Mutual concern — Income of the association of flat owners is not taxable on the principle of mutuality, despite the fact that most of the flats are let out and tenants are paying the contribution — Interest earned from bank on surplus funds deposited in t

9 Wellington Estate Condominium v. ITO
ITAT ‘I’ Bench, Delhi
Before R. P. Tolani (JM) and A. K. Garodia (AM)
ITA No. 2846/Del./2007

A.Y. : 2003-04. Decided on : 16-10-2009

Counsel for assessee/revenue : Ved Jain & V. Mohan/Anusha
Khurana

The assessee was an AOP formed by Residents’ Welfare
Association of the residents of Wellington Estate, DLF City, Phase V, Gurgaon
which consisted of 555 flats, out of which 505 flats were sold out by DLF
Universal Ltd. (Developer) and 51 unsold flats remained in possession of the
developer. The association was registered with The Registrar of Societies,
Haryana on 1-10-2002 and hence this was the first year of operation of the
assessee.

The association claimed itself to be a mutual concern and
claimed that its income is not taxable. The AO rejected the claim of the
assessee and assessed the total income at Rs.25,95,060 as against returned
income of Rs.14,180.

The CIT(A) rejected the claim of the assessee on the ground
that (i) most of the flats were rented out to tenants who were paying various
charges to the association and tenants are not the members of the association;
(ii) the assessee is receiving money on account of various charges from
non-members as per rules; (iii) profits on account of excess charges were
refundable to the members which indicates the profit making purpose of the AOP
and distribution of profits amongst members; and (iv) there is no identity
between the contributors and participators which is essential element of mutual
concern.

The assessee preferred an appeal to the Tribunal.

The Tribunal noted that clause 18(b) of the bye-laws of the
assessee regarding winding up or dissolution of the society provide that any
surplus remaining after satisfaction of its debts and liabilities shall not be
paid to or distributed among the members of the society at the time of
dissolution, but shall be given or transferred to some other institution having
objects similar to the objects of the society to be determined by the members of
the society at the time of dissolution. It also noted that clause 2 and 4 of the
bye-laws provided that the assessee could invest or deposit money and could let
out suitable portion of the common areas to outsiders for commercial purposes
and to accumulate the common profit for building up reserve fund.

The Tribunal observed that the Delhi Bench of Tribunal has in
the case of Standing Conference of Public Enterprise (SCOPE) v. ITO in ITA No.
5051/Del./2007, dated 31-3-2008 dealt with the situation where as per bye-laws
the surplus was not required to be distributed amongst the members on
dissolution of the society and the Revenue had denied mutuality on this ground.
Clause (xvi) of the bye-laws of SCOPE was identical to clause 18(b) of the
bye-laws of the assessee. The Tribunal after considering the decision of Apex
Court in the case of Bankipur Club (226 ITR 97) (SC) rejected the argument of
the Revenue. Further, in the case of SCOPE, interest income was earned from
surplus funds and rental income was received from non-members also. Therefore,
letting out of suitable portion of common area to outsiders for commercial
purposes and accumulation of common profit for building up reserve fund could
not be a reason for denying mutuality. As regards interest income the Tribunal
has in the case of SCOPE held that this issue is covered in favour of the
assessee by the judgment of the Delhi High Court in the case of All India
Oriental Banking Commerce of Welfare Society (184 CTR 274) (Del.).

As regards the allegation of the CIT(A) that when flats are
rented out, maintenance charges are received by the assessee from non-members,
the Tribunal held that liability of payment of maintenance and other charges is
of the member i.e., the owner and even if the same is paid to the society by the
tenant of the members, it cannot be said that the society is receiving it from
non-members because in case of default the assessee can collect the same from
members only and not from tenants. The Tribunal observed that as per clause 4(b)
of the bye-laws all the owners are obliged to pay monthly assessment imposed by
the association to meet all expenses relating to Wellington Estate Condominium,
which may include an insurance premium for a policy to recover repair and
reconstruction work in certain cases. The Tribunal held that payments made by
tenants of the members are to be considered as received from members since the
liability to pay the amount is of the member and the tenant is making the
payment to the assessee for and on behalf of the member. The Tribunal held the
assessee to be a mutual concern and allowed the appeal filed by the assessee.