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.”