Committee to make the compliance as under (vii) To pay the amount of premium at a rate to be fixed by the general body meeting, not exceeding 2.5 per cent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir own decision. This did not detract from the concept of return of surplus to members which they had contributed. On this factual backdrop the assessee was treated as a mutual concern. As such, its income was not liable to tax. A similar view was taken in the case of Apsara Co-operative Housing Society Ltd. [1993] 204 ITR 662 (Cal). The element of mutuality was found in respect of the transfer fee. As such, it was held that the receipt was not subject to tax. We have noted the difference in the provision of the MCS Act and the Gujarat CS Act in this regard. The fact that under certain circumstances the society is empowered to sell the flat to the highest bidder is not a material aliunde to which it can be said that there exists a profit motive. Actually, society acts only in the interest of the member. Entire sale proceeds go to the member or his heirs as per the prescription of bye-law 68(v) of the society. The society has no control over the transfer. It has no control over the price to be charged. It enters into the picture only when the committee is intimated about the proposal. Then it steps in and asks for premium, as provided for in the bye-laws. It is true the rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all participators must be entitled to contribute. The essence of mutuality lies in the return of what one has contributed to a common fund. The property belongs to the members. It is a fallacy. Take the example of a club. If a member orders a dinner and consumes it, whether it can be said that it amounted to a sale ? This is not a sale. The fundamental thing is that the whole property is vested in the members. We find that the transfer form was given on May 4, 1996. The premium was paid on May 23, 1996. The transfer was effected subsequent upon the payment of premium only. As on the date of the payment of premium, the transferor was the owner. Dehors payment of premium, it was not possible to get the flat transferred in the name of transferee. As such, we hold that when the premium was paid, the transferor was the owner of the flat. He continued his membership till the execution of the transfer. Co-operative housing societies in our country play a very special and prominent role in catering to the housing needs of our people. If the society is a voluntary association, created for mutual help without profit motive, no tax is being charged on the income of such society. This p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticipate in the surplus and that all the participators in the surplus must be contributors to the common fund. For this doctrine to apply, it is sine qua non that there should be complete identity between the contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate. It does not matter that the class may be diminished by persons going out of this scheme or increased by others coming in. We find that the transferor satisfied the test of mutuality. When the premium was paid, he was the member of the society. He received the consideration for alienating his right in favour of the transferee. Legally speaking, the transferee stepped into the shoes of the transferor and became eligible for all the benefits which were hereto before available to the transferor. But at the time of effecting the transfer, the transferee was not the member. As such, the amount received from the transferee will not satisfy the test of mutuality. Resultantly, the amount received from the transferor is not exigible to tax, whereas the amount received from the transferee is exigibl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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