IMPORTANT POINTS
Any surplus in common fund of a co-operative society is not income.
Transfer fee, Non-occupancy charges and premium receipts by a housing society are not exigible to tax.

Headnote:(a) Income Tax act, 1961 – Section 2(24)(vii) – Income of Co-operative society from business taxable u/s 2(24)(vii) – Excluded from common law principle of mutuality – Commonality of contributors and participants who are also the beneficiaries – Any surplus in common fund not income – Participants not having property rights to their share in the common fund, nor can they sell their share – Cessation from membership resulting in loss of right to participate without receiving a financial benefit from the cessation of the membership. (Para 14)
       (1889) 2 T.C. 460; (1997) 226 ITR 97 (SC) : (1997) 5 SCC 394; (2013) 350 ITR 509 (SC) : (2013) 5 SCC 509 – Relied upon
       (2010) 328 ITR 362 (Bom) – Cited with approval
       AIR 1965 SC 96 : (1964) 8 SCR 204 – Distinguished
       (2000) 3 SCC 214; (2010) 320 ITR 414 (Bom); (2005) 273 ITR 1 (SC) – Referred
       (b) Maharashtra Cooperative Societies Act, 1960 – Section 79A – Notification dated 09.08.2001 – Transfer fee – Refundable on non-admission to membership of society – Once admitted, transfer fee becomes contribution by member – Principle of mutuality automatically attracted – Held, not liable to tax. (Para 8, 19, 20)
       Maharashtra Cooperative Societies Act, 1960 – Section 79A – Notification dated 09.08.2001 – Non-occupancy charges – Utilized for general maintenance of the premises of the Society and provision of other facilities and general amenities to the members – Not exigible to tax. (Para 9, 19, 20)
       Maharashtra Cooperative Societies Act, 1960 – Section 79A – Notification dated 09.08.2001 – Premium receipts by a housing society for allowing a member to construct using extra FSI – Notification applicable only to cooperative housing societies and has no application to a premises society which consists of nonresidential premises. (Para 11, 19, 20, 24)
       (2012) 349 ITR 541 (Bom); 2013 (2) MHLJ 666 – Referred
       Facts of the case:
       A common question of law arising in this batch of appeals is whether certain receipts by co-operative societies, from its members i.e. non-occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax based on the doctrine of mutuality.
       The assessing officer held that receipt of non-occupancy charges by the society from its members, to the extent that it was beyond 10% of the service charges/maintenance charges stands excluded from the principle of mutuality and was taxable. The order was upheld by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal held that the notification dated 09.08.2001 was applicable to cooperative housing societies only and did not apply to a premises society. It further held that the transfer fee paid by the transferee member was exigible to tax as the transferee did not have the status of a member at the time of such payment and, therefore, the principles of mutuality did not apply. The High Court set aside the finding that payment by the transferee member was taxable while upholding taxability of the receipt beyond that specified in the government notification.
       Finding of the Court:
       Transfer fee, non-occupancy charges and premiums charged by society are not exigible to tax.
       Result: Appeals preferred by Revenue dismissed. Appeal preferred by the assessee society allowed.

JUDGMENT :

Navin Sinha, J.

Delay condoned. Leave granted in all the Special Leave Petitions.

2. A common question of law arises for consideration in this batch of appeals, whether certain receipts by co-operative societies, from its members i.e. non-occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax based on the doctrine of mutuality. The challenge is based on the premise that such receipts are in the nature of business income, generating profits and surplus, having an element of commerciality and therefore exigible to tax. The assessee in Civil Appeal No.1180 of 2015 assails the finding that such receipts, to the extent they were beyond the limits specified in the Government notification dated 09.08.2001 issued under Section 79A of the Maharashtra Cooperative Societies Act, 1960 (hereinafter referred to as `the Act') was exigible to tax falling beyond the mutuality doctrine.

3. The primary facts, for better appreciation shall be noticed from SLP (C) No.30194 of 2010. The assessing officer held that receipt of non-occupancy charges by the society from its members, to the extent that it was beyond 10% of the service charges/maintenance charges permissible under the notification dated 09.08.2001, stands excluded from the principle of mutuality and was taxable. The order was upheld by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal held that the notification dated 09.08.2001 was applicable to cooperative housing societies only and did not apply to a premises society. It further held that the transfer fee paid by the transferee member was exigible to tax as the transferee did not have the status of a member at the time of such payment and, therefore, the principles of mutuality did not apply. The High Court set aside the finding that payment by the transferee member was taxable while upholding taxability of the receipt beyond that specified in the government notification.

4. Shri K.R. Radhakrishnan, learned senior counsel appearing on behalf of the Revenue in all the appeals, submitted that the receipts were exigible to tax no sooner that mutuality came to an end and the receipts had an element of profit, also generating a surplus, rendering commerciality to the nature of the activity. The benefit of a common identity between the contributors and the participants could not alone be the final test. The Tribunal had correctly held that the transferee not being a member at the time of payment, the doctrine of mutuality had no application to such receipts. 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. The validity of the notification dated 09.08.2001 having been upheld by the Bombay High Court in The New India Cooperative Housing Society v. The State of Maharashtra, 2013 (2) MHLJ 666, any receipt by the society beyond that permissible in the law under the notification, was not only illegal, but also amounted to rendering of services for profit attracting an element of commerciality and thus was taxable. It stands to reason that if the society levied maintenance charge upon a resident member at the rate of Rs. 1.35 per sq.ft./p.m. and charged the much higher rate of Rs. 7/- per sq.ft./p.m. as non-occupancy charges from others, the society was acting commercially to earn profit. Reliance was placed on Commissioner of Income Tax, Madras v. Kumbakonam Mutual Benefit Fund Ltd., AIR 1965 SC 96 : (1964) 8 SCR 204, Chelmsford Club v. Commissioner of Income Tax, (2000) 3 SCC 214.

5. Sri Radhakrishnan, sought to invoke Article 43B of the Constitution of India mandating professional management of cooperative societies, to justify taxability of receipts beyond that permissible under the government notification. Reliance was further placed on Article 243ZI to submit that economic participation had to be restricted to members and had no

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2018 Supreme(SC) 289

IMPORTANT POINTSAny surplus in common fund of a co-operative society is not income.Transfer fee, Non-occupancy charges and premium receipts by a housing society are not exigible to tax.

Cases Referred (5)

IMPORTANT POINTS
Any surplus in common fund of a co-operative society is not income.
Transfer fee, Non-occupancy charges and premium receipts by a housing society are not exigible to tax.