TMI Blog2015 (7) TMI 877X X X X Extracts X X X X X X X X Extracts X X X X ..... allotted to its members who enjoy occupational right, but ownership of the land always remains with the society. On the plots of land so allotted, the member would be allowed to construct his residential unit. Upon transfer of the plot by a member, the society would collect 50% of the excess or popularly referred to as 'premium'. The fund so collected would be appropriated in the common fund of the society to be utilised as per the byelaws which envisage development of common facilities and expenditure for common amenities. A part of the surplus would be diverted to the reserve fund of the society. Surplus could also be utilised for waiver of the lease amount or for the health, education and social activities of the members. It can thus be seen that there is total identity of contributors of the fund and recipients from the fund. The contribution comes from the outgoing member in the form of a portion of the premium and it is utilised for the common facilities and amenities for the members of the society. Different modes of application of the funds make it clear that the funds would be expended for common amenities or for general benefit of the members; or be distributed amongst th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Incometax v. Adarsh Cooperative Housing Society Ltd. reported in 213 ITR 677. The Division Bench noted that Bombay High Court in case of Commissioner of Incometax v. Presidency Cooperative Housing Society Ltd. reported in 216 ITR 321 had taken a different view. The Court unable to subscribe to the view taken in case of Adarsh Cooperative Housing Society Ltd., (supra), directed the Tribunal to furnish statement of case in all the matters and further referred the question for the opinion of larger Bench. 3.For some reason, these proceedings remained dormant for a long time and ultimately present larger Bench came to be constituted. Advocates appearing for the Revenue as well as assessees made detailed submissions and relied on several authorities to which we would refer to at appropriate stages. 4.Since the material facts are almost identical, for the purpose of this judgement, we may refer to the facts as arising in ITR No.33/1998. Assessee is a cooperative housing society and was registered on 16.12.1943. For the assessment year 19861987, the assessee filed its return of income showing total income of ₹ 17,879/. The assessee society had given its plots ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contend that the principle of mutuality has its inherent limitations. 7.1. Our attention was drawn to certain provisions of the Gujarat Cooperative Societies Act, 1961 ( the said Act for short). It was pointed out that section 65 of the said Act provides that no part of the funds or assets of a society other than the dividend equalisation fund, and the net profits thereof, shall be paid by way of rebate or dividend or otherwise distributed to its members. It was pointed out that section 66 of the said Act provides for appropriation of profits by the society. Section 67 (1) provides that every society which derives a profit, shall maintain a reserve fund. Section 107 of the said Act provides for winding up of a society. Section 115 provides that any surplus assets of a society which has been wound up, shall not be divided amongst its members but shall be devoted to any object or objects provided in the byelaws of the society, if they specify that such a surplus shall be utilised for the particular purpose. Where the society has no such byelaws, the surplus shall vest in the Registrar who shall hold it in trust and shall transfer it to the reserve fund of a new society registere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eported in (2014) 50 taxmann. 278 (Delhi) in which the assessee cooperative society was engaged in providing credit facility to its members. The society deposited surplus funds in fixed deposits and earned interest thereon. The Court held that such interest would be assessable as 'income from other sources' and not eligible for deduction under section 80P(2)(a)(i) of the Act. 8.On the other hand, learned advocates for the assessees submitted that the decision of this Court in case of Adarsh Cooperative Housing Society Ltd. (supra), needs no reconsideration. It was also been followed in the later decision in case of Commissioner of IncometaxIV, Ahmedabad v. Manekbaug Cooperative Housing Society Ltd. reported in (2012) 22 taxmann. com 220 (Guj.). It was further argued that in the decision of Bombay High Court in case of Presidency Cooperative Housing Society Ltd. (supra), question of mutuality was not considered. It was argued that the judgement of the Supreme Court in case of Bangalore Club (supra), was rendered in entirely different fact situation. The ratio laid down therein in no manner disturbs the ratio in case of Adarsh Cooperative Housing Society Ltd. (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by its member, 50% of the premium i.e. net profit of the outgoing member would be paid to the society. 11. On the basis of such byelaws we need to judge whether in facts of the case, the principle of mutuality would apply. 12. The principle of mutuality has come up for consideration before various Courts earlier. We may briefly refer to some leading decisions of the Supreme Court on the point. In case of The Royal Western India Turf Club Limited (supra), the Supreme Court referring to the decision in case of New York Life Insurance Co. v. Styles (Surveyor of Taxes) reported in (1889) 2 Tax Cas. 460, observed as under : Styles' case (supra) has recently been examined and explained by the Judicial Committee in English Scottish Joint Cooperative Wholesale Society Ltd. V. Commissioner of Agricultural Incometax, Assam(16 ITR 270). After referring to various passages from the speeches of the different Law Lords in Styles' case, Lord Normand, who delivered the judgment of the Board, summarised the grounds of the decision in Styles' case as follows: From these quotations it appears that the exemption was based on (1) the identity of the contributors to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the club, cannot be said to be a trading activity. The surplus excess of receipts over the expenditure as a result of mutual arrangement, cannot be said to be income for the purpose of the Act. In case of Chelmsford Club v. Commissioner of Incometax reported in 243 ITR 89. the facts were that the assessee club provided recreational and refreshment facilities to its members and their guests. Facilities were not available to non members. The club was run on no profit no loss basis and the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. In that background, the Supreme Court applied the following triple test referred to in case of The English Scottish Joint Cooperative Wholesale Society Ltd. (supra) : (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributed amongst the members in the form of dividend or lease rent waiver. It can thus be seen that it is impossible for the contributors to derive profit from contribution made by themselves to a fund since such fund could only be expended or returned to them. Creation of the society was primarily for the convenience of the members to create a housing society where individual members could construct their residential units and common facilities and amenities could be provided by the society. It was essential thus that a combined activity is carried on by a group of persons who would be the members in the cooperative society. All the tests referred to in the Privy Council decision in case of The English Scottish Joint Cooperative Wholesale Society Ltd. (supra), stand fulfilled. 14. Reference to the provisions of Gujarat Cooperative Societies Act would not change the position. Such provisions and in particular section 115 only provide the modality of diverting the funds of the society upon its winding up. We have already noted that the contributors from the members of the society are to be expended for their benefit or would be returned to them while the society is functionin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Styles' case [1889] 2 TC 460 (HL), a leading English case, as discussed earlier. Though it is contended that there is no participation in surplus by the members because the surplus, remaining with the society in case of its cancellation does not return to contributors but is to be utilised for public purposes, the question which arises is : what is meant by return of what has been contributed to a common fund ? does it mean return of the corpus of the fund or does it include retention of control over the corpus to be used in consonance with the statute regulating the association, company or society, as the case may be ? It is to be noticed that as per the findings of the Revenue authorities the amount which is contributed by the outgoing member is in turn utilised by the society for extending common amenities to the members. Thus, according to this finding, the surplus in any particular assessment year is utilised for extending amenities to members in succeeding years. That is to say, such surplus during the existence of the society returns to the members by way of deriving benefit from the amenities provided by the society to its members by expending the surplus. If the inq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. 14. In the said case, the assessee, a members club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to nonmembers. The club was run on no profit no loss basis and that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, question (a) as framed has to be answered in the negative in favour of the assessee and against the Revenue. 18. In case of Commissioner of Incometax 21 v. Jai Hind CHS ltd. reported in reported in 349 ITR 541, once again Division Bench of Bombay High Court held that the amount collected by the society under the head of transferrable development rights from member who desired to develop his plot by using extra FSI would be governed by the principle of mutuality. It was observed as under : 4. The admitted facts would indicate that the TDR premium is liable to be paid by a member of the Society who desires to utilize additional FSI in the form of Transferable Development Rights. The principle of mutuality would clearly apply to a situation as to the present. In the context of the payment of nonoccupancy charges by a member of a Cooperative Housing Society to the Society, a Division Bench of this Court held in Mittal Court Premises Cooperative Society Ltd. vs. Income Tax Officer (2009) 184 Taxman 292/(2010) 320 ITR 414(Bom.) that the principle of mutuality would apply. The Division Bench noted that the object of the Society is to provide service, amenities and faciliti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. Looked at from a commercial point of view the reason why such a clause was inserted in the lease deed was to enable the society to earn an income. It was submitted before us that this clause was inserted merely as a deterrent to transfer. Looking to the nature of the clause, we do not see how the clause deters any transfer by a member. A member may be required to transfer his interest for various reasons. For example, if he is required to move out of Bombay, he may have to sell his interest in the property. All that the clause provides is that the society will receive half the profits when the member sells his interest. Therefore, it cannot be viewed as a deterrent to transfers. This payment is also not a payment for granting consent. The consent of the society is required because the society may want to ensure that an undesirable person does not become its member. Even in a situation where the society is likely to get money or transfer, the society may decline to give its consent for transfer if it considers the person to whom the member's interest is being transferred as undesirable. Therefore, in our view, the purpose for inserting the clause is to ensure an income t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s among whom the profits were distributed were not identical. It was therefore, observed that the element of mutuality was lacking. 4) In case The Royal Western India Turf Club Limited (supra), the assessee was a company which carried on the business of running a race course and providing other facilities such as refreshments. The members of the company were provided with separate enclosure to watch the races for which an admission fee was charged. Nonmembers were not admitted in this enclosure. It was found that the assessee gave to nonmembers the same or similar amenities such as facility to watch the races and to bet on the horses in the races, use of the facilities for refreshments, etc. The daily ticket fee for admission into the members' enclosure was the same as that for admission into the first enclosure to which the public had access. The assessee claimed that in computing its total income, the receipts such as, season admission tickets from members, daily admission gate tickets from members, use of private boxes by members etc. should be excluded. It was in this background held that there was no mutual dealing between the members interse and the principles laid d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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