By TIOL News Service

NEW DELHI, MAR 14, 2018: THE issue is - Whether non-occupancy charges collected by a society-assessee beyond certain percentage of maintenance charges can be said to be falling outside the purview of mutuality even if they are used for the common benefit of the contributors. No is the verdict.

Facts of the case

The Assessee, a Premises cooperative society, had filed its return and on assessment, the AO had held that the receipt of non-occupancy charges by the Assessee from its members was beyond 10% of the service charges or maintenance charges as permitted under the notification dated 09.08.2001 issued u/s 79A of the Maharashtra Cooperative Societies Act. The AO concluded that since, such receipt was excluded from the doctrine of mutuality, it was taxable income. On appeal, the CIT(A) confirmed the AO's order.

On further appeal, the Tribunal held that the notification dated 09.08.2001 was only applicable to cooperative housing societies and not premises society. Further, the Tribunal held that the during the payment, the transferee did not have the status of a member. Therefore, the transfer fee paid by the transferee member was exigible to tax but the Tribunal's view was set aside by the High Court.

On appeal, the Apex Court held that,

++ the doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable. Section 2(24) of the Income Tax Act defines taxable income. The income of a cooperative society from business is taxable u/s 2(24)(vii) and will stand excluded from the principle of mutuality. The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The law envisages a complete identity between the contributors and the participants in this sense. The principle postulates that what is returned is contributed by a member. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities. A common feature of mutual organizations in general can be stated to be that the participants usually do not have property rights to their share in the common fund, nor can they sell their share. Cessation from membership would result in the loss of right to participate without receiving a financial benefit from the cessation of the membership;

++ the proceedings in the present appeals relate to different assessment years based on information gathered by the AO pursuant to notice u/s 133(6) of the Income Tax Act. Transfer charges are payable by the outgoing member. If for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount is appropriated only after the transferee is inducted as a member. In the event of non-admission, the amount is returned. The moment the transferee is inducted as a member the principles of mutuality apply;

++ non occupancy charges are levied by the society and is payable by a member who does not himself occupy the premises but lets it out to a third person. The charges are again utilised only for the common benefit of facilities and amenities to the members. Contribution to the common amenity fund taken from a member disposing property is similarly utilised for meeting sudden and regular heavy repairs to ensure continuous and proper hazard free maintenance of the properties of the society which ultimately enures to the enjoyment, benefit and safety of the members. These charges are levied on the basis of resolutions passed by the society and in consonance with its bye laws;

++ the receipts in the present cases, have indisputably been used for mutual benefit towards maintenance of the premises, repairs, infrastructure and provision of common amenities. Any difference in the contributions payable by old members and fresh inductees cannot fall foul of the law as sufficient classification exists. Membership forming a class, the identity of the individual member not being relevant, induction into membership automatically attracts the doctrine of mutuality;

++ if a society has surplus FSI available, it is entitled to utilise the same by making fresh construction in accordance with law. Naturally, such additional construction would entail extra charges towards maintenance, infrastructure, common facilities and amenities. If the society first inducts new members who are required to contribute to the common fund for availing common facilities, and then grants only occupancy rights to them by draw of lots, the ownership remaining with the society, the receipts cannot be bifurcated into two segments of receipt and costs, so as to hold the former to be outside the purview of mutuality classifying it as income of the society with commerciality. It is not the case of the Revenue that such receipts have not been utilised for the common benefit of those who have contributed to the funds. Further, there is no reason to take a view different from that taken by the High Court, that the notification dated 09.08.2001 is applicable only to cooperative housing societies and has no application to a premises society which consists of non-residential premises;

++ the doctrine of mutuality was held to be inapplicable because the members who had not contributed to surplus as customers were nevertheless entitled to participate and receive part of the surplus. In the case of Chelmsford Club, it was held that there was no profit motive or sharing of profits as such amongst the members. The surplus, if any, from the business was not shared by the members but was used for providing better facilities to the members. There was a clear identity between the contributors and the participators to the fund and the recipients thereof.

(See 2018-TIOL-82-SC-IT)