2018 (2) TMI 2117 - HC - Income Tax

Cooperative society denied Section 80P exemption as primary activity was commercial construction not serving fixed members

The HC dismissed the tax appeal filed by a cooperative society claiming exemption under Section 80P(2)(a)(i) for transfer fees and interest receipts. The ... Deduction u/s 80P - transfer fees and interest receipts - assessee is a Cooperative Society and is exempted from the payment of income tax upon the transfer fee received from the members - Sizable transfer fee has been received and the deductions have been claimed, which are not allowed by the AO - HELD THAT:- This appellant is claiming to be a Cooperative Society and, hence, claiming exemption u/s 80P (2) (a) (i) of the Income-tax Act. This contention is not helpful to this assessee-appellant mainly for the reason that the main activity of this appellant is to construct dwelling units or residential flats and to sell it to the public at large. There are no fixed or definite members of this appellant. As appears from the facts that those who are purchasing the flats from this appellant, they have to pay the sale price as well as transfer fee. Hence, the transfer fee is a part & parcel of the sale price. In the present case, such transfer fee accumulated for the assessment year 2002-03 is at Rs. 9,60,470/-. This is not exempted at all, looking to the nature of activity of this appellant. This transfer fee has been received by this appellant from a new member on their joining to the Society. Thus, firstly the flat is purchased, thereafter the purchaser becomes member of the Society. The main object of this Society is to construct the residential flats and to sell them to the public at large. Thus, the transfer fee is a part & parcel of the sale price. This aspect of the matter has been properly appreciated by the Income Tax Appellate Tribunal under the Income-tax Act. As further appears from the facts that sizable interest receipt has been claimed by this assessee as exempted under Section 80P (2) (a) (i) of the Income-tax Act on the ground that this appellant is giving credit facility to its members. This contention is not accepted by this Court mainly for the reasons that the basic purpose of this assessee is not to provide credit facility to the members. Basically, the members are not fixed or definite persons. The basic goal of this assessee is to construct residential flats and to sell it to the public at large. After purchase of the flats, the purchasers have to become members of the Society. Thus, provision of Section 80P (2) (a) (i) of the Income-tax Act is not applicable to the facts of the present case. Hence, there is no substance in this Tax Appeal, as no substantial question of law is involved. This Tax Appeal is dismissed with a cost of Rs. 5000/-. Issues Involved:1. Applicability of Section 80P (2) (a) (i) of the Income-tax Act for exemption on transfer fees and interest receipts.2. Nature of the appellant's business and its eligibility for tax deductions.3. Calculation of profit rate under Section 44AD of the Income-tax Act.4. Imposition of costs and directions for payment towards the Juvenile Justice Fund.Issue-wise Detailed Analysis:1. Applicability of Section 80P (2) (a) (i) of the Income-tax Act for exemption on transfer fees and interest receipts:The appellant claimed exemption under Section 80P (2) (a) (i) of the Income-tax Act, arguing that as a Cooperative Society, it is exempt from income tax on transfer fees received from members. The court noted that the main activity of the appellant is the construction and sale of dwelling units to the public, and not providing credit facilities to its members. The court held that the transfer fee is part and parcel of the sale price and is not exempt. The interest receipts were also not exempt as they did not arise from providing credit facilities to members but were incidental to the business of selling flats. Hence, the provisions of Section 80P (2) (a) (i) were not applicable.2. Nature of the appellant's business and its eligibility for tax deductions:The court observed that the appellant's primary business is constructing and selling residential flats, and the members are not fixed or definite. The transfer fee received from new members joining the society is considered part of the sale price. The court emphasized that the appellant's business is commercial in nature, and the interest receipts are incidental, thus not qualifying for deductions under Section 80P (2) (a) (i). The court cited the Supreme Court judgments in Tatgars' Cooperative Sale Society vs. Income Tax Officer and Citizen Cooperative Society Limited vs. Assistant Commissioner of Income Tax, which supported the view that interest income on surplus funds not required for business purposes falls under 'Income from other sources' and is taxable.3. Calculation of profit rate under Section 44AD of the Income-tax Act:The court noted that the Assessing Officer had shown leniency by calculating the profit at a rate of 5% instead of the prescribed 8% under Section 44AD of the Income-tax Act. The court emphasized that the authorities cannot be more charitable than the law and the correct rate should have been applied.4. Imposition of costs and directions for payment towards the Juvenile Justice Fund:The court dismissed the Tax Appeal, stating that no substantial question of law was involved. The appellant was ordered to pay costs of Rs. 5000/- to be deposited with the Secretary, Department of Women and Child Development & Social Welfare, Government of Jharkhand, towards the Juvenile Justice Fund. The amount is to be utilized for the welfare of juveniles as per the duties assigned by the State in the Juvenile Justice Act. The court also directed that a copy of the order be sent to the relevant authorities.Conclusion:The court upheld the decisions of the Assessing Officer, the Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal, dismissing the appeal and imposing costs on the appellant. The court found no merit in the appellant's claims for exemption under Section 80P (2) (a) (i) and emphasized the commercial nature of the appellant's business, which disqualified it from the claimed tax deductions.