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TMI Blog2013 (9) TMI 411X X X X Extracts X X X X X X X X Extracts X X X X ..... . To exemplify, consider this: a member, to whom a plot is allotted, lets out the house built thereon, earning a monthly rent. Of course, the rent he receives is his income, and has nothing to do with the society or its income. So however, it is only by virtue and on account of he being a member of the housing society that he could generate the rental income. This, thus, is our basic objection, inasmuch as a mutual concern, by its very nature and concept, cannot lead to any profit, on the basis of contribution to and participation therein, to the contributor/participant. We have deliberately taken an everyday example of letting, and independent of the transfer and TDR premium issues which dog such cases, and is the bone of contention between the parties, only to clarify our objection, which goes to the root of the matter, though is at heart, very simple. There is no creation of any Fund at this stage, i.e., when the society is formed and the members are enrolled; the society charging the members for granting lease what stands charged to it (on getting 999 years lease from the Government). The arrangement, thus, in its design and concept, is not a mutual arrangement, even as ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 147, save the last two years) of the Income Tax Act, 1961 ('the Act' hereinafter) by the Commissioner of Income Tax (Appeals)-32, Mumbai ('CIT(A)' for short). The issues arising in these appeals being common, the same were taken up together for hearing together, and are being disposed of by a common, consolidated order. 2.1 The principal issue involved is taxability or otherwise of sums received by the assessee, a residential housing co-operative society, by way of transfer fee and TDR premium. While the assessee claims the same as tax-exempt on the ground of mutuality, relying on the decision by the Tribunal in its own case for other years, as well as by the hon'ble jurisdictional High Court, the Revenue bases its case on the factual findings issued by its authorities, as well as, again, on the same decisions by the hon'ble jurisdictional high court. The assessment order for A.Y. 2002-03 (in ITA No.498/Mum/2011) being the lead order, we shall adopt the same for the purpose of discussing the facts/case, even as was done at the time of hearing. The specific grounds raised for this year are as under: "1. The Learned CIT(A) 32 has erred in confirming the findings that Transfer Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the rival submissions. We find that the issue in these grounds of appeal of the assessee regarding the taxability of transfer fees received by the appellant society on the principle of mutuality and the issue of disallowance of expenses relating thereto claimed by the assessee is covered with the decision of Mumbai Tribunal in the case of Vithalnagar Co-operative Housing Society Ltd. (supra) and we being in agreement with the said decision of the Mumbai Tribunal in the case of Vithalnagar Co-operative Housing Society Ltd., set aside the issue in these grounds of appeal of the assessee in all the four appeals to the file of the Assessing Officer, who is directed to decide the issue in accordance with the decision of Special Bench of the Mumbai Tribunal in the case of Walkeshwar Triveni Co-Op. Housing Society Ltd. vs. ITO reported in 88 ITD 159 (Mum.) (SB) and any other decision which may be available to him, we decide accordingly." 2.2 This is a subsisting issue in the assessee's case, across all the years, with it being, similarly, the second round before us for A.Ys. 1996-97, 2000-01 and 2001-02, having been decided by the tribunal earlier vide its order dated 04.03.2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are vide paras 3.3 to 3.8 of his order, also reproducing the Notification dated 09.08.2001 issued u/s.79A of the MHSA. The assessee-society has charged transfer fee much in excess of the maximum limit of Rs.25,000/- stipulated thereby for being charged per transfer by a co- operative housing society. In fact, the entire transfer fee of Rs.18.54 lacs under reference comes from a single person, Shri Vinod Parekh qua two plots (refer pg.2 of the assessment order dated 28.02.2003). How could one, under the circumstances, say that there is no profit element or consideration involved? The hon'ble court in Sind CHS (supra) has held that any amount charged by a housing society in excess of the prescribed limit and retained by it would be exigible to tax. It is facile to say that the said Notification is not applicable to the assessee-society as it is a plot owner's society and not a flat owner's society. In fact, the Society in Sind CHS (supra) was also a plot owners' society. The very fact that the Government did not consider it necessary to or in fact issue a separate Notification specifically for such societies would not mean that it is not applicable thereto; on the contrary, would onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nant Ownership Housing Society' (under rule 10(5)), operating on cooperative principles. The land was allotted to the members by collecting there-from the same amount as was required to be deposited on account of lease with the Housing Board; the relevant figures being borne out by its balance-sheet for the relevant year (AY 1996-97). There is, thus, no question of any profit. Again, with reference to sections 64, 67, 70, 110 of MHSA, it was sought to be emphasized that the surplus inures only to the members and, further, is subject to adequate control qua its investment and application. The question of taxability of transfer fee collected in excess of the Notification/s issued by the State Government came for consideration before the tribunal in its' own case for A.Ys. 2003-04 to 2005-06, whereat the tribunal confirmed the principle of mutuality on such transfer fees as well, i.e., collected in excess of the limit imposed by the Government per the said Notification/s. In fact, in Mittal Court PCS Ltd. (supra), the hon'ble court has held that such excess, if collected, would have to be refunded and, in any case, a member is not prohibited from gifting any amount to the society for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ality has been extended to defined groups of people who contribute to a common fund, controlled by a group, for a common benefit. Any amount surplus to that needed to pursue to the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable." (emphasis, by underlining, ours) The apex court, further, culled out, once again, the basic principles and parameters attending mutuality, so that a decision in each case would have to be taken on the touchstone of the satisfaction or otherwise thereof in the facts and circumstances of the case. It is in fact here that the difference arises. That is, the issue is not in the principle of mutuality per se, but in its application, as also observed by the apex court in the case of the CIT vs. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC), which in fact it follows in Bangalore Club (supra). As famously put by it in CIT vs. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC), the principle that no one can make profit out of himself is true enough but may in its application easily lead to confusion (pg. 560). Again, as clarified in CIT vs. Bankipur Club Ltd. [1997] 226 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a common day example, drawing from the area of housing itself. The flat owners in a building desire to provide security for themselves - a basic need, which each of them would even otherwise want for himself. They appoint security staff, paying their salary, uniform, etc., by pooling money through monthly subscriptions, so as to meet the operational cost. This could be extended to cleaning or any other maintenance services of the building (for common areas) as well. A mutual arrangement cannot, by definition, lead to any scope for income in the hands of the contributors or the participants, toward which we have cited some everyday examples. The surplus only represents the excess of such contributions toward a common purpose over the actual expenditure. This is precisely why, where and to the extent the same leads to some income, as where the surplus is parked as a deposit in a bank yielding interest income, the same has been, once again, clarified by the apex court in the case of Bangalore Club (supra) to be outside mutuality. This is even if the banks are also members and, two, that the interest income is to be applied for common purposes. That is, the difference or the dichotomy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for situations leading to benefit to the membership both in the short term as well as that may accrue to the organization indirectly in the long run. In no case, however, could the members of the association or club trade on their membership rights, as the members in the instant case are in a position to. This is precisely why membership of most social or other definite cause clubs is restricted, and not transferable, or is so to a very defined class of persons, as next of kin, which thus operates as a suitable qualification as well as restriction. A member incapable of or not desirous of contributing or participating further, may quit the Association. 4.3 In the case of a housing society as the present one, however, the contributors, by virtue of their membership, obtain a valuable capital asset in their own hands, i.e., the leasehold right in the plots allotted to them, as well as the interest in the super structure. No doubt, the said structure has only been funded by them, but then it is only on the land leased to them by the society, so that independent of the rights in land, leased to them on a 998 year lease, the same is of no value. It is this that they may encash o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 321 (Bom) in the context of the issue of taxability of the receipt of transfer fee. With reference to its decision in the case of Shree Nirmal Commercial Ltd. v. CIT [1992] 193 ITR 694 (Bom), it notes with approval that the arrangement is akin to a sale or transfer of substantial rights to the members. In the cited case, the company devised a scheme, where-under non-refundable deposits were accepted from the shareholders against right to occupancy in the floor space on land obtained by it on lease from the Government for construction of commercial premises. The court having regard to the manner in which the said deposits were taken from the shareholders and having regard to the fact that the shareholders were entitled to assign the floor space to others on the payment of compensation and to transfer their occupancy rights by selling shares, held that the whole transaction was in reality a sale of floor space by the assessee- company to its shareholders. After parting with the right of occupancy of the floor area to every member, what remained with the assessee was merely ownership in the technical sense of the word. The receipt by way of non-refundable deposits was accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , where so, which could, if at all, be only incidental, and would again be taxable. This therefore constitutes our first and primary objection to the assessee's case for being allowed exemption or its various income or categories of income on the principle of mutuality; a housing society, as the one before us, by its very design and concept being not a mutual concern, confer as it does on its individual members valuable, transferable rights, i.e., in their own right, property by definition, which they can hold independent of each other, i.e., independent and apart from their rights to the common fund or property that they as members may hold or enjoy as a body or a group. It may be argued that such a housing society may by its' bye laws prohibit transfer, in which case the objection would not hold. The argument is misplaced. The very fact that the arrangement leads to creation of wealth in the hands of the individual member-contributors is sufficient for the purpose of holding it as not a mutual concern or association. Further on, as the matter impinges on the civil rights, the provisions of common law as well as that relating to holding and enjoyment of property, and immovable pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain, in Bangalore Club (supra). This however does not and would not in any manner imply that no part of the receipt of such society can be exempt on the ground of mutuality. This is as mutuality is essentially an activity based phenomenon. A housing society may choose to fund the maintenance expenditure not through income arising from, say, interest of bank deposits - as in the instant case, but by monthly subscription from its members. The surplus in such a maintenance fund, i.e., excess of collection over a period over the maintenance expenditure incurred thereat, would not be the society's income, which by definition has to arise from outside oneself, the group representing the society. This would be so even if the society transfers this excess to its' general fund, to be applied for other common benefit applications, i.e., apart from maintenance. And, for the same reason - such activities being again mutual, with the receipt only representing their funding. Further, again, it not intended to suggest or imply in any manner that the expenditure incurred on its various activities by a housing society, to be considered as mutual, could or is to be only in the nature of revenue expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l land. The same would only be at market rates, so that the profit motive is built into the transaction/s. On this being put to the ld. AR during hearing, it was clarified by him that no such activities, though permissible under its charter, have been perused by the assessee, and where so, income arising there-from would be taxable. As such, admittedly if any of the assessee's activities are imbued with commerciality, the same would lead to income chargeable to tax under section 4 of the Act. In this regard, in our view, the provision for charge of premium by the assessee-society and, further, worked at one half the amount of the premium received by the transferor-member from the transferee- member cannot but be considered as a commercial transaction. As such, not only does the arrangement lead to creation and holding of wealth/property by the individual-members, it allows them to encash or otherwise exploit it, paying the society its share. That is, the society also partakes of the profit arising on the subsequent transfer by a member, to the extent of 50% thereof. If that is not commercial, what is, while the law has laid down (as by the apex court, among others, in CIT vs. Banki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety's bye laws, as in fact pointed out by the hon'ble court, our point is still made and in fact more validly. That is, that the lease granted is a commercial transaction, and thus commercial considerations imbue its operations, as indeed was found by the hon'ble court. Now it cannot be that while the lease deed is a commercial transaction, as found by the hon'ble court, the bye law, containing like clause; in fact, facilitating the relevant clause in the lease deed, is not. Couple this with the fact, which is again uncontroverted, that no monthly or periodic subscriptions are charged, so that there are no contributions, and the maintenance activities of the society funded wholly or mainly out of interest on bank deposits, and it is clear that the manner and operation of the assessee-society is clearly not governed by mutuality. In sum, the assessee's objects allowing it to conduct business and, further, its articles (bye laws) reserving a right in the lease hold rights granted to its members, which in fact enable it to charge a part (50%) of the premium arising to them on transfer as transfer fee, as also TDR premium toward further construction, taints its objects with commerciali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that though residing at the residential units on the society's land, they do not use the roads or water or electricity or parks, et. al. How would they possibly reside in that case. Again, is it that separate and parallel facilities, being essential, have been set up or provided? There is nothing on record to indicate that. They are not, and in fact cannot possibly be denied the same common facilities set up for the residents, and neither is there any material on record to support or reason to justify the said denial. In fact, the assessee itself justifies charging of the TDR premium on that basis, i.e., the additional support services required to support the additional FSI. The assessee-society conveniently states of no such facilities/amenities being provided by it. Then who, we wonder, is providing these basic, essential services, so vital for residence? Further, in that case, there would be no scope for recovering any sum even from the members. As regards its claim of incurring expenditure on pest/rodent control, cleaning services, trash collection, etc. and the like, the same may well be true. But the question is: Are the basic services required for residing at the soc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, i.e., of practical, everyday import. It is for this that we consider such resident non- members as 'participants' inasmuch as thereby they actually participate in its activities/ amenities. They in fact in that sense are more privileged than the members themselves, availing of the fruits of the activities without contributing or having contributed therefor! No doubt, the primary purpose initially was to promote housing for its members, but once the flats constructed on the plots allotted to the members are transferred to non-members or otherwise let to them, i.e., by converting their houses into multi-storied buildings, the membership becomes a lucrative investment or a source of income for the members. Mutuality ceases and commerciality steps right in; rather, dominates, taking centre stage as it were. In fact, the whole exercise of TDR premium is only to exploit their advantageous position, a capital asset, with the assessee raking in the moolah. In view of the foregoing discussion and analysis, in our view the assessee is not a mutual concern and its various receipts cannot be considered as tax exempt on that ground. If, however, it is for any year able to establish mutuali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the members may receive while transferring their rights, the hon'ble court was of the view that the receipt by way of transfer fees is only in the nature of 'income'; in fact, one that had been contractually provided for. Its capital structure remained undisturbed, so that there was no question of it being a capital receipt or on capital account. The purpose of inserting the clause for the society to receive payment every time the lease changed hands was in its view only to ensure income, so that it had thereby provided for a source of income. Reference in this context is drawn to the detailed discussion, also entailing facts, as appearing at pages 327 to 331 of the reports. Accordingly, it was held that transfer fee was not a capital receipt, but income chargeable to tax. The hon'ble court did not go in to the further question as to whether it was assessable as business income or as income from other sources; the same being largely irrelevant. True, the question of mutuality, as observed by it later in Sind CHS (supra), was not before the hon'ble court, as also sought to be argued by the assessee before the first appellate authority. However, as afore-stated, the concept of ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partly 'income' and partly 'mutual'. The only manner, therefore, that the decision in the case of Sind CHS (supra) is to be interpreted and understood in harmony and reconciled with a series of decisions by the apex court qua mutuality, as well as in the case of Presidency CHS Ltd. (supra), as it indeed has to be, is that though the hon'ble court was of the view that transfer fee is per se income, was of the further and clear view that inasmuch as the same is charged by the society in terms of its bye laws in furtherance of its objects, a reasonable amount, not exceeding that as provided in the relevant Notification issued by the State Government under the relevant statute (as MCS Act, 1960), has to be respected and accorded mutuality status. That is, it provides for a small window of exemption. Again, not providing for any such reasonable limit, it may be appreciated, would, apart from being open to the charge of it being 'income', also attract the charge of commerciality, the very reason why, though being collected under its bye laws, it was considered as income in Presidency CHS Ltd. (supra). The hon'ble court in Sind CHS (supra) in fact refers more than once in the decision to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly as the same is in respect of non-occupancy charges, and is in fact in line with the decision in the case of Sind CHS (supra), discussed hereinabove. As regards the assessee's reliance on the order by the tribunal in its case (for AYs 2003-04 to 2005-06/ supra/ PB pgs. 1-8), we find the same as of no consequence in view of the decision in the case of Presidency CHS Ltd.(supra) and Sind CHS (supra). Again, the decision by the tribunal in the case of ITO v. Damodar Bhuvan CHS (in ITA No. 1610/Mum/2010 dated 16.9.2011/PB pgs. 42 - 46), holding that the quantum of receipt with reference to the restriction thereon by any law as of no consequence is contrary to the decision by the hon'ble court in Sind CHS (supra). In fact, earlier on the special bench of the tribunal in Walkeshwar Triveni Co-operative Housing Society Ltd. (supra) held as under, emphasizing quid pro quo in such payments, and which, it would be seen, is in conformity and agreement with the decisions by the hon'ble court in Sind CHS (supra) and Bharatiya Bhavan Co-operative vs. Smt. Krishna H. Bajaj Ors. (supra): "85. Cooperative Housing Societies in our country playing a very special and prominent role in catering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, in our considered view, the matter arising for consideration being a mixed question of fact and law cannot be said to be covered by the decision in the case of Jai Hind CHS Ltd. (supra). This is for the clear and simple reason that whether commerciality is involved, or the transaction is guided by profit motive, is largely a matter of fact, to be determined on the conspectus of the facts and circumstances of the each case. The assessee's charter as well as its' operations have been found to be imbued with commerciality. Besides, as found by the Revenue in the instant case, common facilities are being enjoyed by both the members and the non-members, so that there is a break down of the identity, so essential and vital to preserve mutuality. Reference in this context is made to the detailed findings at para 3.7 (at pages 11 through 14) of the impugned order (for AY 2002-03). The findings, as afore-stated (refer paras 4.4, 4.5 of this order) remain uncontroverted. All this, then, explains the non-application of the decision in the case of Jai Hind CHS Ltd. (supra) in the instant case. The ld. AR before us has sought to justify the claim, stating that services such as pest/rodent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the apex court in Royal Western India Turf Club Ltd. (supra), is the impossibility that contributors should derive profits from contributions made by them to the fund which could only be expended or returned to themselves. Further on, in our view, the break down of mutuality when a contributor-member takes a loan from the club on interest, as explained by the apex court in Bangalore Club (supra), would apply in equal measure when, similarly, he, on payment of premium to the society, acquires permission to purchase TDRs. This is for two reasons. Firstly, as explained at length in this order, in our view, the whole concept of mutuality suffers and gets vitiated because the arrangement leads to acquisition of individual rights with the members on the grant of lease to them by the society. It would be seen that it is this which is later sought to be capitalized through transfer, letting, etc., and it is only such receipts arising to the society in the exercise of such rights by the members and, correspondingly, profit to them, that are under challenge for mutuality. The acquisition of TDRs is only in continuation and a part of the said process. Two, as explained by the apex court ..... 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