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2015 (7) TMI 877
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.... 2.A group of Incometax applications came up for consideration before the Division Bench where the Revenue wanted such a question to be referred in different cases but in similar factual background. Revenue was of the opinion that the amount received by a cooperative society from the portion of the sale consideration received by its member at the time of transfer of the plot constituted its income and was therefore, taxable under the Income Tax Act. The assessees opposed the applications basing reliance on the Division Bench decision of the Gujarat High Court in case of Commissioner of Incometax v. Adarsh Cooperative Housing Society Ltd. reported in 213 ITR 677. The Division Bench noted that Bombay High Court in case of Commissioner of Incometax v. Presidency Cooperative Housing Society Ltd. reported in 216 ITR 321 had taken a different view. The Court unable to subscribe to the view taken in case of Adarsh Cooperative Housing Society Ltd., (supra), directed the Tribunal to furnish statement of case in all the matters and further referred the question for the opinion of larger Bench. 3.For some reason, these proceedings remained dormant for a long time and ultimately present l....
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....ideration upon its member transferring the plot, such receipt would partake the character of a revenue receipt and would accordingly be taxed in the hands of the society. It was submitted that the principle of mutuality in such a case would not apply. It was strongly urged that the decision of Bombay High Court in case of Presidency Cooperative Housing Society Ltd. (supra), laid down the correct law. Decision of Supreme Court in case of Bangalore Club v. Commissioner of Incometax and another reported in (2013) 350 ITR 509 (SC) was heavily relied upon to contend that the principle of mutuality has its inherent limitations. 7.1. Our attention was drawn to certain provisions of the Gujarat Cooperative Societies Act, 1961 ("the said Act" for short). It was pointed out that section 65 of the said Act provides that no part of the funds or assets of a society other than the dividend equalisation fund, and the net profits thereof, shall be paid by way of rebate or dividend or otherwise distributed to its members. It was pointed out that section 66 of the said Act provides for appropriation of profits by the society. Section 67 (1) provides that every society which derives a profit, shal....
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....nciple of mutuality was not applicable. 3) Delhi Stock Exchange Association Ltd v. Commissioner of Income tax reported in (1961) 41 ITR 495 (SC), in which the assessee was a Stock Exchange. The income accrued was distributed amongst the shareholders. It was held that receipts by Stock Exchange Association towards admission fee on account of authorised assistants and members are taxable as income from business and the concept of mutuality would not apply. 4) Mantola Cooperative Thrift & Credit Society Ltd. v. Commissioner of Incometax reported in (2014) 50 taxmann. 278 (Delhi) in which the assessee cooperative society was engaged in providing credit facility to its members. The society deposited surplus funds in fixed deposits and earned interest thereon. The Court held that such interest would be assessable as 'income from other sources' and not eligible for deduction under section 80P(2)(a)(i) of the Act. 8.On the other hand, learned advocates for the assessees submitted that the decision of this Court in case of Adarsh Cooperative Housing Society Ltd. (supra), needs no reconsideration. It was also been followed in the later decision in case of Commissioner of Inc....
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....us byelaws contained therein envisage that out of the net profit, 25% would be kept in reserve fund. 9% dividend on the share value could be distributed to the members. After providing for these two items, 50% of the remaining net profit would be paid to the members in the proportion of the lease rent paid by them. 30% would be diverted to a fund for other activities which would be utilised for health, education and social activities of the members as per the objects of the society. Byelaws also envisage that upon transfer of a plot by its member, 50% of the premium i.e. net profit of the outgoing member would be paid to the society. 11. On the basis of such byelaws we need to judge whether in facts of the case, the principle of mutuality would apply. 12. The principle of mutuality has come up for consideration before various Courts earlier. We may briefly refer to some leading decisions of the Supreme Court on the point. In case of The Royal Western India Turf Club Limited(supra), the Supreme Court referring to the decision in case of New York Life Insurance Co. v. Styles (Surveyor of Taxes) reported in (1889) 2 Tax Cas. 460, observed as under : "Styles' case (supra) ....
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....s, the services offered on the above counts were not done. with any profit motive and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members. (and their friends, if any, availing of the facilities occasionally) In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the clubs to its members, as stated herein above as part of the usual privileges, advantages and conveniences; attached to the members 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 said to be income" for the purpose of the Act." * In case of Chelmsford Club v. Commissioner of Incometax reported in 243 ITR 89. the facts were that the assessee club provided recreational and refreshment facilities to its members and their guests. Facilities were not available to non members. The club was run on "no profit no loss" basis and the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. In....
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....ease amount or for the health, education and social activities of the members. It can thus be seen that there is total identity of contributors of the fund and recipients from the fund. The contribution comes from the outgoing member in the form of a portion of the premium and it is utilised for the common facilities and amenities for the members of the society. Different modes of application of the funds make it clear that the funds would be expended for common amenities or for general benefit of the members; or be distributed amongst the members in the form of dividend or lease rent waiver. It can thus be seen that it is impossible for the contributors to derive profit from contribution made by themselves to a fund since such fund could only be expended or returned to them. Creation of the society was primarily for the convenience of the members to create a housing society where individual members could construct their residential units and common facilities and amenities could be provided by the society. It was essential thus that a combined activity is carried on by a group of persons who would be the members in the cooperative society. All the tests referred to in the Privy Co....
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....ion and the purchaser enters as member in his place to derive the benefit of expenses incurred by the society. It is to be appreciated in this connection that there is room for change of the name of the member not only at the time of transfer but also in the case of devolution after demise of the original member. What is to be reckoned is that the character of the contributor does not cease to exist in view of the nature of the enactment visavis the scheme of the Act and the principle of "mutuality" as propounded in Styles' case [1889] 2 TC 460 (HL), a leading English case, as discussed earlier. Though it is contended that there is no participation in surplus by the members because the surplus, remaining with the society in case of its cancellation does not return to contributors but is to be utilised for public purposes, the question which arises is : what is meant by "return" of what has been contributed to a common fund ? does it mean return of the corpus of the fund or does it include retention of control over the corpus to be used in consonance with the statute regulating the association, company or society, as the case may be ? It is to be noticed that as per the findings....
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....he Supreme Court, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities, which it offers, does not affect the mutuality of the enterprise. The law, according to the said decision, recognizes the principle of mutuality excluding the levy of income tax from the income of such business to which the above principle is applicable. The Supreme Court referred to section 2(24) of the Incometax Act, 1961, which shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. 14. In the said case....
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...., it will not loose the character of the amount being paid by a member. In these circumstances, the identity of the contributor and beneficiary being satisfied and considering the provisions of Maharashtra Cooperative Societies Act and Rules framed thereunder, surplus can be disposed off in favour of the members only or for the objects for which they may specify. As held by us in Income Tax Appeal No.931 of 2004 the same reasoning will apply to the appellants/petitioners before us. In these circumstances, question (a) as framed has to be answered in the negative in favour of the assessee and against the Revenue." 18. In case of Commissioner of Incometax 21 v. Jai Hind CHS ltd. reported in reported in 349 ITR 541, once again Division Bench of Bombay High Court held that the amount collected by the society under the head of transferrable development rights from member who desired to develop his plot by using extra FSI would be governed by the principle of mutuality. It was observed as under : "4. The admitted facts would indicate that the TDR premium is liable to be paid by a member of the Society who desires to utilize additional FSI in the form of Transferable Development Rig....
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..... In such background, it was observed as under : "10. In the present case, the payment is certainly not in repayment of capital on account of parting with of any property of the Housing Society; nor is it repayment of capital in installments. It cannot, therefore, fall in the category of a capital receipt. Looked at from a commercial point of view, the society receives a payment under its contract with the lessee every time the lease changes hands. It is a source of income for the society. 18. Looked at from a commercial point of view the reason why such a clause was inserted in the lease deed was to enable the society to earn an income. It was submitted before us that this clause was inserted merely as a deterrent to transfer. Looking to the nature of the clause, we do not see how the clause deters any transfer by a member. A member may be required to transfer his interest for various reasons. For example, if he is required to move out of Bombay, he may have to sell his interest in the property. All that the clause provides is that the society will receive half the profits when the member sells his interest. Therefore, it cannot be viewed as a deterrent to transfers. This pa....
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....uction under section 80P(2)(a)(i) of the Income Tax Act since it would be assessable as 'income from other sources'. 3) In case of Delhi Stock Exchange Association Ltd (supra), the assessee was a stock exchange. It was a company formed to promote and regulate the business of exchange of stocks and shares, debentures, etc. Income accrued was distributed amongst the shareholders. It was observed that the body of trading members who paid the entrance fees and the shareholders among whom the profits were distributed were not identical. It was therefore, observed that the element of mutuality was lacking. 4) In case The Royal Western India Turf Club Limited (supra), the assessee was a company which carried on the business of running a race course and providing other facilities such as refreshments. The members of the company were provided with separate enclosure to watch the races for which an admission fee was charged. Nonmembers were not admitted in this enclosure. It was found that the assessee gave to nonmembers the same or similar amenities such as facility to watch the races and to bet on the horses in the races, use of the facilities for refreshments, etc. The daily....