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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 ..... , 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 Charges Rs.18,53,760/- received by the assessee which is Plot owner Society as Taxable without appreciating full facts and considering various judgements passed by Hon. Bombay High Court and Hon. Tribunal. 2. The learned Assessing Officer has erred in treating the T.D.R. premium received of Rs.24,06,798/- as income and has further erred in not considering the direction given by Hon. Tribunal in order dated 4th March 2008. 3. The Learned CIT(A) 32 has erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (supra). The Revenue in the set aside proceedings has proceeded to decide the matter in view of the factual findings, and by following the decision in the case of Sind Co-operative Housing Society vs. ITO [2009] 317 ITR 47 (Bom). 3.1 Before us, the assessee's principal case was that the matter is covered by the decision of the tribunal in its own case, i.e., for A.Ys. 2003-04 to 2005-06, vide order (in ITA Nos.6346 to 6348/Mum/2009) dated 24.06.2011 (copy on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 only imply that it is applicable to such societies inasmuch as the plot owners' societies are also housing societies meant to satisfy, and as much, the need for housing and, further, governed by the MHSA as well as the model bye-laws issued there-under. That is, to say that while there is a legal bar on a residential flat society, so that it could legally charge only as much, but no corresponding bar on a residential housing society where formed by the plot owners, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 its' objects. The issue of TDR premium, again, stands considered by the hon'ble court in the case of CIT vs. Jai Hind CHS Ltd. [2012] 349 ITR 541 (Bom), wherein, following its approval of the principle of mutuality in respect of non-occupancy charges paid by a member to the society in Mittal Court PCS Ltd. (supra), it stands clarified that the same principle would apply to the case of TDR premium as well, as the said premium is required to defray the additional burd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 ITR 97 (SC), which it again noted with approval, that whether or not the persons dealing with each other are a 'mutual club' or carrying on a trading activity or adventure in the nature of trade, is largely a question of fact; further emphasizing that at what point does the relationship of mutuality end and that of trading begins is a difficult and vexed question. A host of factors may have to be considered to arrive at the conclusion (page 110). It is these factors, in lig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangement 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 between the 'surplus' with a mutual concern/association, on one hand, and the 'income' arising to it (which could only be from a source outside itself), on the other, is plain and manifest in the terms of the arrangement itself. However, a break in the mutuality, as in the case of interest income, may not necessarily lead to disbanding or relegating the arrangement or the association as not a mutual concern. The same would only be where the same goes to the very root, as an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or capitalize on or even trade on, as say by letting the property. Such valuable rights that inure to the members, i.e., separate and distinct from the rights that vest in them as a part of the class of contributors, militates against the very notion of mutuality, which in its concept and operation cannot yield any income to them in their individual capacity. In fact, they have practically all the rights, and at a cost, and which they may leverage to generate income for themselves. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btained 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 accordingly treated as a trading receipt (at page 328). The striking similarity with the instant case may be noted, and this is precisely this point that we were trying to bring forth when we said that the arrangement leads to substantial rights in the hands of the members, which they may subsequently use or deploy for their profit. The hon'ble court in Presidency CHS Ltd. (supra), in endorsing the lease agreement as commercial, examined the matter from several angles, countering all the arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inition, 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 property in particular, would need to examined, besides the provisions of the relevant co-operative societies act, before one could authoritatively comment on the legality of the stated embargo on transfer. In fact, such restriction - which is hypothetical, and assumed only for the purpose of discussion, if stipulated, would defeat the very concept and operation of the co-operative movement qua the housing sector, which is in fact a leading and successful example of the application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcess 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 expenditure, as maintenance expenditure referred to by us. The common benefit expenditure could include that yielding enduring benefit, as toward infrastructure facilities, as by way of internal roads, parks, street lights, drainage, water and electric supply, etc. All we have stated and clarified is that the concept of 'income' and 'mutuality' are antithesis to each other. This we consider to be also the ratio of the decision by the hon'ble jurisdictional high court in the case of Presi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. Bankipur Club Ltd. (supra), would disqualify a concern as a mutual entity on a very taint of commerciality. This is precisely what weighed with the hon'ble court in Presidency CHS Ltd. (supra) in holding the arrangement, for which it also examined the terms of the lease, providing for a like clause, in holding the arrangement as commercial in nature. Surely, this is not to meet the regular operational expenses, transfer being an uncertain and variable phenomenon, which argument was again consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 commerciality, excluding mutuality. No specific services, except some routine paper work, a part of the normal administrative functions, it may be appreciated, is rendered for the purpose, while premiums linked to market rates are charged on the basis of the area and/or on the basis of the transaction value. This constitutes our second objection to the assessee being not eligible for being considered as a mutual concern. It would be also noted that this arises directly out of and is incident to the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason 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 society's land, viz. internal roads, parks, lighting, electricity, water, drainage, security, etc., the infrastructural facilities set up by the housing society, available only to the members, or to non-members as well? The assessee has been completely unable to address this basic question raised by the Revenue, inspite of being specifically questioned on this aspect during hearing. In fact, it has not disputed the primary facts as listed in its respect as listed by the ld. CIT(A) at para 3.7 (pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mutuality qua a particular receipt, the same being activity based, in consonance with its bye laws, the same though can be considered. Receipt-wise claims 5. Though we have considered the assessee's case for being tax-exempt as a mutual concern, we may also deal individually with its claim for exemption qua transfer fees and TDR premium as being governed by mutuality, particularly with reference to the case as made out. This is also necessary as the Revenue has, though making out a case of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'income' and 'mutuality' are antithesis to each other, so that one excludes the other. After explaining the concept of mutuality in light of the precedents, and examining the facts of the case, the apex court in Bankipur Club Ltd. (supra) held that the surplus arising is not 'income' for the purposes of the Act, being a result of a mutual arrangement. This stands reiterated by it in Bangalore Club Ltd. (supra). That is, it is not possible to say that a receipt constitutes 'income', though is subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the objects or operations of the society being not tainted with commerciality, so that the same constitutes a fundamental consideration that cannot be, or seen to be, violated, while in our case the hon'ble court has already found the transaction of transfer fees to be arising out of or as a result of a commercial transaction, with in fact it being linked to the transfer consideration, i.e., market rate, in principle. The hon'ble court in Sind CHS (supra), further makes it abundantly clear that any exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 profile of taxation at times tempts the human ingenuity to defile the law. Consequently, the spirit of mutuality is abused with impurity. To hood- wink the law premium is worded under different names, viz. DONATION, WELFARE FUND, COMMON AMENITIES FUND, etc. etc. Such contributions are compulsive to effect the transfer. Socie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 control, trash bag/collection, plot beautification, cleaning, etc., are provided only to members. That may well be true, even as we have already expressed our disagreement with the claim, and have no reason to hold that the basic services such as internal roads, parks, water and electric supply, drainage, street light, etc. are not enjoyed by the non-members residing at the society's land as well. So, however, the question is, how is the argument relevant? If the assessee has instituted and, accordingly, rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 in Bangalore Club (supra), the common fund should exist and be applied between the group/club and its members. When the deposit by the club with the member-bank is given on loan to its client, the club's money goes out of this closed system, and the mutuality breaks. Similarly, the TDR premium paid to the society is recouped by the member through sale and/or otherwise worked on to generate income from its investment, as by letting the flat. That is, he trades on it, much in the same manner as the bank does on the money borrowed from, or deposited with it by, the club. Finally, in our view, the decision in the assessee's case in Preside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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