Calcutta High Court
Commissioner Of Income-Tax vs Apsara Co-Operative Housing Society ... on 3 May, 1993
Equivalent citations: [1993]204ITR662(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment year 1984-85, the following question of law has been referred to this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the transfer fee of Rs. 40,870 was not taxable income of the assessee ?"
2. Shortly stated, the facts are that the assessee is a co-operative housing society. During the year relevant to the assessment year 1984-85, the assessee received transfer fee amounting to Rs. 45,870 for change of hands of flats. Following the treatment given to similar receipts in earlier assessments, the Assessing Officer held that the receipts were taxable as income. The administrative expenditure of the assessee was estimated at Rs. 5,000. The Assessing Officer, therefore, included a sum of Rs. 40,870 as the assessee's income under the head "Other sources".
3. The assessee went in appeal. The Commissioner of Income-tax, following the earlier findings in the assessee's case, held that the persons became members first before they are entitled to get the flats transferred in their names or are liable to pay the transfer fees. There is an element of mutuality in respect of transfer fees and, therefore, this receipt is not to be subjected to tax. Accordingly, the sum of Rs. 40,870 was deleted from the total income.
4. Being aggrieved by the order of the Commissioner of Income-tax (Appeals), the Department filed an appeal before the Appellate Tribunal. The Tribunal followed its earlier decision and upheld the action of the Commissioner of Income-tax (Appeals).
5. At the hearing before us, Mr. Moitra, appearing for the Revenue has submitted that, in view of the provisions of Section 2(24)(vii), the income which has been derived should be brought to tax. Section 2(24)(vii) provides as follows :
"the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with Section 44 or any surplus taken to be such profits and gains by virtue of the provisions contained in the First Schedule."
6. This contention, in our view, has no substance. The question of assessability in terms of Section 2(24)(vii) only arises if the co-operative society is engaged in business. In this case, it is a housing co-operative society and it does not carry on business. It only provides residential apartments to the members of the society. His next contention is about the word "surplus" in Section 2(24)(vii) as mentioned in the First Schedule. The First Schedule deals with insurance business and it has nothing to do with the co-operative society. He has brought to our attention the judgment of the Madras High Court in the case of CIT v. Madras Race Club [1976] 105 ITR 433. In that case, the assessee was carrying on the business of a race club. It provided facilities for other games, etc., to its members and subscriptions were taken from the members. The question was whether the club was entitled to exemption and whether the business which it was carrying on with profit motive was destructive of the principle of mutuality. There, the Madras High Court was of the view that, where there is a contribution of monies by certain persons coming together for trading or non-trading purposes without any idea of making a profit, the same cannot be brought within the ambit of taxation. Similarly, a members' club which comes into existence for the purpose of providing certain amenities to the members without any business element cannot also be taxed. In this case, as the Tribunal found that there was no profit element in the transaction, the society, under its regulations or bye-laws, realises transfer fee from a member when the member intends to transfer the flat to any other person, member or otherwise and this amount is taken for the benefit of the members of the society and not for business purposes.
7. Our attention has also been drawn to a decision of the Gujarat High Court in the case of CIT v. Shree Jari Merchants Association [1977] 106 ITR 542. There, the Gujarat High Court was of the view that a mutual association is an association of persons who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out of those funds in the same capacity in which they made the contributions. Thus, they receive back what was already their own. They contribute not with an idea to trade but with an idea of rendering mutual help. The receipt which comes back in their hands is not a profit, because no man can make a profit out of himself. Thus, the main test of mutuality is complete identity of the contributors with the recipients. If such a mutual concern receives any income, the surplus of which goes back to those who contributed the said income, it is not liable to tax because, on account of the operation of the principle of mutuality, the income remains, in reality, the income of the contributors. In that case, on the facts of the case, the Gujarat High Court found that, under Rule 38 of the constitution of the assessee-association, the surplus assets of the assessee shall, at the time of its dissolution, be used in the manner proposed in the resolution passed by the association. Apparently, any resolution which might come up for consideration in future would not necessarily provide for the distribution of the surplus assets only amongst the members of the association. In case the assets of the association are not liable to be returned to the members, the identity between the contributors and the recipients would be lost. This would militate against the very basic principle of mutuality. On that test, it was held that the association was not a mutual concern, which fact is absent in this case.
8. This principle, in our view, is applicable to a mutual concern and shall apply in the case of a co-operative society. It is the members who form themselves into a co-operative society for the purpose of having a co-operative housing society and there was no question of any profit element in such an association or in having a transfer fee. The Tribunal has not found that there was any profit element involved. It is a mutual concern.
9. The Calcutta High Court in CIT v. Darjeeling Club Ltd. [1985] 153 ITR 676, held that a group of persons can form a club to provide some facilities to themselves and any excess payment for these facilities may be retained for future use. In this process, no profit is made. Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund, the company makes no profit. In such cases, where there is identity in the character of those who contribute and of those who participate in the Surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. It is not necessary that the members who contribute to the funds of the club must be the identical persons who enjoy the benefit of the excess contribution. What is important is that the members as a class will be entitled to the benefit.
10. Our attention has also been drawn to the Full Bench decision of the Patna High Court in the case of CIT v. Banhipur Club Ltd. [1992] 198 ITR 261. In that case, the assessee-club has a bar where drinks are supplied to the members and their guests. The club also serves refreshments and meals to its members. It has also a set of rooms which are let out to the members. It has got a hall which is let out with furniture to the Rotary Club, Lions Club, etc., on payment. Apart from permanent members, the club, under its articles of association, has also temporary members, lady members, honorary members and patrons. The guests of the members cannot eat or drink of their own accord meaning thereby that nothing can be sold to them even if they pay. Members alone can order for services to be rendered to their guests for which the members alone pay or sign the bills. The set of rooms are also let out only to the members and if guests stay, the rooms are booked in the names of the members who alone can pay the charges. There, it was held that the assessee-club is a mutual concern and the income from the guest-houses received from the members of the club for their use and the use of their guests is entitled to exemption from income-tax.
11. We are of the view that the aforesaid principles applicable to the members' club will equally apply to the facts of a co-operative society, particularly of a housing co-operative society which does not carry on any business and where no element of profit is involved.
12. In that view of the matter, the question in this reference is answered in the affirmative and in favour of the assessee and against the Revenue.
13. There will be no order as to costs.
Nure Alam Chowdhury, J.
14. I agree.