IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH "B" AHMEDABAD Before Shri Mahavir Singh, Judicial Member, and Shri D. C. Agrawal, Accountant Member IT A No.2133/ Ahd/2006 & C.O. No.262/ Ahd/2006 Assessment Year:2003-04 Date of hearing:3.3.10 Drafted:3.3.10 Asstt. Commissioner of V/s. Manekbag Co-op. Income-tax, Circle-9, Housing Societ y, Ltd., Ahmedabad Dr. Radhakrishna Marg, Ambawadi, Ahmedabad Manekbaug Co-op. Housing Societ y Ltd., V/s. ACIT, Circle-9, Dr. Radhakrishna Marg, Ahmedabad Ambawadi, Ahmedabad PAN No. AAAAM 0606P (Appellant) .. (Respondent) Assessee by :- Shri S.N.Soparkar & Smt. Urvashi Shodhan, AR Revenue by:- Shri V.C.Modi, Addl. CIT-DR ORDER
PER Mahavir Singh, Judicial Member:-
This appeal by the Revenue and Cross Objection (CO) by the assessee are arising out of the order of Commissioner of Income-tax (Appeals)-XV, Ahmedabad in appeal No. CIT(A)-XV/ITO.Wd.9(3)/40/06-07 dated 20-07-2006. The assessment was framed by the Income-tax Officer, Ward-9(3), Ahmedabad u/s.143(3) of the Income- tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 24-03-2006 for the assessment year 2003-04.
2. The first and second two inter-connected issues in this appeal of the Revenue and the issue that income of the assessee is, at all not taxable on principle of ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 2 mutuality as raised by the assessee in the CO of the assessee against the order of CIT(A). For this, Revenue has raised two grounds, which read as under:-
"ITA No.2133/Ahd/2006 (by the Revenue)
1. The ld. CIT(A) has erred in law and on facts in reducing the disallowance of expenses made by the Assessing Officer from Rs.13,18,756 to Rs.7,61,826.
2. The ld. CIT(A) has also erred in law and on facts in deleting the addition of Rs.2,00,000/- being the transfer fee on transfer of plots."
And that of assessee's CO three grounds are as under:-
"CO No.262/Ahd/2006 (by the assessee)
1. The C.I.T. (Appeals)erred in not accepting the plea of the assessee that on the principle of mutuality, the assessee's income is not table at all.
2. In any case, the C.I.T (Appeals) erred in not giving the deduction of the total expenditure incurred by the assessee and in not holding that only the income of Rs.4,02,182/-, which was the net surplus of income over expenditure could be considered for taxability.
3. The C.I.T. (Appeals) failed to appreciate that even the above surplus of Rs.4,02,182/- will not be taxable because the income of the assessee by way of interest from Co-operative banks of Rs.4,78,317/- which is exempt u/s.80P(ii) was more than Rs.4,02,182/-."
3. The brief facts leading to the above issue are that the assessee is a Co- Operative Housing Society and derives income from hiring of hall, catering services, commissions etc. The assessee has declared gross receipts at Rs.21,56,766/- and declared net income at Rs.4,02,182/-. The assessee's main activities are hiring of Sanskritik Hall namely Manekbaug Sanskritik Kendra, received deposits from the members of the society on which interest is earned and incurred expenditure for maintenance of housing society and assessee also received commission from decorators and caters for a sum of Rs.8 lakh and rent from Manekbaug Sanskritik Kendra and other receipts related to it and claimed that income related to hiring of hall should be assessed as business income. The assessee also claimed the deduction on the principle of mutuality, i.e. all the expenses claimed by the assessee and stated that the income of the assessee should be taxed under the head "business". The Assessing Officer noted in his assessment order that the assessee being a Co-operative Housing Society cannot carry on business and therefore held that the entire income of the assessee is to be taxed under the head 'income from other sources' under the provision of Section 56(1) of the Act. The AO held that ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 3 expenses debited in its income and expenditure account, which cannot be said to be incurred for earning income from other sources and accordingly he allowed expenses to the extent of Rs.4,36,328/- u/s.57(iii) of the Act and balance expenses claimed at Rs.13,18,256/- out of the total expenses of Rs.17,54,584/- was disallowed. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) reduced the disallowance at Rs.7,61,826/- out of the total disallowance made by the Assessing Officer at Rs.13,18,756/- by giving following finding in para-2.3 of his appellate order:-
"2.3 I have considered the submissions of the Authorized Representative carefully and have gone through the observations of the Assessing Officer in the assessment order. I find that the expenses claimed by the Authorized Representative i.e. 90% of salary and bonus should be considered as allowable against income from Sanskritik Hall instead of 50% allowed by the Assessing Officer. Therefore, further reduction of 40% of salary should be allowed and 40% of bonus i.e. Rs.3,964/- should be allowed. Further the water expenses of Rs.1,56,650/- should be allowed as deduction. Similarly other expenses claimed by the appellant like advertisement expenses of Rs.28,342/-, service tax of Rs.16,998/-, staff medical expenses of Rs.5,250/-, municipal tax of Rs.77,036/-, audit fees of Rs.5,000/-, legal fees of Rs.64,000/-, 80% of Stationery and printing expenses of Rs.13,865/-, insurance premium of Rs.4,474/- depreciation on electrical fitting of Rs.243/-, depreciation on dead stock and furniture of Rs.22,287/- and depreciation on substation construction of Rs.3,190/- should be allowed as deduction against the income from hiring of Sanskritik Hall and decorators and caterers commission. As regards the other source of income i.e. interest from banks, following the decision of Hon'ble ITAT, Ahmedabad in the case of M/s. Gulmarg Association cited by the Authorized Representative, and as per the segregation of expenses given by the Authorized Representative, as there is surplus of Rs.10,870/-, the same is directed to be taxed income from other sources."
4. As regards to second issue of addition of Rs.2 lakh of transfer fee received by the assessee on transfer of balance as income of the assessee, the CIT(A) deleted the said addition relying on the Tribunal's decision of "C" Bench in the case of Gulmarg Association v. ITO Ward-8(7) Ahmedabad dated 28-05-2004 As regards to the issue of mutuality raised by the assessee, Ld. Counsel for the assessee stated that the income of the assessee is not at all taxable in view of principle of mutuality and he stated that the CIT(A) has wrongly confirmed the disallowance by not giving the deduction of total expenditure incurred by the assessee. He stated that the entire expenditure should be allowed as incurred by the assessee on account of net surplus of income over expenditure, which cannot be considered for taxability. He ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 4 stated that there is no surplus and even the above surplus amounting to Rs.4,02,182/- will not be taxable because the income of the assessee is earned by way of interest in co-operative bank at Rs.4,78,317/- which is not exempt u/s.80IB(2) of the Act, which was more than Rs.4,02,182/-. The Ld. Counsel for the assessee relied on the case of Gulmarg Association (supra) in para-6 to 8, which reads as under:-
"6. We have heard the ld. representatives of the parties and gone through the decisions cited. The admitted of the case are that a society is formed for maintenance of residential society of the members, maintenance charges are mutually collected from members. The object was not to earn any profit and distribution thereof to the members. Even on dissolution the surplus will not be distributed to members. For the purpose of the object of society i.e. maintenance, the society created a fund like construction fund and maintenance fund. The maintenance fund was deposited with bank and others, the interest income received. Both the lower authorities have accepted the principles of mutuality in respect of contribution from members which is not under dispute. On the basis of that principle, the AO has not charged tax on surplus. The dispute is only in respect of interest income. The judgment of Hon'ble Gujarat High Court in the case of Rajpat Club (supra) is distinguishable on facts, in that case surplus fund was invested with the intention to earn interest income further on dissolution surplus shall be distributed to members. Whereas in the case under consideration that interest income was directly charged for the maintenance expenses and not to earn interest as income. This observation is supported by the facts of this case that this income will not be given to the members even on dissolution of the association. Under the circumstances, we find that the lower authorities have not properly appreciated the facts of the case. The peculiar fact of the case is that the society has decided to collect one time found from members instead of periodical collection from the members and further decided that in the case of income falls short, the deficit will be collected from members. The above facts are summarized in figures for different years as under:-
Gulmarg Association 94-95 95-96 96-97 97-98 98-99 Total maintenance Expenses 187162 199414 271402 357259 382095 Less: Interest 66268 65463 105868 122882 97250 Balance to be Contributed by 120894 133951 165534 234377 284845 members Ashima Estate 94-95 96-97 97-98 Total maintenance expenses 1,92,265 2,59,215 3,34,610 ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 5 Less: interest 79,174 1,21,587 1,15,577 Balance to be contributed by members 1,13,091 1,37,628 2,19,033 From the above facts it is clear that the association assessee has Credited charge on the maintenance fund collected from the members towards maintenance expenses. So to the extent it is not income because it has been diverted by an overriding title. We find that the accrual of interest income itself is for the purpose of maintenance. As per the object and dissolution clauses and connected resolution of the association, this income is never to be distributed to members of the association, this income is never to be distributed to members of the association as income or otherwise. Apart from above we find that in the case under consideration, the assessee has reduced the cost of maintenance which was to be contributed by the members. It is useful to refer the ruling laid down by the apex court in the case of CIT v. Bokaro Steels Ltd. 236 ITR 315 (SC) wherein it has been held that the activities of the assessee were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The receipts had been adjusted against the chares payable to the contractors and had gone to reduce the cost of construction. In the case under consideration the assessee created a fund for meeting the maintenance expenditure, on the basis of above ruling of the apex court the assessee is entitled for reduction of maintenance expenses. The interest income is first adjustable against expenses and if surplus is found that amount is certainly taxable. If it is found otherwise, we are of the view that such interest is not taxable.
7. The controversy under consideration can be examined from one more angle that is that, for the sake of argument it assumed that the association created a fund for maintenance on the basis of one time collection from the members and invested in the bank & others. This can be said to be one type of business activity of the association. For the purpose of calculation of profit the assessee is entitled for expenditure pertaining to that from the income/receipt of that activity. In the case under consideration interest income is income/receipt and maintenance expense is expenditure of that activity. If income exceeds than expenditure that surplus is subject to tax. In the case under consideration there was loss as calculated above. On identical set of fact the Ho'ble Delhi High Court in the case of Director of Income Tax vs. ALL India Oriental Bank & Commerce Welfare Society (2003) 130 Taxman 575 (Del) has discussed the appeal of revenue as no question of law survives, with the following observations:
'As is evident from the format of the questions, the only issue raised by the revenue is as to whether the interest income derived by the respondent/assessee on the contributions made by the members of the welfare society is to be taxed in the hands of the society or not. Since in our view, the issue raised by the revenue is legal and is no more res integra, we deem it unnecessary to state the facts. Suffice it to notice that while completing assessment on the respondent assessee, a co-
operative society comprising of the employees of the Bank, the AO had ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 6 held that the interest income earned by the society on the contributions received from the members was not exempt on the principle of mutuality.
The issue with regard to the concept and principle for mutuality has been elaborately examined by the apex court in Cheimsford Club vs. CIT (2000) 159 CTR (SC) 235: (2000) 243 ITR 89 (SC). Their Lordships have held that where a number of persons combine together contribute to a common found for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus generated cannot in any sense be regarded as profits chargeable to tax. It has been observed that what is required to be seen is whether there is a complete identity between the contributions and participators. Once the identity of the contributor to the fund of the recipients of the funds; the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words as an instruments obtained to their mandate; and the impossibility that the contributors should derive profit from contributions made by themselves to a fund which could only be expended or returned to themselves is established, the doctrine, of mutuality is established.
It is not the revenue's case that the afore-noted three conditions are not established in the instant case. As a matter of fact, before the Tribunal, the ld. Departmental Representative had conceded that the controversy, sought to be raised again in this appeal, stands concluded against the revenue in Cheimsford Club vs. CIT (supra). In this view of the matter, no question of law much less a substantial question of law survives for our consideration.'
8. In the light of the above discussion and under the peculiar circumstances, we find that there is no justification in taxing interest income. We therefore set aside the orders of the lower authorities and the claim of the assessee is allowed. Accordingly, the additions made by the AO are deleted."
5. After hearing the rival contentions and going through the facts of the case as narrated above, we are of the view that the assessee is a registered co-operative under the Gujarat Co-Operative Societies Act. We find that the main object of the society is to manage, administer, operate, supervise and make available the common facilities and amenities to its members. To meet the expenses on account of maintenance, the housing society collected deposits from its members, made deposits and earned interest there on from a co-operative bank. The assessee also, to made out further expenses of maintenance, let out the Manekbaug Sanskritik Kendra and earned rental income and also earned income from transfer fee for entering new members. We find that this issue is squarely covered by the decision of ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 7 jurisdictional High Court in the case of Adarsh Co-operative Housing Society Ltd. 213 ITR 677 (Guj) and Hon'ble Bombay High Court in the case of Sind Co-op. Housing Society & others v. ITO Ward-1(7), Pune in ITA No.931/Pun/2004 dated 17- 07-2009. We find that the Revenue could not distinguish the above decisions referred by Ld. Counsel for the assessee that of jurisdictional High Court in the case of Adarsh Co-operative Housing Society Ltd. (supra) and Hon'ble Bombay High Court in the case of Sind Co-op. Housing Society & Others (supra) and that also of this Tribunal in the case of Shree Yogeshwarnagar Co-op. Housing Society Ltd. v ACIT Circle-9 A'bd in ITA No.2129/Ahd/2005 dated 11-09-2009. We feel that the income earned by the society on account of interest, rent and other miscellaneous income from its members is exempt in view of the principle of mutuality. We find that the Hon'ble Bombay High Court held as under:
"21. We may now deal with some other submissions advanced on behalf of the Revenue. It was contended that the class of members means, members such as permanent, temporary, honorary etc. This is based on the assumption that there can be different classes of members. In a Cooperative Housing Society there can be members and associate members. We have already quoted from the judgments where reference is to members as a class and that class may be diminished by members going out or increased by the members coming in. But the class remains the same. As already noted by the Supreme Court in Bankipur Club (Supra), the identity must be as a class of contributors and participants and it does not matter that the class may; be diminished or increased by members going out or coming in. Similarly, it is not necessary that each member should contribute or each member should participate in the surplus and get back from the surplus .... What he has paid, as long as they have control over the surplus.
22. It was also sought to be contended that the payment is not voluntary and at any rate the excess amount charge than what is permitted in the bye- laws will be exigible to tax. Firstly, whether it is voluntary or not would make no difference to the principle of mutuality. Secondly payments are made under the bye-laws which constitutes a contract between the society and its members which is voluntarily entered into and voluntarily conducted as a matter of convenience and discipline for running of the society. If it is the case that the amounts more than permissible under the notification had been received under pressure or coercion or contrary to Government directions, then considering section 72 of the Contract Act, that amount will have to be refunded. At any rate if the society retains the amount in excess of binding Government Notification or the bye-laws that amount will be exigible to tax as it has an element of profiteering.
23. It was then sought to be contended that the premium charged is a profit. As we have already noted and considering the bylaws, the society is registered with the object principally of looking after the property including ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 8 building thereon. There is no trading or business transactions. The member by adopting the bylaws agree amongst themselves that a fee for transfer of flat/tenement when it is sold would be paid to the society. It may be that both incoming or outgoing member have to contribute to the common fund of the society. The amount paid however, is to be exclusively used for the benefits of the members as a class.
24. It was next contended that there is no legal bar for the assessee to earn profits. There can be no dispute on that proposition but the profit must come from a commercial activity in the nature of trade, business or the like in which event the assessee then will have to pay tax on such profits. Charging of transfer fees as per by-laws has no element of trading or commerciality. There therefore, being no taint of commerciality, the question of earning profits would not arise when the housing society from the funds received applies the moneys towards maintenance of the society and providing the members with usual privileges, advantages and conveniences.
25. It was also contended that the case should be covered by section 28(3) of the Income Tax Act. Section 28(3) would have no application to the facts of the case as it deals with the income derived by the member from professional or similar association from the specific services performed for its members. A cooperative society has not similarity whatsoever with a professional association. In CIT V.s Apsara (Supra) the Calcutta High Court, there held that even if the case of member or professional association, general fees levied by the association on its members by way of entrance fees or periodical subscription or otherwise would not constitute business. Since, these are not related to any specific services rendered by its members. We are in respectful agreement with that view.
26. In so far as Section 80P is concerned, the deduction is available in respect of the charges from certain commercial activities by the cooperative housing society. That is not relevant for the issue being answered.
27. An argument has been advances that the societies are charging more than the amount as notified or permitted by the Government Notification dated 9.08.2001. The case before us are for the assessment year previous to that. Earlier notification on 20.12.1989 provided that only if the bye-laws were amended in terms of the notification dated 27.11.1989, then the society could not charge more than what was set out in the notification. We really would not be concerned therefore, in this group of cases with notification as now notified by the Government. If therefore, any amount has been received beyond the amount notified by the Government and that amount has not been refunded to the members to that excess amount as already held, the principle of mutuality will apply.
28. Let us now apply the various tests which are to be considered for applying the principle of mutuality to a case of the cooperative housing society based on our earlier discussion.
(1) Is there any commercially involved.
ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 9 This has to be found from the bye-laws of the cooperative housing society. In case of the cooperative Housing Society, admittedly there is no commercially involved. Once there is no commercially involved the first test of profitability does not exist. The first requirement of mutuality is therefore, met.
(2) From the moneys received are the services offered in the nature of profit sharing or privilege, advantages and conveniences.
In case of a cooperative housing society, the only activities which it can carry out in terms of its bye-laws are basically maintenance of its property which includes building or buildings. The subscription and or contributions received by the members can only be expended for the purposes of maintenance and providing other privileges, advantages and conveniences to its members in terms of its bye-laws. Another test of mutuality is thus satisfied.
(3) Are the participants and contributors identifiable and belong to the same class in the case of the cooperative housing society.
The class of members are clearly identifiable. Members are ordinary members of associate members. The participants and contributors are the members. The members may come in our go out. The fact that only some members from those who contributed may participate in the surplus, as held by the Supreme Court is irrelevant as long as the class is identifiable. This test is also satisfied in the case of a Housing cooperative society.
(4) Do the members have the right to share in the surplus and do they have a right to deal with its surpluses.
In terms of the bye laws, it is only the members who have a right to share in the surplus. Under the M.C.S. Act, no part of the funds, as provided in section 64 can be paid by way of bonus or dividend or otherwise distributed among its members except as provided therein. Under Section 67, there is a limit on the dividend to be paid on liquidation . Under section 110 of the M.C.S. Act. The surplus can only be dealt with in the manner provided therein which includes any member or devoted to objects provided by the bye-laws or be transferred to another society with similar object. Rule 90 of the Rules provide how the surplus is to be divided. The surplus then can be distributed in terms of the bye-laws to members and or by operation of law to another society having the same objective. In other words yet another test of mutuality is satisfied.
29. Once these tests are satisfied, in our opinion, there can be no doubt that the principle of mutuality will apply to a cooperative Housing Society which has its predominant activity, the maintenance of the property of the ITA No.2133/Ahd/2006 & CO 262/Ahd/2006 A.Y. 2003-04 ACIT Cir-9 A'bd v. Manekbag Co-op. Hsg. So. Ltd. Page 10 society which includes its building or buildings and as long as there is no commerciality, trade or business.
30. For all the aforesaid reasons, the questions as framed will have to be answered in favour of the assessee and against the revenue."
6. In view of the above decision of Hon'ble Bombay High Court in the case of Sind Co-operative Housing Society And Others (supra), we feel that in the present case, the income earned by the society on account of interest, rent and other miscellaneous from its members for the purpose of maintenance will attract the concept of mutuality and accordingly the incomes will be subject to exemption, if any surplus, is there. Accordingly, this appeal of the Revenue is dismissed and that of CO of assessee is allowed.
7. In the result, Revenue's appeal is dismissed and that of assessee's CO is allowed.
Order pronounced in Open Court on 05/03/2010 Sd/- Sd/- (D.C.Agrawal) (Mahavir Singh) (Accountant Member) (Judicial Member) Ahmedabad, Dated :05/03/2010 *Dkp Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT(Appeals)-XV, Ahmedabad 4. The CIT concerns. 5. The DR, ITAT, Ahmedabad 6. Guard File. BY ORDER, /True copy/ Deputy/Asstt.Registrar ITAT, Ahmedabad