By TIOL News Service

MUMBAI, JULY 05, 2016: THE issue is - Whether the collection made by a co-operative housing society as interest free loan, from incoming members as a binding precondition for becoming a member, are revenue receipts. NO is the verdict.

Facts of the case

The assessee is a tenant copartnership housing Society. Thus, the Society owns both the land and the building and only allots its tenaments to its members. The society was constituted in the year 1954 and has 198 members occupying its tenaments. It had available unutilized FSI (Floor Space Index) and sought to exploit it by constructing four additional tenaments and also enclosing the balconies (Verandah) of the existing tenaments resulting in additional l00 sq.ft. to its members. None of the existing members came forward to seek allotment of the four additional tenaments which were to be constructed on exploitation of the unutilized FSI. In 1998, four persons sought membership of the Society. They were alloted the tenaments on construction by the Society. The four new members had after becoming members contributed to the Society in the aggregate an amount of Rs.1.10 Crores. This resulted in allotment of four new tenaments constructed by the Society. However, the aforesaid contribution received from the four new members was not offered to tax by the Society on the principle of mutuality. The AO did not accept assessee's contention in respect of mutuality and held that the contribution from the four new members is in fact consideration received for Sale of four new tenaments and, therefore, chargeable to tax as the income of the Society. On appeal, the Tribunal held that the amounts paid by members would be covered under the concept of mutuality.

Having heard the parties, the High Court held that,

++ it is found that the test to determine the satisfaction of mutuality has been laid down by the decision of the Apex Court in Banglore Club Vs. Commissioner of Income Tax, wherein it was observed that the basis of not taxing surplus funds in the hands of an Assessee on the principle of Mutuality finds its origin in the concept of 'no man can make a profit of himself'. The Apex Court in Banglore Club set out three tests to be satisfied as under before the principle of mutuality can be applied as: (i) There must be a complete identity between the contributors and the participants as a class; (ii) The actions of the participants and contributors must be in furtherance of the activities of the assessee; and (iii) There must be no scope of profiteering by the contributors from a fund made by them, which could only be expended or returned to them. The Apex Court in Banglore Club case also observed that at what point mutuality ceases and commerciality begins is a question of fact. Keeping the aforesaid tests in mind, we find that the Tribunal on examination of the facts before it has came to the conclusion that the contribution of Rs.1.10 Crores received by the Society was from its members and the allotment of four new tenaments was also done only to the existing members. It is an undisputed position that the four new members were members of the Society prior to the allotment of the tenaments to them and also before making their contribution. It is not the case of the Revenue that there is absence of complete identity of the contributors and participants of the Society. So far the second test is concerned viz. that the actions of the Society must be in furtherance of the object of the Society. This is also satisfied. This is so as it is not the case of the Revenue that building tenaments and giving it to its members is not the object of the Society. Thirdly, there is no scope for profiteering in the present facts, as the members have not purchased the flat but have only got a right to occupy a tenament allotted by the Society. Thus, on facts, the Tribunal has so held without specifically referring to the three tests. Thus, on facts, the view taken by the impugned order stand covered in favour of the Society.

(See 2016-TIOL-1278-HC-MUM-IT)