2025 (5) TMI 1650 - AT - Income Tax

Addition of business income - Assessment of cooperative society - exemption u/s 80P(2)(d) and the principle of mutuality - appellant in its submission had stated that it was a registered cooperative society and it had fulfilled all the conditions of the test of mutuality as the investment utilized specifically are for the purpose for which it was created which is furtherance of objectives and aims of association and nothing else - as per CIT(A) appellant has not mentioned anything about the mismatches and mistakes of reporting figures in different columns of ITR. HELD THAT - Under the Income-tax Act the cooperative-societies are taxable entities. It falls under the category of an Association of Persons (AOP) which is a group of individuals (whether incorporated or not) who get together with a common purpose and have a legal entity. The main source of income of the housing society is the pulling together of the member s financial contributions to pay for the services and amenities provided to its members. This includes a number of charges paid by the members such as maintenance expenses water electricity and service tax charges life charges etc. All these are simply collected by the managing committee who acts as a collector and which in turn pays to various parties concerned. These are not taxable under the Income-tax Act. Even after charges have been paid by the society and there remains some surplus it is not taxable and is categorized as an exemption under the Principle of mutuality . Essence of the doctrine of mutuality lies in the principle that what is returned is what a member contributes. A person cannot trade with himself; he cannot make taxable profit by dealing with himself. All the expenses are paid by the members towards a common fund which cannot be considered as income of any person. After meeting various expenses such as property tax electricity water security charges etc. there was a surplus. Hence the excess of income falls under the concept of mutuality and is not liable to be taxed. It is also clear from the audited account that the assessee had not carried out any business activity during the year. In view of the discussion made above the order of CIT(A) is set aside and the AO is directed to delete the addition. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

- Whether the addition of Rs. 8,00,142/- on account of business income by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] was justified, given the appellant's status as a registered cooperative society and the application of the principle of mutuality.

- Whether the Central Processing Centre's (CPC) invocation of section 143(1)(a)(ii) of the Income-tax Act, 1961, to disallow the claim on the basis of minor technical errors in reporting (mismatches in columns of the income tax return) was legally valid and could override substantive claims relating to exemption under cooperative society status and mutuality.

- Whether income arising from transactions with members of the cooperative society, which resulted in a surplus after meeting expenses, falls within the exemption under section 80P(2)(d) of the Act and the principle of mutuality, thus not liable to be taxed.

- Whether the CIT(A) erred in not accepting the appellant's claim that the surplus income was exempt under the principle of mutuality and cooperative society provisions, and instead relied on technical discrepancies to uphold the addition.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Addition of Rs. 8,00,142/- as Business Income

Relevant Legal Framework and Precedents: The Income-tax Act, 1961, recognizes cooperative societies as taxable entities under the category of Association of Persons (AOP). Section 80P(2)(d) provides for deduction of income of cooperative societies arising from specified business activities with members. The principle of mutuality, a well-established doctrine in tax jurisprudence, exempts income arising from mutual dealings among members of a cooperative society from taxation, as such income is not considered profit but a return of contributions.

Precedents relied upon included the decision of the ITAT, Mumbai, in the case of Lands End Co-operative Housing Society Limited, which upheld the exemption of income arising from mutuality.

Court's Interpretation and Reasoning: The Tribunal observed that the appellant was a registered cooperative society fulfilling all conditions of the test of mutuality. The income and expenditure account showed that the contributions received were from members and that the surplus after meeting expenses was attributable to mutual dealings among members. The Tribunal emphasized that the society had not carried out any business activity during the year, as evident from the audited accounts.

Key Evidence and Findings: The audited financial statements indicated income sources such as maintenance charges, water charges, property tax collections, electricity charges, and interest from members. After deducting expenses like property tax, electricity, water, and security charges, a surplus of Rs. 8,05,404/- remained, which was consistent with the principle of mutuality. No evidence suggested any business activity generating taxable income.

Application of Law to Facts: Applying the principle of mutuality and section 80P(2)(d), the Tribunal concluded that the surplus income was exempt from tax as it was a return of members' contributions and not business income. The Tribunal rejected the addition made by the AO and upheld by CIT(A) as contrary to the legal position.

Treatment of Competing Arguments: The Revenue's contention that the addition was justified due to reporting mismatches was considered a minor technical issue not warranting disallowance of substantial claims. The Tribunal disagreed with the CIT(A)'s reliance on such technical grounds to override the cooperative society's exemption claim.

Conclusion: The addition of Rs. 8,00,142/- was not sustainable and was directed to be deleted.

Issue 2: Legality of CPC's Invocation of Section 143(1)(a)(ii) for Disallowance on Technical Grounds

Relevant Legal Framework: Section 143(1)(a)(ii) empowers the CPC to make adjustments to income tax returns based on certain criteria, including mismatches or errors in reported figures. However, this power is limited and cannot be used to negate substantive legal claims or exemptions without proper scrutiny.

Court's Interpretation and Reasoning: The Tribunal held that the CPC's action to disallow the claim based on minor mismatches in column figures of the return was not justified when the substantive claim of exemption under cooperative society status and mutuality was established. The Tribunal underscored that the CPC's power under section 143(1)(a)(ii) does not extend to discarding substantial issues on minor technical grounds.

Key Evidence and Findings: The appellant had not carried out any business activity, and the surplus income was from members' contributions, which was exempt. The CPC's reliance on technical mismatches was not supported by evidence indicating any substantive tax liability.

Application of Law to Facts: The Tribunal applied the principle that procedural or technical errors cannot override substantive rights and exemptions recognized under the law.

Treatment of Competing Arguments: The Revenue's argument that the mismatch justified the addition was rejected as it conflicted with the established principles of mutuality and cooperative society taxation.

Conclusion: The CPC's invocation of section 143(1)(a)(ii) to disallow the claim was not legally sustainable.

Issue 3: Applicability of Section 80P(2)(d) and Principle of Mutuality to Surplus Income

Relevant Legal Framework: Section 80P(2)(d) provides exemption to cooperative societies on income derived from specified business activities with members. The principle of mutuality, a cornerstone in cooperative society taxation, exempts surplus arising from mutual dealings among members from being treated as taxable income.

Court's Interpretation and Reasoning: The Tribunal reaffirmed that the income arising from members' contributions, after meeting expenses, constituted a surplus not liable to tax. The Tribunal emphasized that the managing committee's role as a mere collector and disburser of funds did not convert the surplus into taxable business income.

Key Evidence and Findings: The financial statements showed that the income was primarily from members and that no business activity was conducted. The surplus was a natural outcome of mutual dealings and hence exempt.

Application of Law to Facts: The Tribunal applied the legal principles to the facts, concluding that the surplus fell squarely within the exemption under section 80P(2)(d) and the principle of mutuality.

Treatment of Competing Arguments: The Revenue's position that the surplus was taxable business income was rejected in light of the cooperative society's status and the nature of income.

Conclusion: The surplus income was exempt under section 80P(2)(d) and the principle of mutuality.

3. SIGNIFICANT HOLDINGS

- "The essence of the doctrine of mutuality lies in the principle that what is returned is what a member contributes. A person cannot trade with himself; he cannot make taxable profit by dealing with himself."

- "All the expenses are paid by the members towards a common fund which cannot be considered as income of any person."

- The Tribunal held that the CPC's power under section 143(1)(a)(ii) "does not empower the CPC to discard substantial issue like co-operative society status and income arising from mutuality on minor technical ground."

- The Tribunal concluded that "the excess of income falls under the concept of mutuality and is not liable to be taxed."

- The Tribunal set aside the CIT(A)'s order regarding the addition of Rs. 8,00,142/- and directed the AO to delete the addition, thereby allowing the appeal.

- The Tribunal extended the same reasoning to the subsequent assessment year, allowing the appeal for AY 2019-20 on identical grounds.