THE NUTAN LAXMI CO OPERITVE HOUSING SCOETY LTD,MUMBAI vs. ITO 21(1)(3), MUMBAI

Common issues urged in both the appeals are:-

The assessees’ herein are co-operative housing Societies. The assessees are one of the fourteen co-operative housing societies formed in 1947 for providing housing to middle class persons in the then distant suburb of Vile Parle, Mumbai. The Bombay Housing Board allotted housing plots to these housing socities in the year 1960. The Bombay Housing Board also earmarked certain plots as amenities and utilities plots. These plots were conveyed to the fourteen housing societies and each of the fourteen societies held specified shares in each of the common amenities and utility plots. The area comprising the various amenity plots and the purpose thereof was also specified by Government while conveying the land to the Societies.

One of the amenity plots were encroached by some people and according to the assessees, they could not evacuate them. Hence all the fourteen housing societies decided to dispose that plot “As is where is basis” in the year relevant to the AY 1995-96. The sale proceeds were divided amongst the housing societies in the ratio of their respective shares. The Nutan laxmi co-op housing society received a sum of Rs.23.23 lakhs and the Suvarnanagar co-op housing society received a sum of Rs.7.61 lakhs as their respective shares. The AO assessed the same as Business Income of the assessee, while the claim of the assessees was that the same constitute capital receipts in their respective hands.

This is third round of proceedings. In the earlier two rounds, the Tribunal had restored the matter to the file of the Assessing Officer with the direction to examine the issue afresh after considering the stand taken in the hands of other twelve co-op housing societies. In the set aside proceedings, the AO called for details from other twelve cooperative societies. It was noticed that 3 The Nutan Laxmi Cooperative Hosing Society Ltd. & The Suvarnanagar Cooperative Hosing Society Ltd. (a) In the case of the two assessees herein and also in the case of five other societies, the AO had assessed the receipts as business income.

These assessees contended before the AO that they are not engaged in the regular business of purchase and sale of plots and further, they have held the plots for more than 10 years in common. It was further submitted that during the year relevant to AY 2004-05, another common plot was sold to Indian Police Service and the proceeds were taxed as Capital gains only. However, the AO, after examining the objects of the housing societies, took the view that they have been formed for undertaking purchase and sale of plots. Accordingly, the AO took the view that the intention of the society was to earn profit on sale of plot. Accordingly he assessed the entire proceeds as business income of the assessee. The Ld CIT(A) also confirmed the same. In the case of Suvarnangar co-op housing society, the AO also took the view that the assessee could not prove the ownership of the plot and hence he took the view that entire income is assessable under the head Business.

The Ld A.R submitted that though the object clause mentions that the societies are involved in trading in plots, yet the plots were allotted to the members “at Cost” only, when the allotments were originally made. Accordingly the Ld A.R submitted that these societies did not have profit motive, which is essential element to consider the activities as business activities. The Ld A.R further submitted that “object clauses” are not determinative factor for deciding the nature of receipt. In this regard, the ld

The Ld D.R, on the contrary, submitted that the objects clause of the assessees clearly states that they have been formed to undertake trading in plots. He further submitted that the assessees have not furnished any material to show the impugned plot formed part of common amenity plots and further whether the amenities, if any, were created on the common plots as envisaged by the Government. These assessees have also failed to prove the ownership of plot. Accordingly, the Ld CIT(A) has held that the amount received is on sale of excess land available with the societies and hence the same is rightly assessed as Business Income.

We heard the parties on this issue and perused the record. There is no dispute with regard to the fact these are housing co-operative societies and they have been formed to acquire plots from the Bombay Housing Society and to allot the same to its members. As per the scheme of Government, certain plots were allotted in common for the purpose of creating common amenities. The individual plots allotted to each of the societies have been, in turn, allotted to its members. During the course of hearing, the Ld A.R also showed us that the societies herein have allotted plots to its members at Cost Price only, i.e., without making any mark up. Accordingly the ld A.R contended that there is 5 The Nutan Laxmi Cooperative Hosing Society Ltd. & The Suvarnanagar Cooperative Hosing Society Ltd. absence of profit motive and hence the activities of the assessee cannot be considered as business. We find merit in the said contentions. The Ld A.R also submitted that, at some point of time, one of the common plots was allotted to School at nominal rate of Re.1/- per sq.ft. Be that as it may, we notice that the AO has mainly treated the impugned receipts as Business Income for the reason that the object clause mentions that they are involved in trading in plots. Another reason cited is that these societies could not prove their ownership rights.

The Hon’ble Supreme Court has held in the case of Raj Dadarkar & Associates (supra) that the object clause is not determining factor and the circumstances of each case should be examined to determine the nature of receipt. We notice that these Societies have sold the plot as its owner and the buyer has also accepted the same as owner. According to the societies, these common amenity plots have been owned by them jointly for about 15 years or more. When there is no dispute on this aspect, we are unable to understand as to how the AO was questioning the ownership. We also notice that the AO has not conducted any enquiry with any of the authorities to disprove the claim of the societies. We have noticed that these societies have sold another plot in the year relevant to AY 2004-05 to Indian Police Service, in which police quarters were proposed to be constructed. It can be noticed that the above transaction has taken place with a Government Agency. Had these societies were not the owners of the plots, a Government agency, which is a part of Police department, would not have acquired the plot from these Societies. Hence we do not find any reason to suspect the ownership claim of the plots.

We also notice that the AO himself has assessed the income arising on sale of plot to Indian Police Service as Capital Gains in AY 2004-05. Further our foregoing discussions would show that the reasoning given by the AO fails. There is no other instance to show that these societies were indulging in purchase and sale of plots. Accordingly we are of the view that there is no 6 The Nutan Laxmi Cooperative Hosing Society Ltd. & The Suvarnanagar Cooperative Hosing Society Ltd. reason to assess the impugned receipts on sale of plot as Business income of the assessee. Accordingly we set aside the orders passed by tax authorities in the hands of both the assessees herein and direct the AO to compute the income under the head Capital Gains as provisions of the Act.

The next common issue urged by the assessees relate to the taxability of Transfer fees received from the incoming members. These assessees claimed the same as exempt under Mutuality Principles and the same was rejected by the tax authorities on the reasoning that the transfer fees received from incoming member is not covered by mutuality principles. In this regard, the AO had placed reliance on the decision rendered by Special bench in the case of Walkeshwar Triveni Co-op Hsg. Society Ltd.

We heard the parties on this issue. The Ld A.R placed reliance on the decision of Venkatesh Premises Co-op Hsg. Society Ltd (402 ITR 670)(SC) rendered by Hon’ble Supreme Court and contended that these receipts are exempt under mutuality principles. The Ld A.R also submitted that the new members have been admitted as Joint/associate members. Accordingly she submitted that the impugned receipt is exempt under mutuality principles.

On the contrary, the Ld D.R placed reliance on the orders passed by Ld CIT(A).

Since the Principle of mutuality is applicable to these co-operative societies and since the new members have been admitted as Joint/Associate members, we are of the view that the decision rendered by Hon’ble Supreme Court in the case of Venkatesh Premises Co-op Hsg. Society shall be applicable to these assessees. Accordingly we set aside the orders passed by Ld CIT(A) and direct the AO to delete the addition relating to Transfer fees in both the cases.

In the case of Suvarna Nagar co-op Hsg. Society, one more issue relating to rejection of claim u/s. 80P(2)(d) has been raised. The assessee appears to have claimed exemption u/s 80P(2)(d) of the Act in respect of interest received from other co-operative banks before Ld CIT(A). However, it submitted that this ground is consequential in nature. The Ld CIT(A) took the view that the assessee is not eligible for deduction, as it is not held to be a mutual concern.

We heard the parties on this issue. The deduction u/s 80P(2)(d) is allowed even if the assessee is not considered to be a mutual concern. In any case, the Principle of mutuality should apply to the assessee as per the decision rendered by Hon’ble Supreme court referred above. The assessee also placed reliance on certain decisions rendered by ITAT holding that the interest received from co-operative banks is eligible for deduction u/s 80P(2)(d) of the Act. Since these aspects have not been examined by the AO, we restore this issue to the file of the AO.

In the result, both the appeals are treated as allowed.