Character of income- Contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax – Principle of mutuality :
The assessee was a, housing co-operative society, registered under the Maharashtra Co-operative Societies Act, 1960. The assessee fell in the category known as “tenant co-partnership housing society”. The main feature of such a society is that it owns both land and building either on leasehold or freehold basis and on construction of tenements they are allotted to its members. The society constructed 198 flats from 1954 till 1956 and allotted them to members, who, among others, had a right to transfer their right of membership and other attendant privileges.
During these assessment years the assessee society collected interest free loans from the incoming members. The AO was of the view that the loans so taken are really not refundable and consequently represented income in its hand, liable to be taxed. The assessee submitted that the loans in question were all repayable sums. In fact, all the loans were eventually repaid .
The assessee before ITAT contended that the department did not properly appreciate that the loans in question were only in the nature of loans and did not have the character of income. Even otherwise, on the basis of mutuality the sum could not be brought to tax.
The issue stood concluded against the Revenue and in favour of the assessee by the decision of the Apex Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. Commissioner of IncomeTax, (2004), 270 ITR 1.
As regards second issue the said Society owned both the land and the building and only alloted its tenaments to its members. The respondent society was constituted in the year 1954 and had 198 members occupying its tenaments. The respondent Society had available unutilised FSI (Floor Space Index) and sought to exploit it by constructing four additional tenaments and also enclosing the balconies (Verandah) of the existing tenaments resulting in additional l00 sq.ft. to its members. None of the existing members came forward to seek allotment of the four additional tenaments which were to be constructed on exploitation of the unutilised FSI.
In 1998, four persons sought membership of the Society. The above four new members were subsequently alloted the tenaments on construction by the respondent Society. The four new members had after becoming members contributed to the Society in the aggregate an amount of Rs.1.10 Crore. This resulted in allotment of four new tenaments constructed by the Society. However, the aforesaid contribution received from the four new members was not offered to tax by the Society on the principle of mutuality. However, the Assessing Officer did not accept assessee’s contention in respect of mutuality and held that the contribution from the four new members is in fact consideration received for sale of four new tenaments and, therefore, chargeable to tax as the income of the Society.
The CIT (A) dismissed the Society’s appeal holding there is no reason to disturb the findings of the Assessing Officer.
On further appeal by the Society, the Tribunal while allowing the Society’s appeal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax vs. Bankipur Club Ltd. 226 ITR 97 wherein it was held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators.
The tribunal held that the contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax
The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the test to determine the satisfaction of mutuality had been laid down by the decision of the Apex Court in Banglore Club vs. CIT 350 ITR, 509. The Apex Court has observed that the basis of not taxing surplus funds in the hands of an Assessee on the principle of Mutuality found its origin in the concept that no man can make a profit of himself. The Apex Court in Banglore Club (supra) set out three tests to be satisfied as under before the principle of mutuality can be applied as under :
i) There must be a complete identity between the contributors and the participants as a class;
(ii) The actions of the participants and contributors must be in furtherance of the activities of the assessee; and
(iii) There must be no scope of profiteering by the contributors from a fund made by them, which could only be expended or returned to them.
Thus, on facts, tests are satisfied therefore the Appeal of the revenue is dismissed.
