2021 (1) TMI 1349 - AT - Income Tax

Nature of receipt - Membership fee received by the appellant society from members - revenue receipt or capital receipt - HELD THAT - We find that a subscription or admission fee normally constitutes a capital receipt and not liable to tax and also transfer of income to reserve fund in compliance with the statutory provisions constitute a charge against the profits of the income. From the very nature of Membership fee collected from members it is clear that fees was not charged from the members for rendering any specific evidence by society. Further there is no expressed provision in the Income Tax Act providing that such fees is taxable as revenue receipt. Subscription or admission fee received from the class B members does not constitute a revenue receipt in the hands of the appellant society. We will be failing in our duty if we do not refer to the decision of Citizen Co-operative Society Limited 2017 (8) TMI 536 - SUPREME COURT wherein held that a particular class of members having no voting rights cannot be treated as members of the society and consequently the principle of mutuality cannot be made applicable. The dictum laid down in this decision had not application to issue on hand inasmuch as the issue in the present appeal does not involve the exemption of income on mutuality principle. The income received by the appellant society in the form of subscription or admission fee does not constitute revenue receipt in the hands of the appellant society. Accordingly the grounds of appeal no.1 and 2 are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue considered in these appeals was whether the Membership fee received from class B members/shareholders of the appellant co-operative society constitutes a revenue receipt taxable under the Income Tax Act, 1961, or a capital receipt not liable to tax. Additionally, the treatment of the subscription fee in the context of the society's bylaws and the Maharashtra State Co-operative Society Act, 1960, was also scrutinized.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework involved the interpretation of the Income Tax Act, 1961, particularly concerning the classification of receipts as revenue or capital. The Tribunal referenced the Maharashtra State Co-operative Society Act, 1960, and the society's bylaws to determine the nature of the membership fee. The decision in Peerless General Finance & Investment Company Ltd. vs. CIT was pivotal, where the Supreme Court held that certain subscriptions were capital receipts.

Court's Interpretation and Reasoning

The Tribunal examined whether the membership fee should be classified as a revenue receipt. It considered the treatment of the fee in the society's books, which was transferred to the reserve fund as per the bylaws and the Maharashtra State Co-operative Society Act, 1960. The Tribunal noted that the Supreme Court in Peerless General Finance & Investment Company Ltd. had established that similar subscriptions were capital receipts, not revenue.

Key Evidence and Findings

The appellant society had transferred the membership fee to the reserve fund, aligning with statutory provisions and bylaws. The Tribunal found no evidence that the fee was charged for specific services rendered by the society, reinforcing the argument that it was not a revenue receipt.

Application of Law to Facts

The Tribunal applied the principles from the Peerless case, determining that the membership fee was not income but a capital receipt. It emphasized that the absence of a specific provision in the Income Tax Act categorizing such fees as revenue supported this conclusion.

Treatment of Competing Arguments

The Revenue argued that the Maharashtra State Co-operative Society Act, 1960, could not override the Income Tax Act. However, the Tribunal found that the treatment of the fee as a capital receipt was consistent with the Supreme Court's interpretation in similar cases. The Tribunal dismissed the Revenue's arguments, citing the lack of statutory basis for treating the fee as a revenue receipt.

Conclusions

The Tribunal concluded that the membership fee received by the appellant society from class B members does not constitute a revenue receipt. This conclusion was based on the treatment of the fee in the society's accounts, statutory compliance, and the principles established by the Supreme Court.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

The Tribunal cited the Supreme Court's observation: "It is the true nature and quality of the receipt and not the head under which it is entered in the account books that would prove decisive." This underscored that the classification of receipts should be based on their nature, not merely their accounting treatment.

Core Principles Established

The Tribunal reaffirmed that membership fees transferred to reserve funds, in compliance with statutory provisions, are capital receipts. It emphasized that the absence of explicit provisions in the Income Tax Act to categorize such fees as revenue receipts supports their classification as capital receipts.

Final Determinations on Each Issue

The Tribunal allowed the appeals in part, ruling that the membership fees in question were capital receipts. This decision applied to all the appeals, as the issues were identical across the assessment years.

In conclusion, the Tribunal's judgment clarified the treatment of membership fees for co-operative societies under the Income Tax Act, reinforcing the principle that such fees are capital receipts when transferred to reserve funds in accordance with statutory requirements.