Co-operative Housing Society : Transfer fees : Principle of mutuality applies to transfer fees received in accordance with the bye-laws and as per restriction by Government regulations : Excess amount not permissible under bye-laws, etc. to be returned :

[Sind Co-op. Hsg. Society v. ITO (Bom.), ITA No. 931
of 2004 dated 17-7-2009 (Not reported)]

In a group of appeals concerning the taxability of transfer
fees received by a co-operative society the Bombay High Court has considered
and decided the following question of law.

“Whether on the facts and in the circumstances of the
case any part of transfer fees received by the assessee societies — whether
from outgoing or incoming members — is not liable to tax on the ground of
mutuality ?”

The Bombay High Court has held as under :

“(i) The principle of mutuality will apply to a
co-operative housing society which has its predominant activity, the
maintenance of the property of the society which includes its building or
buildings and as long as there is no taint of commerciality, trade or
business.

(ii) As the main activity of a co-operative housing
society is to maintain the property owned by it and to render services to
its members by way of usual privileges, advantages and conveniences, there
is no profit motive involved in these activities. The amount legally
chargeable and received goes into the fund of the society which is utilised
for the repairs of the property and common benefits to its members.

(iii) Charging of transfer fees as per bye-laws has no
element of trading or commerciality. There therefore being no taint of
commerciality, the question of earning profits would not arise when the
housing society from the funds received applies the money received towards
maintenance of the society and providing the members with usual privileges,
advantages and conveniences.

(iv) The transfer fee can be appropriated only if the
transferee is admitted to membership. The fact that a proposed transferee
may make payment in advance by itself is not relevant. The amount
can only be appropriated on the transferee being admitted as a member. If it
is held that the payment of transfer fee is by a stranger, it will certainly
be in the nature of gift and not income.

(v) Whether it is voluntary or not would make no
difference to the principle of mutuality. Payments are made under the
bye-laws which con-stitute a contract between the society and its members
which is voluntarily entered into and voluntarily conducted as a matter of
convenience and discipline for running the society.

(vi) If it is the case that amount more than permissible
under the Notification has been received under pressure or coercion or
contrary to Govt. directions, then considering S. 72 of the Contract Act,
that amount will have to be refunded. At any rate if the society retains the
amount in excess of binding Govt. Notification or the bye-laws, that amount
will be exigible to tax as it has an element of profiteering.

(vii) An argument has been advanced that the societies
are charging more than the amount as notified or permitted by the Government
Notification dated 9-8-2001. The cases before us are for the assessment
years previous to that. Earlier Notification dated 20-12-1989 provided that
only if the bye-laws were amended in terms of Notification dated 27-11-1989,
then the society could not charge more than what was set out in the
Notification. We really would not be concerned therefore, in this group of
cases with Notification as now notified by the Government. If therefore, any
amount has been received beyond the amount notified by the Government and
that amount has not been refunded to the members, to that excess amount as
already held, the principle of mutuality will apply.”