2025 (7) TMI 39 - AT - Income Tax

Income earned from the activity carried out by the assessee for its Members on the Principle of Mutuality - apart from the interest income assessee receives the amount from Members towards Annual Maintenance Charges Parking fees etc. and the expenditures are incurred for the Members towards Electricity Security services Garden maintenance Lift maintenance Gymnasium and Club House Expenses HELD THAT - It is not in dispute that assessee has raised this ground for the first time. It is also observed that in the Income and Expenditure Account assessee has made a provision of income-tax which shows that the present claim before us regarding the Principle of Mutuality was never in the mind of the assessee. Even in the return of income deduction has been claimed u/s. 80P but then ld. AO has curtailed it to deduction u/s. 80P(2)(c) and further ld.CIT(A) gave benefit of deduction u/s. 80P(2)(d). Since this is a legal ground raised for the first time and goes to the root cause of the issue and facts already available on record we admit the legal ground but since CIT(A) had no occasion to deal with this legal issue the same needs to be examined by ld.CIT(A) in the light of the facts of the case with regard to the receipt from the Members and the expenditure incurred against the same. We therefore restore this legal issue to the file of ld.CIT(A) for necessary adjudication - Ground No.1 raised by the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the surplus of Rs. 10,18,128 arising from the income and expenditure account of the appellant society should be treated as business income or exempt under the Principle of Mutuality, given that the appellant is a housing co-operative society and the income is derived from its members.

(b) Whether the deduction under section 80P(2)(d) of the Income-tax Act, 1961, is allowable for interest income of Rs. 5,50,370 earned from other co-operative societies. (This ground was not pressed and hence not considered substantively.)

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Application of the Principle of Mutuality to the Surplus Income of Rs. 10,18,128

Relevant Legal Framework and Precedents:

The Principle of Mutuality is a well-established legal doctrine which exempts certain transactions between members of a mutual organization from being treated as income for taxation purposes. The principle essentially states that receipts and payments between members of a mutual entity are not income or expenditure in the conventional sense, but rather mutual dealings that do not result in taxable income.

Section 80P of the Income-tax Act provides specific deductions to cooperative societies, but the Principle of Mutuality operates independently as a common law principle recognized by courts.

The appellant relied heavily on the Hon'ble Supreme Court decision in ITO Vs. Venkatesh Premises Cooperative Society Ltd. (2018), which clarified that income derived from activities carried out exclusively for members of a cooperative society, where receipts and payments are mutual, should not be treated as taxable business income.

Court's Interpretation and Reasoning:

The Tribunal noted that the appellant society is a cooperative housing society that receives income from its members in the form of annual maintenance charges, parking fees, and similar receipts. The society incurs expenditures such as electricity, security, garden maintenance, lift maintenance, gymnasium, and clubhouse expenses, all for the benefit of its members.

The appellant contended that the surplus income of Rs. 10,18,128 arising from these transactions should be exempt under the Principle of Mutuality, as these transactions are mutual dealings between the society and its members.

The Revenue's representative opposed this contention, stating that this issue was being raised for the first time before the Tribunal and had not been considered in the earlier proceedings.

Key Evidence and Findings:

The Tribunal observed that the appellant had declared a gross total income of Rs. 15,65,984/- in the original return and had claimed deductions under section 80P. The Assessing Officer (AO) allowed a limited deduction under section 80P(2)(c) and assessed the income at Rs. 15,18,450/-. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed deduction under section 80P(2)(d) for interest income but had not considered the Principle of Mutuality claim as it was not raised before him.

It was also noted that the appellant had made a provision for income tax of Rs. 3,25,000 in its income and expenditure account, indicating that the Principle of Mutuality claim was not contemplated earlier.

Application of Law to Facts:

The Tribunal recognized that the Principle of Mutuality is a legal issue going to the root of the matter and that the facts necessary for its adjudication were already available on record. Since the issue was raised for the first time before the Tribunal, and the CIT(A) had not examined this legal question, the Tribunal admitted the new legal ground.

However, rather than deciding the issue itself, the Tribunal restored the matter to the CIT(A) for fresh consideration in light of the Principle of Mutuality and the relevant Supreme Court precedent, directing the CIT(A) to afford the appellant a reasonable opportunity of hearing and to examine the receipts and expenditures vis-`a-vis the members.

Treatment of Competing Arguments:

The Tribunal balanced the appellant's reliance on the Supreme Court ruling with the procedural aspect that this ground was not raised earlier. It acknowledged the Revenue's concern about the issue being raised for the first time but emphasized the legal nature of the issue and the availability of facts on record. Consequently, the Tribunal allowed the issue to be examined afresh by the CIT(A).

Conclusions:

The Tribunal held that the Principle of Mutuality claim deserves consideration and remanded the issue to the CIT(A) for adjudication. The ground was allowed for statistical purposes, and the appeal was partly allowed accordingly.

Issue (b): Deduction under Section 80P(2)(d) for Interest Income of Rs. 5,50,370

This ground was not pressed by the appellant before the Tribunal as the CIT(A) had already granted relief in this regard. The Tribunal accordingly dismissed this ground as not pressed and infructuous without substantive examination.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations and established core principles:

"Since this is a legal ground raised for the first time and goes to the root cause of the issue and facts already available on record, we admit the legal ground but since ld.CIT(A) had no occasion to deal with this legal issue, the same needs to be examined by ld.CIT(A) in the light of the facts of the case with regard to the receipt from the Members and the expenditure incurred against the same."

This holding underscores that even if a legal ground is raised for the first time at the appellate stage, it may be admitted if it is purely legal and the facts are on record, but remand for consideration by the lower appellate authority is appropriate.

The Tribunal preserved the principle that the Principle of Mutuality exempts income arising from mutual dealings among members of a cooperative society from being treated as taxable business income, subject to factual verification.

On the procedural aspect, the Tribunal emphasized the necessity of affording a reasonable opportunity of hearing to the assessee before deciding the issue.

Finally, the Tribunal's order partly allowed the appeal for statistical purposes, directing the CIT(A) to reconsider the Principle of Mutuality claim in the light of the relevant Supreme Court precedent and the facts of the case.