Income – Mutuality – A. Y. 1986-87 – Co-operative society allotting plots in land to members at premium – Ownership of land remaining with society – Premium to be utilised for development of common facilities and amenities – Co-operative society a mutual concern – Premium received for transfer of plots exempt from tax

The
assessee is a co-operative housing society. It owned lands for
residential use. Such lands were developed by the society for providing
common amenities such as internal roads, drainage, street lights if need
be, common plot and club house. Individual plots were allotted to
members who enjoy occupational rights but ownership of the land always
remained with the society. On the plot of land so allotted, the member
would be allowed to construct his residential unit. Upon transfer of the
plot by a member, the society would collect 50% of the excess or
premium. The fund so collected would be appropriated in the common fund
of the society to be utilised according to the bye-laws which envisaged
development of common facilities and expenditure for common amenities. A
part of the surplus would be diverted to the reserve fund of the
society. The surplus could also be utilised for waiver of the lease
amount or for the health, education and social activities of the
members. The Assessing Officer held that the assessee was not a
co-operative society but an association of persons engaged in business
and, accordingly, made an addition to the income of the assessee on
account of the premium received for transfer of plots. The Commissioner
(Appeals) held that the assessee was governed by the principles of
mutuality, and such amount was not taxable in the hands of the assessee
society. The Tribunal confirmed the order of the Commissioner (Appeals).

In appeal by the Revenue, the Full Bench of the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i)
Contributions made by the members to the general fund of a co-operative
society in various forms would be governed by the principle of
mutuality. Particularly, in the case of premium collected by the society
from its outgoing member from out of a portion of his profit, the
principle of mutuality would apply and the receipt would not be taxable
as income of the society.

ii) There was total identity of
contributors of the fund and recipients from the fund. The contribution
came from the outgoing member in the form of a portion of the premium
and it was utilised for the common facilities and amenities for the
members of the society. Different modes of application of the funds made
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 rents waiver.

iii) 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 be
carried on by a group of persons who would be the members in the
co-operative society.

iv) Merely because upon the winding up of
the society, the surplus fund would be utilised by the Registrar as
provided under the Gujarat Co-operative Societies Act, 1961, and would
not be returned to the members, that would not break down the
relationship of mutuality since even in the eventuality of winding up,
there was no scope of profiteering by the members. Therefore, the
premium received by the assesses for transfer of plots was exempt from
tax.”