PATHARE PRABHU CO OP HSG SOC.LTD,MUMBAI vs. ITO 15(2)(2), MUMBAI

Common grounds have been taken by the assessee in all the years under consideration, therefore, all the appeals were heard and are now disposed off by this consolidated order.

Rival contentions have been heard and record perused. Facts in brief are that the assessee is a registered cooperative Housing Society assessed to tax before the ITO Ward-15(2)(2), Mumbai. In the A.Y.2003- 04 The AO issued a notice u/s.143(2) of the Act pursuant to the order of 2 ITA Nos.5524-5526&128/2012& ITA No.256/13 Tribunal, restoring the issues under appeal to the file of AO and giving directions to the AO to examine them de novo. The AO made the assessment u/s.143(3) and determined the total income of the assessee society at Rs.21,71,920/-. The AO added the amounts received from members of the society on issuing NOC to members for development of plot, use of TDR etc., and treated the same as income from other sources. The fact of the case that this amount is received from members, is accepted by the AO in his assessment orders for the respective assessment years being the orders presently appealed against. However, the AO treated contribution towards special development funds for giving NOC as income from other sources liable to tax. By the impugned order the CIT(A) confirmed the action of AO treating such receipt as income from other sources.

Ld. AR placed on record various decisions of the Tribunal wherein contribution towards special development funds was held to be received from participators, who has contributed to the common fund when there is complete identity between the body of contributors and body of participators. If all the participators of the common funds are also contributor and their identities are established, the test of mutuality is satisfied, therefore, not liable to tax.

From the record, we found that the ITAT vide its order dated 28-9- 2008for the assessment year 2003-04, 2004-05, 2005-06 has directed the AO to examine the resolution passed by the Special General meeting of the society on 17-12-2006, where the purpose of utilization of special

From the record we also found that amount so received by the assessee was within the framework of law of the society, thus, there was no profit motive attributed to the society. In order to bring the contribution within the net of tax, there should exist a pervading profit motive. For this purpose reliance can be placed on the decision of Hon’ble Bombay High Court in the case of Surat district Cotton Dealers Association, 35 ITR 121, wherein it was held that to establish the mutuality, there must be identity between participators and contributors but it is not necessary that there must be actual contribution by all the members of the association. It was further held by the Court that if all the members have a right to make

After considering the rival contentions we found that the issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of Jai Hind CHS Ltd., 349 ITR 541, wherein the Hon’ble High Court held as under :- “The assessee was a co-operative housing society formed of plot owners, who had obtained a lease of land from the Maharashtra Housing Board. The assessee had entered into sub-lease agreements with its members. The assessee passed a resolution by which it resolved that if any member desired to avail of the benefit of transferable development rights for carrying out construction or additional construction on his/her plot, the member should apply for a no objection certificate which could be granted on the payment of a premium calculated at the rate of Rs.250 per sq.ft.. The assessee received a premium of Rs. 18.75 lakhs from four members in the previous year relevant to the assessment year 2005-06. The Assessing Officer was of the view that the transferable development rights premium was charged by the society from its members to permit them to commercially exploit the potential for the development of the plot. He added the amount to the income of the assessee. On appeal to the High Court :- Held, dismissing the appeal, that the transferrable development rights premium was a payment made by a member of the assessee, as a consideration for being permitted to make an additional utilization of the FSI on the plot allotted by the assessee. The assessee which looked after the infrastructure, required the payment of the premium in order to defray the additional burden that must be cast as a result of the utilization of the FSI. The point, however, was that there was a complete mutuality between the assessee and its members. The amount was not taxable.”

As the facts and circumstances during the years under consideration are same with respect to nature of receipts and complete mutuality between the assessee and its members, respectfully following the decision of Hon’ble Bombay High Court reproduced above, we do not find any merit in the order of lower authorities taxing the contribution

The next ground taken by the assessee in the assessment year 2003-04 and 2005-06 pertains to taxing land premium on transfer in excess of Rs.25,000/- taxed by the AO.

Ld. AR placed on record order of the Tribunal in case of The Friends Co-op Housing society Ltd., ITA No.962/Mum/2010, order dated 22-10-2010, wherein exactly similar issue was dealt with and allowed in favour of the assessee. The precise observation of the Bench was as under :-

We have carefully considered the submissions of the ld. DR and perused the material available on record. We find that the facts are not in dispute. We further find that the ld. CIT(A) while deleting both the additions has followed the judgment of Hon'ble Juri ictional High Court in Sind Cooperative Housing Society (supra).

In the Sind Co-operative Housing Soc. (supra) it has been held as under (Placitum 44-46, page 62-63 of 317 ITR) : ”Let us now apply the various tests which are to be considered for applying the principle of mutuality to a case of a cooperative housing society based on our earlier discussion. (1) Is there any commerciality involved. This has to be found from the bye-laws of the co-operative housing society. In the case of the co-operative housing society, admittedly, there is no commerciality involved. Once there is no commerciality involved the first test of profitability does not exist. The first requirement of mutuality is, therefore, met. (2) From the moneys received are the services offered in the nature of profit sharing or privileges, advantages and conveniences. In the case of a co-operative housing society, the only activities which it can carry out in terms of its bye-laws are basically maintenance of its property which includes building or buildings.

In the result, the revenue’s appeal stands dismissed.

Reliance was also placed by ld. AR on the decision of Hon’ble Bombay High Court in the case of Mittal Court Premises Co-operative Society Ltd., 184 taxman 292, held as under :- The assessee was a co-operative commercial housing society. Its objects were to manage, maintain and administer the property of the society; to undertake and provide amenities and facilities for the benefit of its members or for public benefit on its own account or jointly with the other co-operative institutions; and to organise social, cultural or recreational activities. It received transfer fee and non-occupancy charges from existing/new members and contended that same was not taxable on principle of mutuality. The Tribunal noted that the transferees were, admittedly, not the members of the assessee-society on the date on which the payments were made to the assessee-society and they were admitted as members of the society and flats were entered in their names only after the impugned payments were made to the assessee-society. It was also found that the amounts were paid in excess of the Government notification. The Tribunal, therefore, held that amounts received by the assessee as transfer fees were exigible to tax. As regards non- occupancy charges, the Tribunal referred to the Government notification, dated 1-8-2001, which set out that the society should not collect non-occupancy charges at the rate exceeding 10 per cent of the service charges (excluding Municipal Corporation/Nagar Palika Taxes). The Tribunal found that the non-occupancy charges collected by the assessee-society were in excess of the limits laid down by the aforesaid notification. It remanded the issue to the Assessing Officer with a direction to treat non-occupancy charges received by the assessee-society over and above the 10 per cent of the maintenance charges as non-taxable in its hands, as the same was governed by the principles of mutuality. HELD The restrictions imposed by the notifications issued by the State of Maharashtra on the amount of transfer fee when the member desires to transfer his shares or occupancy rights are only in respect of housing residential societies. In the instant case, the assessee was not a housing residential society and, consequently, those notifications would not be applicable. The bye-laws of the society were nothing but the contract between the society and the members. Under those bye-laws, it was the member who had to make the payment. Any inter se arrangement between the incoming members and the transferee was irrelevant insofar as the society was concerned. There was an agreement by which the amount was paid by the transferee. Insofar as the assessee-society was concerned, even if receipt was issued in the name of transferee, it was in the nature of admission fee which could be appropriated only on the transferee being admitted. Merely because the amount might be appropriated earlier, it would not loose the character of the 8 ITA Nos.5524-5526&128/2012& ITA No.256/13 amount being paid by a member. In those circumstances, the identity of the contributor and beneficiary being satisfied and considering the provisions of the Maharashtra Co-operative Societies Act and the Rules framed thereunder, surplus could be disposed of in favour of the members only or for the objects for which they would specify. In those circumstances, the Tribunal erred in holding that the contribution to common amenity fund repairs and welfare fund being the first contribution made by the existing/new member was transfer fee. [Para 7] So far as non-occupation charges were concerned, bye-laws of the society themselves provided for non-occupation charges. The contribution, therefore, was by the member. Object of the contribution was for the purpose of increasing the society's funds, which could be used for the objects of the society. Object of the society was to provide services, amenities and facilities to its members. In those circumstances, the principle of mutuality must also apply. There was no element of profiteering. The matter had been remanded by the Tribunal. The Tribunal had directed the Assessing Officer to treat non-occupancy charges received by the assessee-society, which was a premises society, over and above the 10 per cent of the maintenance charges as non-taxable in its hands as the same was governed by the principles of mutuality. [Para 8] Apart from that, even assuming that the Government notifications were applicable, if the society could not have charged excess amount, it would have to be refunded to the members. A member is not prohibited from gifting any amount to the society for the objects of the society. The principle of mutuality would not cease on account of those aspects. At the highest, authorities under the Co- operative Societies Act and Rules, if any action is taken, may direct an additional amount to be refunded. Therefore, in respect of contribution by way of non-occupancy charges, principle of mutuality would apply. [Para 9]”

After considering rival contentions and facts and circumstances of the case, we found that this issue is also covered by the decision of Hon’ble Bombay High Court in the case of Sind Cooperative Housing Society, 317 ITR 47, wherein the Hon’ble High Court has held as under :- “If the object of the assessee company claiming to be a "mutual concern" or "club" is to carry on a particular business and money is realized both from the members and from non-members, for the same consideration, by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. On the other hand, if it is 9 ITA Nos.5524-5526&128/2012& ITA No.256/13 merely a mutual arrangement whether fees or subscriptions are collected for extending facilities to members like usual privileges, advantages and conveniences even if some surplus is generated, then that surplus cannot be regarded as profit as long as the contributors and participants as a class are the same and they have a say over the distribution of the surplus. In a Co-operative Housing Society there can be members and associate members. We have already quoted from the judgments where reference is to members as a class and that class may be diminished by members going out or increased by the members coming in. But the class remains the same. The assessee, a co-operative housing society, was registered with the object principally of looking after the property including building thereon. The bye-laws of the assessee permitted it to change a transfer fee in terms of the notification issued by the Government of Maharashtra. Bye-law 38(3)(ix) provided that the assessee can charge transfer fee and the members by adopting the bye-laws agreed, amongst themselves, that a fee for transfer of flat/tenement when it was sold would be paid to the assessee. Both the incoming or the outgoing member had to contribute to the common fund of the assessee. The amount paid was to be exclusively used for the benefit of the members as a class. The amount could only be appropriated on the transferee being admitted as a member. If the transferee was not admitted as a member, the amount received would have to be refunded, as the amount was payable only on a transfer of rights of the transferor in the transferee. The amount legally chargeable and received went into the fund of the assessee which was utilized for the repairs of the property and common benefits to its members. On appeal contending that the Tribunal overlooked the principle while holding that contribution by the transferee would not attract the principle of mutuality: Held, allowing the appeal, (i) that whether the fee was voluntary or not would make no difference to the principle of mutuality. Payments were made under the bye-laws of the assessee which constituted a contract between the assessee and its members which was voluntarily entered into and voluntarily conducted as a matter of convenience and discipline for running of the assessee- society. If any amount was received more than was chargeable under the bye-laws or the Government notification, the assessee was bound to repay the amount and if it retained the amount it would be in the nature of profit making that specific amount exigible to tax. Under the bye-laws, charging of transfer fees had no element of trading or commerciality. Since there was no taint of commerciality the question of earning profits would not arise when the assessee from the funds received applied the moneys received towards maintenance of the society and providing the members with usual privileges, advantages and conveniences. Thus, the principle of mutuality was applicable to the assessee which had as 10 ITA Nos.5524-5526&128/2012& ITA No.256/13 its predominant activity, the maintenance of the property of the society which included its buildings) and as long as there was no taint of commerciality, trade or business, the receipt of transfer fees was not liable to tax.”

As the facts and circumstances during the year under consideration are same, respectfully following the order of the juri ictional High Court, we do not find any merit in the action of the lower authorities for taxing the land premium on transfer received from the members of the society.

The decision of the Hon’ble Bombay High Court in the case of Sind Cooperative Housing Society Ltd. was not accepted by the AO only on the plea that the revenue is in further appeal before the Hon’ble Supreme Court against the order of Hon’ble High Court. This observation of the AO is devoid of any merit. The non acceptance of Hon’ble Bombay High Court’s judgment by the revenue is not sustainable in view of the same Court’s decision in Bank of Baroda Vs. HC Srivastava and others, 256 ITR 385 as laid down by the Mumbai Tribunal in ITO Vs. Grand Paradi CH Society Ltd., ITAT “G” Bench, Mumbai in ITA No.521/Mum/2010, order dated 27-8-2010. 15. In the result, all the appeals of the assessee are allowed. Order pronounced in the open court on this 09/10/2015. (ऩर्न ससिंह) (आय.सी.शभमव) (PAWAN SINGH) (R.C.SHARMA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुिंफई Mumbai; ददनमिंक Dated 09/10/2015 प्र.कु.सभ/pkm, यन.स/ PS