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TMI Blog2009 (7) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... er fee received from its members it not taxable. X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of a transfer the amount can only be adjusted if such transferee is admitted as a member. If the transferee is held to be a stranger and he make the payment of transfer fees, it would be in the nature of gift and certainly not income. 4. On behalf of Revenue, their learned counsel have submitted as under. It is necessary to see in what capacity the incoming member made the payment. It cannot be said that the incoming member is in the same class of persons as the existing members of the assessee society. The incoming member at the time of payment of premium does not enjoy any rights in the assessee society whatsoever. Considering various judgments on the principle of mutuality dealing with clubs, it is submitted that in the case of a club, there are different types of members and different types of membership can be given to the same class of members of a club but a non member of a class cannot be equated as being in a class of member of the same club. The society may have different types of members like associate members, nominal members, sympathizer members who constitute members of the class. Similarly the club can have a class of members who may be permanent, temporary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit is the prime object for making such charge. The essential difference between the working of the club and that of cooperative societies, it is submitted is that there exists various classes of membership and the main question in most decided cases was whether the entrance fees collected for certain services including from non members, retain the character of mutuality. The payment by the members are voluntary. In the case of housing societies, according to bye laws, the transferor has to make payment of premium and in some cases transferor and transferee equally. It is obligation on the transferor to pay the premium. It is submitted that receipt of premium in the case of society is a revenue receipt and devoid of principle of any mutuality and is exigible to tax. Mr. Suresh Kumar appearing for the Revenue in Income Tax Appeal No. 1028 of 2004 and other appeals and petitions has reiterated what has been submitted by the other counsel. In addition it is submitted that the amounts charged are in excess of what is laid down by the bye laws or Government Notification. It is therefore, not voluntary. Similar arguments have been advanced in Income Tax Appeal No. 92 of 2008 by Mrs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only after admission to membership. 7. We may also refer to the model bylaws of the Flat Owners/Plot Purchased Type Cooperative Housing Society Limited. Bylaw No. 38 (e) provides what documents that the transferor/transferee shall submit for compliance. Byelaw 38(e) (ix) reads as under; : "(ix) payment of amount of premium at the rate to be fixed by the general body meeting but within the limits as prescribed under the circular issued by the Department of Cooperation/Government of Maharashtra from time to time. No additional amount towards donation or contribution to any other funds or under any other pretext shall be recovered from transferor or transferee." Bye-law 40 reads as under : "The transferee shall be eligible to exercise the rights of membership on receipt of the letter in the prescribed form from the society, subject to the provisions of the MCS Act, 1960 and Rules made thereunder." These bylaw therefore permit the charging of transfer fee in terms of the notification issued by the Government of Maharashtra. The latter part of byelaw 38(e)(ix) indicates that the transfer fee could be charged from both the transferor or transferee. 8. The Government of Maharashtra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which the surplus belonged was serving." Rule 90 reads as under : "Disposal of surplus assets : Where the Registrar has to divide the surplus assets amongst members of the society which has been wound up, he shall divide them in proportion to the share capital held by each of such members or in any other suitable manner sanctioned by the State Government in special cases." 10. In passing, section 72 of the Indian Contract Act may be referred to : "Liability of a person to whom money is paid, or thing delivered, by mistake or under coercion : A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it." 11. Some of the judgments adverted to on the principles of mutuality and or pertaining to the receipts by Cooperative Housing Societies may now be referred to. C.I.T. Vs. Kumbhakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 was in respect of a company limited by shares carrying on banking business restricted to its shareholders. A shareholder was entitled to participate in the profits as and when dividend was declared, even though he had not taken any loan from the respondent. The question was whether the respondent was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution to a common fund put up for payment of liabilities undertaken by each contributor to the other contributors and no refund of surplus to the contributors. There being no mutual dealing the question as to the complete identity of the contributors and the participators need not be raised or considered. Suffice it to say that in the absence, as there is in the present case, of any dealing between the members inter se in the nature of mutual insurance, the principles laid down in Styles' case and the cases that followed it can have no application here......" The court further observed that the dealings discloses same profit earning motives and is tainted with commerciality. 13. Our attention was also invited to several judgments in so far as Stock exchanges are concerned. We may only gainfully refer to the judgment in Delhi Stock Exchange Association Versus C.I.T. (1961) 41 ITR 495. The Supreme Court there noted that the appellant was a company which was an association which carried on a trade and its profits were divisible as dividend amongst the shareholders. The object with which the company was formed was to promote and regulate the business in share, stocks and securities et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Practice of Income Tax (Eighth Edition, Volume I, 1990) by Kanga and Palkhiwala at page 113 thus : "........... 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. The Madras, Andhra Pradesh and the Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves; it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects...." The court on the findings therein, held that the receipts for the various facilities extended by the clubs to their members, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be "a trading activity". The surplus-excess of receipts over the expenditure as a result of mutual arrangement cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court held that the members formed themselves into a Cooperative Society for the purpose of having a Cooperative Housing Society and there was no question of any profit element in such association or in having a transfer fee. The assessee cooperative housing society was a mutual concern. The Court there found that there was complete identity in the character of those who contributed and those who participated in the surplus. In fact Calcutta High Court relying on the judgment in Bankipur (supra) and other judgments noted that the principles applicable to the members of the club will be equally applied to the cooperative Housing Society, particularly Housing Cooperative Society which does not carry on any business and where no element of profit is involved. The assessee cooperative housing society was a mutual concern. The court held that the transfer fee received by the society for transfer of flat was not taxable income of the assesee. 19. In C.I.T. Vs. Adarsh Cooperative Housing Society Ltd. (Guj) 213 ITR 677, the issue again was whether on transfer of lease, the amount received by the society from the member out of the premium received by him from the purchaser was exigible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is by a stranger, it will certainly be in the nature of gift and not income. If an amount is received more than what is chargeable under the bye-laws or Government directions, the society is bound to repay the same and if it retains the amount it will be in the nature of profit making and that specific amount will be exigible to tax. Considering the bye-laws, as the main activity of a housing cooperative Housing Society is to maintain the property owned by it and to render services to its members by way of usual privileges, advantages and conveniences, there is no profit motive involved in these activities. The amount legally chargeable and received goes into the fund of the society which is utilized for the repairs of the property and common benefits to its members. 21. We may now deal with some other submissions advanced on behalf of the Revenue. It was contended that the class of members means, members such as permanent, temporary, honorary etc. This is based on the assumption that there can be different classes of members. In a Cooperative Housing Society there can be members and associate members. We have already quoted from the judgments where reference is to members as a cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee then will have to pay tax on such profits. Charging of transfer fees as per bye-laws has no element of trading or commerciality. There therefore being no taint of commerciality, the question of earning profits would not arise when the housing society from the funds received applies the moneys received towards maintenance of the society and providing the members with usual privileges, advantages and conveniences. 25. It was also contended that the case should be covered by section 28(3) of the Income Tax Act. Section 28(3) would have no application to the facts of the case as it deals with the income derived by the member from professional or similar association from the specific services performed for its members. A cooperative society has no similarity whatsoever with a professional association. In CIT Vs. Apsara (supra) the Calcutta High Court there held that even if the case of member or professional association, general fees levied by the association on its members by way of entrance fees or periodical subscription or otherwise would not constitute business. Since these are not related to any specific services rendered by its members. We are in respectful agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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