Income-tax Act, 1961 — Principle of mutuality — Principle of mutuality is applicable to the assessee even though it is an incorporated company —Interest earned by the mutual association from banks, bonds, etc. on surplus funds is not liable to tax.

The assessee-company
constructed a building, flats in which were allotted to shareholders. The
assessee in its return of income claimed the amounts collected towards share
transfer fees : Rs.62,20,000; nominee occupancy charges and repairs :
Rs.3,00,000; security deposits (non-refundable) : Rs.5,85,000 and interest and
dividend: Rs.11,95,577 to be not chargeable to tax on the ground of mutuality.
The assessee received nominee occupancy charges in respect of flats which were
given on rent by the members. Non-refundable security deposits were received by
the assessee from shareholders who carried out repairs to their flats. The
Assessing Officer (AO) in an order passed u/s.147 of the Act taxed all these
amounts on the ground that the principle of mutuality applies only to
co-operative bodies and as regards transfer fees he held that since the transfer
fees were received from incoming members, in view of the ratio of the Special
Bench decision of the ITAT in the case of Walkeshwar Triveni CHS Ltd. the same
are taxable. Aggrieved the assessee preferred an appeal to the CIT(A).

The CIT(A) held that the
principle of mutuality applies. He held that the share transfer fees, nominee
occupancy charges and security deposits (non-refundable) to be not chargeable to
tax. He, however, held that interest and dividend is chargeable to tax since in
case of interest and dividend contributors to the common fund are non-members of
the
assessee-company, who are not entitled to participate in the surplus.

Aggrieved the assessee and
the Department preferred an appeal to the Tribunal.

The Tribunal noted that in
earlier years, in the as-sessee’s own case, the Tribunal has accepted that the
principle of mutuality is applicable even in the case of an assessee being a
company. The Tribunal following the orders of the Tribunal in the as-sessee’s
own case and the ruling of the Supreme Court in the case of Bankipur Club Ltd.
(226 ITR 97) (SC) confirmed the decision of the CIT(A) that principle of
mutuality is applicable to the assessee even though it is an incorporated
company.

The Tribunal following the
judgment of the Bombay High Court in the case of Sind Co-operative Housing
Society Ltd., held the share transfer fees to be not chargeable to tax because
of the principle of mutuality.

The Tribunal having noted
that non-refundable security deposits were received by the assessee from its
members who wanted to carry out some repairs in their flats and the identity of
the contributors and the participants in the surplus was preserved, held the
same to be not chargeable to tax.

Non-occupancy charges were
held to be not liable to tax by following the decision of the Bombay High Court
in the case of Mittal Court Premises Co-operative Society Ltd. (2009 TIOL 548 HC
Mum.-IT).

Interest earned from banks
on surplus funds was held to be not liable to tax by following the order of the
Tribunal in the assessee’s own case for A.Y. 2004-05 and also the order of the
Tribunal in the case of Bombay Gymkhana Ltd. (ITA No. 7624/Mum./2007 dated
20-4-2009).

The appeal filed by the
assessee was allowed and the appeal of the Department was dismissed.