2006 (5) TMI 311 - AT - Income Tax

Tribunal rules loans from members not taxable, surplus from FSI not income.

The Tribunal ruled in favor of the assessee on both issues. It held that loans taken from incoming members were not taxable as income, as they were ... Business income Issues Involved:1. Taxability of loans taken from incoming members.2. Taxability of surplus arising from utilizing the balance FSI (Floor Space Index).Issue-wise Detailed Analysis:1. Taxability of Loans Taken from Incoming Members:The common issue in assessment years 1998-99, 1999-2000, and 2000-01 relates to the taxability of loans taken from incoming members when the existing 198 members transferred their interest in favor of the incoming members. The assessee, a housing co-operative society, collected interest-free loans from incoming members during these years. The Assessing Officer viewed these loans as non-refundable and consequently represented them as income liable to be taxed. However, the assessee contended that the loans were repayable and were indeed repaid, some even before the re-opening of assessment under section 147 of the Act. The assessee argued that these sums were received as loans based on resolutions passed by the society and could not be taxed as income. The Bombay High Court decision in CIT v. Shri Chhatrapati Sahakar Sakhar Karkhana Ltd. was cited by the department but was overruled by the Supreme Court in Siddheshwar Sahakari Sakhar Karkhana Ltd. The Tribunal accepted the assessee's stand, noting that the loans were taken through regular banking channels, credited in the society's books as repayable loans, and were indeed repaid. The issue was decided in favor of the assessee.2. Taxability of Surplus Arising from Utilizing the Balance FSI:The issue for the assessment year 2001-02 relates to the taxability of the alleged surplus arising from utilizing the balance FSI to the existing land where 198 tenements were constructed in 1954-56. The society constructed four new tenements and enclosed verandahs of existing tenements using the unutilized FSI. The funds for the project were provided by the new members and existing members' contributions. The Assessing Officer treated the construction of four new tenements and their allotment to new members as a non-mutual activity of the society, thus treating it as income from business activity. The assessee argued that the project was a part of its mutual activity and any surplus should not be taxed. The CIT(A) rejected the assessee's contentions, agreeing with the Assessing Officer that the surplus was liable to be taxed.The Tribunal, however, noted that the society is a tenant co-partnership housing society and cannot sell its tenements but can only allot them to members. The Tribunal referenced the Supreme Court decision in Ramesh S. Shah and the Maharashtra State Co-operative Appellate Court decision in Adarsh Grih Nirman Sahakari Sansthan, which supported the assessee's position that the society could not sell tenements. The Tribunal emphasized the concept of mutuality, stating that the society's dealings with its members, including the new members, were mutual. The identity of both the members and their contributions was established, fulfilling the requirements of mutuality as outlined in the Supreme Court's decision in CIT v. Bankipur Club Ltd.The Tribunal concluded that the revenue's approach to treat the project as a non-mutual business activity was unjustified. The entire project, including the construction of four new tenements and the enclosure of verandahs for existing members, was considered a single project with mutual contributions from members. The Tribunal deleted the impugned additions and allowed the appeals, deciding in favor of the assessee.Conclusion:The Tribunal ruled in favor of the assessee on both issues, concluding that the loans taken from incoming members were not taxable as income and that the surplus from utilizing the balance FSI was part of the society's mutual activity and not liable to be taxed. The appeals were allowed, and the additions made by the Assessing Officer were deleted.