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TMI Blog1981 (7) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... the premium amount if any received by him from the purchaser. During the previous year relevant to the asst. yr. 1971-72, the assessee received a sum of Rs. 23,680 on allotment of plots by lease to members and a sum of Rs. 40,335 being half share of the excess received by members on transfer of the lease from themselves to others. In the original return filed by the assessee these receipts were shown as capital gains subject to relief under s. 80T. In a revised return the assessee excluded these amounts altogether claiming that these were capital or other receipts not taxable in its hands. The ITO, however, brought these amounts to tax. According to him, the cooperative society was carrying on the business of providing houses to its members which involved incidental activities like buying and selling of land, transfer of land, providing loans to members for construction of houses; the society itself is construction of house etc. The activity of transfer of lease resulting in has of excess being received by the assessee also constituted part of the society's business. Both these amounts were included in its income as business. According to the ITO at any rate they would come under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA Nos. 34,82,83, 84/75-76 and 713/76-77 dt. 17th March 1978. 3. For the assessee. It is pointed out that this was clear case of mutual association. Those who contributed the moneys were the ultimate recipients. At any rate there was no question of the assessee being a dealer in tenancy. The specific purpose of bringing into existence a co-operative society was to procure lands and buildings for self-occupation of the members. In fact, on principle the members could not even let out or dispose off of these lands or properties. As it happened the financial fortune of different members delveoped differently and sometimes unfavourably, property cannot be struck on to them irretrievably. It was this contingency which induced the society to take advantage of half the excess which the members received when the lease was sold. According to the ld. Counsel both the initial receipts in the lease of the plots as well as the 50 per cent of excess received on transfer of lease are of the same nature. The society was bound to serve a public purpose. What is charged at the time of allotment or what was received on the transfer of lease has nothing to do with the market value. The society wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith lands of any tenure and to sell by instalments and subject to any terms or condition and to make and guarantee advances to Members for building or purchasing property and to erect, pull down, repair, alter or otherwise deal with any building thereon. All persons who have signed the application for registration are original members. Other members shall be elected by the committee provided that all members shall belong to caste, race or profession or shall be residents in Surat City and Chorais Taluka. Two adverse votes are sufficient to exclude an application. Every person shall pay Representative. 1 on applying for admission for which he shall receive a copy of the bye-laws. In case where the application is refused the entrance fee shall be returned, 7A. A person may be admitted as a nominal member on payment of Rs. 1 only as entrance fee. A nominal member is one who is admitted as such for the purpose of joint-holding of shares along with an ordinary member and shall exercise no right or receive no advantage as a nominal member unless otherwise specifically provided for under these bye-laws. 64. No member shall be tenant of the society unless he holds at least five share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to its members. The construction of houses are made only by members. The society provides credit facilities to them for construction charging reasonable interest the loan itself being repayable over a stipulated period. A member holding a minimum of 5 shares in the society is entitled to the lease of a plot. At the time of lease the society collects a lumpsum to be decided by the Managing Committee from time to time. The ownership of the land remains with the Society, the member being given only the right of use of the land for a period 998 years. It would appear that the society collects this amount from the members at the time of the lease for providing common facilities like roads, electricity and drainage. As regards this receipt the claim of the assessee is that the amount received from the member for the acquisition of the lease at any rate is a capital receipt if not exempt on the ground of mutuality. 8. As regards the receipt from the member who transfers his lease hold interest to another the assessee's claim for this receipt being capital is on the ground that the amount collected after the plot is transferred is not a fee for granting the permission or recording a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent of the excess premium received on transfer. The bye-laws stipulate tha these amounts are to be utilised partly for forming a development fund and partly for direct expenditure for the development of the area and the provisions for civic amenities. From the very nature of things it is not possible to equate or find an absolute arithmetical equality between the amount spent by the assessee on purchase ore acquisition of the land and on account of interest, development expenditure etc. And the receipts from members either by way of share purchase money or amounts received at the time of lease or later on. But from the bye-laws it would be clear that the society has not worked consciously for an excess but works conscientiously for its objective of making land and houses available to the members. It is against the above background that any surplus which results from its day-to-day transaction or transactions over the period is to be disposed off is to be considered. The disposal of the surplus provided for in Arts. 67 and 68 of the bye-laws indicates that the member is entitled to a nominal dividend and perhaps a casual reduction in the lease amount. The balance of amount if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished, and the principle of mutuality would be available to them. Nothing would detract from this principle even if their association is a body corporate, and hence, a legal person. If such a mutual concern receives any income, it is not liable to tax because on account of the operation for the principle of mutuality, the income remains, in reality, the income of the contributors". 11. Referring to the leading English case of mutuality in the case of Styles vs. New York Life Insurance Co. (1889) 2 TO 460 (HL), their Lordships expressed with approval the ratio of that decision as stated by Lord Normand, in English and Scottish Joint Co-operative Wholesale Society Ltd. vs. Commr. Of Agrl. IT Act, (1948) 16 ITR 270 (PC) at p. 276 to the effect that from these quotations it appears that from these quotations it appears that the exemption was based on, (1) the identity of the contributors to the fund and recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy-holders, in other words as an instrument to their mandate, and (3) the impossibility that contributors should derive profit from contributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and the at the legal entity can never make a profit out of its members". 13. The settled legal position therefore is that while a corporate body may by itself be capable of making a profit thus defeating a possibility of exemption from taxation on the ground of a mutuality, where this possibility is not there and the contributors and the receivers of the benefits are same, the principle of mutuality would apply. In the case of Shree Jari Merchants Association (1977) 106 ITR 542 (Guj), the assessee was an association of persons and there was a provision that the surplus assets could at the time of the dissolution be used in the manner proposed in a resolution passed by the Association which could even provide for distribution amongst non-member. In view of the above provision, the principle of mutuality was denied in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses its betterment programme spread over a long period. 15. With regard to the 50 per cent of the excess received on transfer of the lease, the ld. Counsel for the Department laid much stress on the expectancy part of the receipts and also relied on the decision of the Bombay Bench. In our opinion, the nature of these receipts is also not in any way different from the other receipts refereed to above. The assessee remains the owner of the property. Instead of an original lessee member, the leased plot is taken over by another lessee member. The excess which the selling member gets from the purchaser may represent the exceeds over what he has paid to the society compared with the market price. Even so the society not having received the market price of the lease at the time of the original allotment and being entitled to only 50 per cent of the excess cannot be said to be receiving any excess by way of capital gain or regular income. This is not a capital gain because there is no transfer in which the society is involved. Transfer of an asset is the foundation of capital gains. The transfer is of the lease of a plot by one member to another member. The concept of capital gain has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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