2018 (3) TMI 675 - SC - Income Tax

Court rules receipts for common benefit of members not taxable under mutuality doctrine. Economic participation limited to members.

The Court dismissed all appeals by the Revenue and allowed the appeal by the assessee society, ruling that the receipts were not taxable under the ... Doctrine of mutuality - commonality of contributors and participants - income from business excluded from mutuality under clause (vii) of the definition of taxable income - commerciality/profit motive as determinative for taxation - scope and applicability of Government directions under Section 79A of the Maharashtra Cooperative Societies Act - applicability of the Government notification dated 09.08.2001Doctrine of mutuality - commonality of contributors and participants - commerciality/profit motive as determinative for taxation - Whether receipts such as non-occupancy charges, common amenity fund contributions and receipts from extra construction/premia are exigible to income tax or exempt under the doctrine of mutuality - HELD THAT: - The Court applied the common-law principle that a person cannot make a profit from himself and that a contribution to a common fund by members which is used for the common benefit does not constitute taxable income. The essence of mutuality is identity between contributors and participants and entitlement to share in the surplus; surplus arising after meeting common purposes is an increase in the common fund and not income. Where receipts are contributed by members and utilised for maintenance, repairs, infrastructure and common amenities for the class of members, they retain the character of mutual receipts and are not taxable merely because some members pay higher contributions or some members do not occupy premises. The presence of a surplus at year-end intended for contingencies does not convert the mutual fund into taxable profit unless the activity is shown to constitute business or fall under the statutory exclusion (clause (vii) of the definition of income). The Court held that the receipts in the present cases were indisputably used for mutual benefit and therefore fall within the doctrine of mutuality and are not exigible to tax. [Paras 16, 17, 18, 19, 20]Receipts such as non-occupancy charges, common amenity fund contributions and receipts associated with extra construction/premia, when contributed by members and used for the common benefit of members, are exempt from tax under the doctrine of mutuality.Doctrine of mutuality - membership and timing of appropriation - Whether transfer charges paid (or partly paid) by a transferee prior to formal admission to membership are taxable because the transferee was not a member at the time of payment - HELD THAT: - The Court held that where a transfer fee paid before admission is returned if the person is not admitted, appropriation occurs only after admission and the payment effectively becomes a contribution by a member. Admission to membership creates the class identity required for mutuality; the fact that part-payment may have been made by the transferee for convenience is irrelevant if the amount is appropriated only upon induction and utilised for the common benefit of members. Therefore such transfer charges do not become taxable merely because a transferee had paid them prior to formal admission. [Paras 8, 19]Transfer charges which are refunded if admission does not occur, and appropriated only after admission to membership, attract the doctrine of mutuality and are not exigible to tax.Scope and applicability of Government directions under Section 79A of the Maharashtra Cooperative Societies Act - applicability of the Government notification dated 09.08.2001 - Whether the Government notification dated 09.08.2001 issued under Section 79A applies to premises societies (non-residential) or is confined to cooperative housing societies - HELD THAT: - The Court agreed with the High Court's conclusion that the notification dated 09.08.2001, insofar as it prescribes rates and matters concerning transfer premium and allied matters, is directed to cooperative housing societies and does not apply to premises societies consisting of non-residential premises. Consequently, conclusions premised exclusively on the notification's limits cannot be extended to premises societies. The New India Cooperative Housing Society case addressed a distinct cause of action and does not alter the present conclusion. [Paras 3, 22, 23, 24]The notification dated 09.08.2001 applies only to cooperative housing societies and is not applicable to premises societies consisting of non-residential premises.Final Conclusion: The appeals filed by the Revenue are dismissed; the appeal filed by the assessee in Civil Appeal No.1180 of 2015 is allowed, holding that the impugned receipts qualified for exemption under the doctrine of mutuality and that the 09.08.2001 notification is confined to housing societies. Issues Involved:1. Taxability of receipts by cooperative societies from members.2. Application of the doctrine of mutuality to such receipts.3. Validity and applicability of the government notification dated 09.08.2001.4. Taxability of non-occupancy charges, transfer charges, and common amenity fund charges.5. Economic participation and its restriction to members.Detailed Analysis:1. Taxability of Receipts by Cooperative Societies from Members:The central issue was whether certain receipts by cooperative societies from their members, such as non-occupancy charges, transfer charges, and common amenity fund charges, are exempt from income tax based on the doctrine of mutuality. The challenge was based on the premise that these receipts are in the nature of business income, generating profits and surplus, thus having an element of commerciality and therefore exigible to tax.2. Application of the Doctrine of Mutuality:The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself cannot be regarded as income and taxable. The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus, and the participators in the surplus are contributors to the common fund. The principle postulates that what is returned is contributed by a member. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities.3. Validity and Applicability of the Government Notification Dated 09.08.2001:The notification dated 09.08.2001 issued under Section 79A of the Maharashtra Cooperative Societies Act, 1960, was discussed. It was argued that the notification was applicable only to cooperative housing societies and did not apply to premises societies. The High Court had set aside the finding that payment by the transferee member was taxable while upholding the taxability of the receipt beyond that specified in the government notification. The Court concluded that the notification dated 09.08.2001 is applicable only to cooperative housing societies and has no application to a premises society which consists of non-residential premises.4. Taxability of Non-Occupancy Charges, Transfer Charges, and Common Amenity Fund Charges:The Court held that non-occupancy charges were levied for the general maintenance of the premises of the Society and provision of other facilities and general amenities to the members. The fact that such members who were not in self-occupation may have had to pay at a higher rate was irrelevant so long as the receipts were utilized for the benefit of the members as a class. Transfer charges are payable by the outgoing member, and if for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount is appropriated only after the transferee is inducted as a member. Contribution to the common amenity fund taken from a member disposing of the property is similarly utilized for meeting sudden and regular heavy repairs to ensure continuous and proper hazard-free maintenance of the properties of the society, which ultimately enures to the enjoyment, benefit, and safety of the members.5. Economic Participation and Its Restriction to Members:Economic participation had to be restricted to members and had no application to a transferee who was not a member, rendering receipt from them sans mutuality taxable. The Court emphasized that the principle of mutuality could not be invoked to prevent taxability of high-value receipts by a society selling properties and then inducting such purchasers as members.Conclusion:The Court dismissed all appeals preferred by the Revenue and allowed the appeal preferred by the assessee society, concluding that the receipts in question were not exigible to tax as they fell under the doctrine of mutuality. The Court upheld the principle that so long as the receipts were utilized for the common benefit of the members, they were not taxable.