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2015 (7) TMI 877 - GUJARAT HIGH COURT

2015 (7) TMI 877 - GUJARAT HIGH COURT - [2015] 377 ITR 13 (Guj) - Taxability of the receipts by a cooperative housing society from a portion of sale consideration received by its member at the time of transfer of the plot - Addition on account of premium account received for transfer of plots - Held that:- It could be seen that in various decisions, this Court as well as Bombay High Court consistently held that contribution made by the members to the general fund of the society in various forms .....

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iple of mutuality since such surplus would be used for maintenance and development of the club.

Individual plots are 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 appropri .....

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he 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 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 themselve .....

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in case of The English & Scottish Joint Cooperative Wholesale Society Ltd. (1948 (4) TMI 2 - PRIVY COUNCIL ), stand fulfilled. Decided in favour of the assessee - INCOME TAX REFERENCE NO. 33 of 1998 With INCOME TAX REFERENCE NO. 12 of 1999 With INCOME TAX REFERENCE NO. 12 of 2010 With INCOME TAX REFERENCE NO. 1 of 2014 - Dated:- 24-4-2015 - MR. AKIL KURESHI, MOHINDER PAL AND PARESH UPADHYAY, JJ. FOR THE APPLICANT : MR NITIN K MEHTA WITH KM PARIKH, ADVOCATE FOR THE RESPONDENT : MR SN SOPARKAR, SR .....

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deleting the addition of ₹ 3,25,387/made on account of premium account received for transfer of plots? 2.A group of Incometax applications came up for consideration before the Division Bench where the Revenue wanted such a question to be referred in different cases but in similar factual background. Revenue was of the opinion that the amount received by a cooperative society from the portion of the sale consideration received by its member at the time of transfer of the plot constituted i .....

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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 s .....

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sfer of a plot of land allotted to a member to incoming member, the society would collect 50% of the excess received by such outgoing member. During the year under consideration, the society collected such premium of ₹ 1,25,387/upon transfer of four plots. The society claimed that the premium amount was not a revenue receipt. The Assessing Officer in his order dated 30.3.1989, however, held that the assessee was not a cooperative society but an association of persons engaged in the busines .....

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to the society, therefore, as per the principle of mutuality, such amount was not taxable in the hands of the society. CIT(Appeals), following the decision of the Income Tax Appellate Tribunal in case of Adarsh Cooperative Housing Society Ltd., allowed the appeal. 6.Revenue carried the matter in appeal before the Tribunal. The Tribunal noted that the decision of ITAT in case of Adarsh Cooperative Housing Society Ltd. was also confirmed by the Gujarat High Court in case of Adarsh Cooperative Hous .....

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ombay High Court in case of Presidency Cooperative Housing Society Ltd. (supra), laid down the correct law. Decision of Supreme Court in case of Bangalore Club v. Commissioner of Incometax and another reported in (2013) 350 ITR 509 (SC) was heavily relied upon to 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 .....

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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 registered with a similar object and serving more .....

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ain the fund of society in perpetuity and even upon winding up of the society, would not be distributed amongst the members. In addition to placing heavy reliance on the decision of the Bombay High Court in case of Presidency Cooperative Housing Society Ltd.(supra) and of the Supreme Court in case of Bangalore Club (supra), following further decisions were cited before us. 1) The English & Scottish Joint Cooperative Wholesale Society Ltd. v. Commissioner of Agricultural Income tax reported i .....

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total income, various items of receipts such as season admission tickets from members, daily admission gate tickets from members, use of private boxes by members, etc. should be excluded. The Supreme Court held that there was no mutuality between the members interse and that therefore, the principle of mutuality was not applicable. 3) Delhi Stock Exchange Association Ltd v. Commissioner of Income tax reported in (1961) 41 ITR 495 (SC), in which the assessee was a Stock Exchange. The income accr .....

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ed 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, .....

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ve Housing Society Ltd. (supra). It was pointed out that similar view has been taken by other High Courts as well. Reference to all these judgements will be made at a later stage. 8.1. It was further contended that byelaws of the society provided for collection of 50% of the excess from the sale consideration upon a member transferring the plot to another person. Such amount would be utilised for maintenance of the society and for providing other facilities and amenities to the members. Thus in .....

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ws being standard byelaws as prescribed by the cooperative department, such byelaws may be taken as standard for the purpose of all the assessee societies. 10. As per the byelaws, some of the main objects of the society are : 1) development of plots for allotment to the members to enable them to construct their residential units on them. 2) to provide necessary funds to its members for construction of such houses. 3) to make necessary arrangements for health, education and social activities of t .....

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alue could be distributed to the members. After providing for these two items, 50% of the remaining net profit would be paid to the members in the proportion of the lease rent paid by them. 30% would be diverted to a fund for other activities which would be utilised for health, education and social activities of the members as per the objects of the society. Byelaws also envisage that upon transfer of a plot by its member, 50% of the premium i.e. net profit of the outgoing member would be paid t .....

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) 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 th .....

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; • In case of Commissioner of Incometax v. Bankipur Club Ltd. reported in 226 ITR 97,the Supreme Court held that excess over expenditure received by a club from facilities extended to members as part of advantages attached to such membership, shall not be taxable on the principle of mutuality. It was observed as under : Now we turn to the main question canvassed be the Revenue in the appeals coming under Groups A to D, namely, whether the assessees, mutual clubs. are entitled to exemption .....

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ed be way of admission fees. periodical subscription etc. from the members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective Clubs. It has also been found that different clubs realised various sums on the above counts only to afford to its members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on th .....

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s 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 .....

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ntity 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 by themselves to a fund which could only be expended or returned to themselves. It was held that applying such criteria to the facts of case on hand, the business of the assessee was governed by the doctrine of mutuality. • In case of Bangalore Club (supra), the Supreme Court observed .....

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ile associations, insurance companies and finance organizations. 13. With this background, if we revert to the case on hand, undisputed facts are that all assessees are cooperative housing societies. They own lands for residential use. Such lands are developed by the society by providing common amenities such as internal roads, drainage, street lights if need be, common plot and club house. Individual plots are allotted to its members who enjoy occupational right, but ownership of the land alway .....

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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 clea .....

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nstruct 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. S .....

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ationship of mutuality since even in the eventuality of winding up, there is no scope of profiteering by the members. 15. Division Bench of this Court in case of Adarsh Cooperative Housing Society Ltd.(supra), under identical circumstances, held that principle of mutuality would apply. It was held as under : For arriving at any conclusion as to the question of "mutuality" between the assessee and its members, the consistent tests applied since Styles' case [1889] 2 TC 460 (HL) have .....

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39;s fund to the extent provided in the byelaws, subject to which only he was entitled to derive benefits. The contribution on the happening of the event is a must and is not mere entitlement to contribute at his discretion. Therefore, the argument that contribution is not by a member who could participate in the surplus is of no consequence and deserves to be rejected. It is to be noticed at pain of repetition that the identity of the individuals as contributors and participants is not essentia .....

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at is to be reckoned is that the character of the contributor does not cease to exist in view of the nature of the enactment visavis the scheme of the Act and the principle of "mutuality" as propounded in 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 .....

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lised 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 inquiry is limited to assessment year concerned, the test of return of the surp .....

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ombay Cooperative Societies Act, 1925 should be treated as a a mutual concern and by virtue of the income which it received from its members should held to be not liable to be taxed . It appears that the Supreme Court in the subsequent decision in the case of Chelmsord Club v. Commissioner of Incometax, reported in [2000] 243 ITR 89 has adopted the same principle. As pointed out in the above decision, under the Incometax Act, 1961, what is taxed is, the income, profits or gains earned or arising .....

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Court proceeded, it is immaterial what particular form the association takes. Trading between persons associating together in this way, according to the said decision, does not give rise to profits, which are chargeable to tax. Where the trade or activity is mutual, according to the Supreme Court, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities, which it offers, does not affect the mutuality of the enterprise. The law, accord .....

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blishes 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 memb .....

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lub house was not assessable. In such situation, the Supreme Court held that the assessee s business was governed by the doctrine of mutuality and it was admitted fact that the business of the assessee did not come within the scope of business referred to in section 2[24][vii] of the Act. It was not only the surplus from the activities of the business of the club that was excluded from the levy of incometax, according to the Supreme Court, even the annual value of the club house, as contemplated .....

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320 ITR 414 (Bom), on a similar question of taxability of the premium collected by the society upon transfer of plot, held as under : ...We have referred to the byelaws of both, the Mittal Court Premises Cooperative Society Ltd. and Maker ChambersIII Premises Cooperative Society Ltd. The byelaws are nothing but the contract between the Society and the member. Under these byelaws, it is the member who has to make the payment. Any interse arrangement between the incoming members and the transfere .....

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neficiary being satisfied and considering the provisions of Maharashtra Cooperative Societies Act and Rules framed thereunder, surplus can be disposed off in favour of the members only or for the objects for which they may specify. As held by us in Income Tax Appeal No.931 of 2004 the same reasoning will apply to the appellants/petitioners before us. In these circumstances, question (a) as framed has to be answered in the negative in favour of the assessee and against the Revenue. 18. In case of .....

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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 .....

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y which looks after the infrastructure, requires the payment of the premium in order to defray the additional burden that may be cast as a result of the utilization of the FSI. The point however, is that there is a complete mutuality between the Cooperative Housing Society and its members. 19. From the above discussion, it could be seen that in various decisions, this Court as well as Bombay High Court consistently held that contribution made by the members to the general fund of the society in .....

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uality since such surplus would be used for maintenance and development of the club. Similar view was also taken by the Supreme Court in case of Bankipur Club Ltd.(supra). 20. In the referring order, the Division Bench had placed reliance on judgement of the Bombay High Court in case of Presidency Cooperative Housing Society Ltd.(supra). In the said case, the question of taxability of the premium on transfer of a plot did come up for consideration. In such background, it was observed as under : .....

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n 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 t .....

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ber's interest is being transferred as undesirable. Therefore, in our view, the purpose for inserting the clause is to ensure an income to the society whenever there is a transfer of the member's interest in favour of a third party. 21. However, in such decision the principle of mutuality was never pressed in service nor discussed by the Court. The said decision therefore, is not a authority on the question that we are trying to answer. 22. Under the circumstances, we are of the opinion .....

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tea on its own land. When the tea was produced, it was sold to the lenders, and the price was set off against the amount of the loan. In this background, it was held that there was a dual relationship between the appellant and its members and there was a mutual creditordebtor relationship and there was also a buyer and seller relationship. There was nothing notional about either of these relationships and they were not mere conventional machinery to give efficacy to a relationship which was in .....

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income would not be eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act since it would be assessable as 'income from other sources'. 3) In case of Delhi Stock Exchange Association Ltd (supra), the assessee was a stock exchange. It was a company formed to promote and regulate the business of exchange of stocks and shares, debentures, etc. Income accrued was distributed amongst the shareholders. It was observed that the body of trading members who paid the entrance fees .....

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d 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, da .....

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deposits kept with certain banks which were corporate members of the assessee on the principle of mutuality. The assessee however, paid tax on interest earned on fixed deposits kept with nonmember banks. It was in this background held that for application of principle of mutuality, there has to be a complete identify between the class of participators and the class of contributors. Second feature highlighted was, actions of the participators and the contributors must be in furtherance of the ma .....

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ive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. This principle requires that the funds must be returned to the contributors as well as expended solely on the contributors. True, that in the present case, the funds do return to the club. However, before that, they are expended on nonmembers i.e. the clients of the bank. Banks generate revenue by paying a lower rate of interest to clubassessee, that makes deposits with them, and t .....

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