Income Tax Appellate Tribunal - Mumbai
Shree Parleshwar Co-Op. Housing ... vs Ito, Ward 21(2)(4), Mumbai on 9 May, 2006
Equivalent citations: [2006]8SOT668(MUM)
ORDER
G.E. Veerabhadrappa, V.P. All these four appeals filed by the assessee against the consolidated order of the Commissioner (Appeals) for the assessment years 1998-99 to 2001-02 involve some common grounds, Therefore, we proceed to dispose of these appeals by this consolidated order for the sake of convenience.
2. The common issue in assessment years 1998-99, 1999-2000 and 2000-01 relates to taxability of loan taken from incoming members when the existing (198) members transferred their interest in favour of the incoming members.
3. The assessee before us is a, housing co-operative society, registered under the Maharashtra Co-operative Societies Act, 1960. The assessee falls in the category known as "tenant co-partnership housing society". The main feature of this society is that it owns both land and building either on leasehold or freehold basis and on construction of tenements they are allotted to its members. The society in this case constructed 198 flats from 1954 till 1956 and allotted them to members, who, among others, have right to transfer their right of membership and other attended privileges.
4. During these assessment years the assessee society collected interest free loans from the incoming members. The assessing officer was of the view that the loans so taken are really not refundable and consequently represented income in its hand, liable to be taxed. The case of the assessee is that the assessing officer did not properly appreciate the true nature of the transaction. The loans in question are all repayable sums. In fact, all the loans were eventually repaid and in respect of one such loan, it was repaid even before the re-opening of assessment under section 147 of the Act. Other loans have been repaid over a period of five years. The assessee before us contends that the department did not properly appreciate that the loans in question were only in the nature of loan and do not have the character of income or any traces of it. Even otherwise, on the basis of mutuality the sum could not be brought to tax. In any of the matter, the learned counsel for the assessee contended, these sums were received as loans on the basis of resolutions passed by the society and, therefore, cannot be taxed as income. The learned counsel for the assessee further argued that the only ground on which the addition is made is on the basis of Bombay High Court decision in the case of CIT v. Shri Chhatrapati Sahakar Sakhar Karkhana Ltd. (2000) 245 ITR 498 (Bom). The learned counsel pleaded that the said decision of the Bombay High Court has already been overruled by the Apex Court in Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT (2004) 270 ITR 1 (SC). The learned Departmental Representative, on the other hand, strongly supported the orders of the Commissioner (Appeals) and the assessing officer on the basis of the lines of reasoning given by them in their orders.
5. We have considered the rival submissions as also the impugned orders and documents and papers filed before us. We are unable to accept the stand of the department. The assessee has passed resolutions to take refundable loans from incoming members as and when the existing 198 members transferred their membership/interest in the society. The loans have been taken from members who are clearly identifiable. The loans have been taken through regular banking channels and credited in the society's books as loans repayable and, in fact, they were so repaid subsequently, in one such case even before the re-opening proceedings under section 147 of the Act started. The Bombay High Court decision, as mentioned above, has already been reversed by the Apex Court in the case of Siddheshwar Sahakri Sakhar Karkhana Ltd. (supra). In the light of the above, the issue in all these appeals is decided in favour of the assessee.
6. Now what survives for decision is the ground raised in the assessment year 2001-02 which relates to only the taxability of the alleged surplus arising from utilizing the balance FSI to the existing land in which 198 tenements have already been constructed in the years 1954-56.
7. Now the facts relevant to the issue are that the society was formed in the year 1954, as already stated, constructed 198 tenements and allotted them to members. The society also constructed a common community hall through the contribution of these members. This hall was being used for the activities of the members. It was also let out as marriage hall to outsiders on specific charges. The assessee society offered to tax the entire income received for such use from year to year.
The society was left with some unutilized FSI and the same were utilized for constructing four new tenements as also for enclosing the verandahs by the existing tenements. It was decided to build four new tenements, which were to be allotted to four new members. Choice was given to the existing members but none of them came forward. The funds required for the project were to be provided by the member allottees of the new tenements as also by utilizing the funds available with the society through the contributions over the years or otherwise from the existing members. Plans were submitted and were ultimately approved by the Municipal Corporation of Greater Mumbai and the construction commenced in the year 1997-98. New members were duly admitted in 1998-99 and the entire project namely, building four new tenements and enclosing the verandahs of the existing 198 tenements was completed in the year 2001 and the extra area to the existing members and the new tenements to the new admitted members were effectively handed over to the members. Factual matrix of the events relating to the admission and contribution for the new four tenements from the members is summarized below:
S. No. Name of new member Date of application by new members for fresh membership Date if managing committee meeting approving the membership Date of first instalment of contribution Date if allotment letter issued by society
1.
Mr. Ram V. Rane 5-9-1998 5-9-1998 5-9-1998 30-10-1998
2. Mr. Sudhir V. Rane 5-9-1998 5-9-1998 5-9-1998 30-10-1998
3. Mr. S udhir G. Pisat 15-8-1998 16-8-1998 23-8-1998 22-11-1998
4. Mrs. Minal S. Pisat 21-11-1998 21-11-1998 21-11-1998 22-11-1998
8. In respect of the enclosure of verandahs to the tenements occupied by 198 existing members, there were no specific contributions by them except paltry sums towards relaying of electrical cables as a result of addition of verandahs. The total cost of the entire project was claimed to be about Rs. 188.30 lakhs (which included cost of verandahs four new tenements) as against the total receipt of Rs. 119.79 lakhs, which was claimed to result in a deficit of Rs. 60.59 lakhs in the entire deal. These claims of the assessee were never accepted by the assessing officer who went to treat the construction of four new tenements and their allotment to the four new members as non-mutual activity of the society and, therefore, treated the same as income from business activity and determined the income as under:
Total receipts from New Members including subscription of share capital Rs. 110.00 lakhs Cost of construction estimated by assessing officer for four new tenements Rs. 23.40 lakhs Income added as business income from project Rs. 86.60 lakhs
9. The assessment in which originally there was no addition, was reopened under section 147 of the Act to make the impugned addition.
10. It was contended on behalf of the assessee that this is a part of its mutual activity and assuming there is a surplus, it is not liable to be taxed. According to it, there is no surplus at all as it was as a composite combined project, which resulted into a net deficit, as stated earlier. Members of the society would not have approved the project of building four new tenements without assuring them of enclosing the verandahs, which will give them additional space admeasuring roughly 100 sq. ft. So it was contended that when the additional cost of enclosure of verandahs to the 198 existing tenements is considered, there is no surplus. Without prejudice, it was also the contention of the assessee that the surplus, if any, is not liable to be taxed in the hands of the society on grounds of principle of mutuality in its transactions with its members - existing as also the new members. There is complete identity of the contributors and the beneficiary to the total project viewed as a whole.
11. The department rejected the above contention of the assessee on the following grounds :
(a) The assessing officer held that members could not be admitted for tenements under construction. Therefore, receipts prior to tenement becoming ready were not mutual in character.
(b) The assessing officer held that tenements were not allotted but were sold to members and, therefore concept of mutuality was never applicable to the impugned transactions.
(c) The assessing officer held that the extension project was not single integrated project but building four new tenements was construction project whereas building extra enclosures of verandahs for existing members was extension project. He.further held that construction activity as such was not the main object of the society and, therefore, it was non-mutual in character whereas the extension was mutual activity.
(d) The assessing officer raised the issue of inequality in contribution from members for the project and on that ground held the activity to be non-mutual.
12. The assessee went in appeal to the Commissioner (Appeals) on various grounds, challenging the validity of re-opening of assessment under section 147, challenging the treatment of transaction as non-mutual, challenging the artificial bisection of single project into two and according two different tax treatments to such bisected segments, etc.
13. The Commissioner (Appeals) rejected all the contentions of the assessee raised before him. Though he accepted one plea of the assessee that new members could be admitted for tenements under construction (para 32 of his order), but ultimately agreed with the assessing officer. He opined that the bye-laws of the society which authorized construction of tenements was extinguished with the initial construction of 198 tenements. In other words, the objectives of the society, viz. building houses and giving them to members was no longer operative in respect of the subsequent tenements, which were built after about 50 years though the exiting FSI was utilized. Hence, the so-called surplus, without considering the cost of enclosure of verandahs of 198 tenements, was liable to be taxed in any manner. The Commissioner (Appeals) went on to observe that 198 members did not contribute concurrently with the contribution from the four new members.
The assessee is aggrieved by all these findings of the Commissioner (Appeals) and is before
14. The learned counsel for the assessee has challenged all these findings of the Commissioner (Appeals). Shri B.K. Khare, learned counsel for the assessee, explained the provisions of rule 10 of Maharashtra Co-operative Society Rules, 1961, which classified various societies. It was contended that the assessee is a tenant co-partnership housing society and accordingly owns both land and building in freehold basis. It is, therefore, entitled to only allot the share to new or existing members. It cannot sell any of its construction segments either to members or outsiders. It has functioned under the discipline of the rule governing the society and, therefore, the concept of mutuality applies with all its force and no question of levy of tax either on part or whole of the construction project, which was exclusively for the benefit of the members - existing and new. Reliance was placed on the decision of Apex Court in Ramesh S. Shah AIR 1975 SC 147 (sic) and decision of Maharashtra State Co-operative Appellate court in the case of Adarsh Grih Nirman Sahakari Sansthan v. K.K. Londhe (1992) CTJ 453. The assessee has filed all the compilation including the rules and bye-laws of the society, the accounting details of its transaction and case laws relied on before the revenue authorities as well as before us.
15. The learned Departmental Representative, on the other hand, pointed out that the assessing officer and the learned Commissioner (Appeals) have given detailed reasons in support of the departmental stand on each of the disputed issues. He heavily relied upon these and pointed out that the assessee's appeal should be dismissed.
16. We have carefully considered the rival contentions in the light of the material placed before us as also the relevant case laws relied upon by the parties. We have also carefully gone through the impugned orders on the issue before us.
17. There is no dispute that the assessee is a society registered under Maharashtra Co-operative Societies Act and is functioning since 1954. The society is established to provide for housing facilities to its members. The society owns both land and building on freehold basis and had allotted tenements to its members. It is a tenant co-partnership housing society. The Act, the rules and the bye-laws of the society ordains the society only to allot the flats to its members and the society has done so in this case.
18. The Hon'ble Supreme Court in the case of Ramesh S. Shah (supra) has explained the nature of the society. It was held that the land and building were always owned by the society and what the member is allotted is only conditional occupancy rights. However, the society has power to expel a member and dismiss him and disposes him of the premises and the premises are then retained by the society within the framework of its byelaws. Having regard to this and the nature of the society not being in serious dispute, we are unable to accept the stand of the revenue that notwithstanding all these, the society has sold the four new tenements to the new members. The proposition that a society cannot sell its tenement is clearly established in yet another judgment of Maharashtra State Cooperative Appellate Court in the case of Adarsh Grih Nirman Sansthan (supra) wherein the court, in fact, directed cancellation of sale deed entered into by the society. Again this position is reaffirmed by the Divisional Joint Registrar, Co-operative Society, Mumbai Division, in assessee-society's own case (Appeal No. 193/2003) relevant observation to this effect is as follows :
"I find substance in the arguments made by the learned advocate for the appellant regarding furnishing indemnity bonds by the managing committee members of the housing societies and the fact that the society being open plot type tenant co-partnership society cannot sell the flat but can only allot the same to the members...."
19. The revenue cannot ignore all these and the nature of society and bring to tax revenue, which falls within the domain of the mutuality. The concept of mutuality is the very foundation of co-operative society. All these four new members have been claimed to be included into the society as per the provisions of Maharashtra State Co-operative Societies Act, 1960 and Rules, Bye-Laws enacted there under. It is also undisputed that project undertook certain additional facility to existing members and construction of four new tenements of a smaller size so as to utilize available FSI. As we have observed earlier, the plan of building was modified, according to the above, changes were made in existing site plan as per the relevant provisions of building bye-laws applicable to the property in question. The induction of new four members and modification of building plan for accommodating four new members along with some additional facilities to existing members were claimed to have been carried out within the four corners of building bye-laws applicable to the area. There is nothing on record to suggest that there was any violation of any provisions of Maharashtra Co-operative Societies Act, 1960 for inducting new members in the society. There is again nothing on record to suggest any violation of the relevant building bye-laws applicable to property in question regarding additional construction along with for four new in-comer and enhancing facility to existing members. The assessee society was entitled to avail unused/additional FSI as per law. Under this background, it is not justified on the part of revenue to treat one segment of this project pertaining to new four tenements as non-mutual business activity and addition of the same as business income from the said activity. Once the allotment of new four members is as per the provisions of Maharashtra Co-operative Society Rules, 1960, and Rules-Laws, Bye-Laws enacted there under, the income from the same should not be treated as business income.
20. The Hon'ble Supreme Court in the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC) stating the relevant law from Halsbury's Laws of England, Fourth Edition, reissue Volume 23, paragraphs 161 and 162, observed as under :
"Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not giving rise to profits which are chargeable to tax. Where the trade or activity is mutual, 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."
In this case, the identity of both the members and their contributions is proved. Therefore, in terms of the above decision of the Supreme Court mutuality stands established.
21. As long as the society dealt with its members and allotted them four new tenements, obviously satisfies the test of mutuality. The four new tenements cannot be allotted to the 198 existing members. It has chosen to allot the tenements to the new four members who were admitted by the society. The character of society has not changed either with the construction of four new tenements or with the allotment of them to the four new members or with the admission of four new members to its fold. Obviously, a member who joined in 1954 to this society has paid much less when compared to a member who joined subsequently say in 1998. That does not make any difference to the nature of the society or its transactions with such members, any less mutual 'A' might have joined a mutual society by paying a paltry sum and 'B' might have jointed much later by paying astronomical sums as entrance fee, but that by itself will not result the society losing its mutual tag on the ground of inequality in contribution from members for the project. The revenue should have treated the entire activity of providing verandahs to the existing 198 members who occupies the existing tenements and the construction of the four new tenements, which are allotted to four new members as one single project, contribution for project coming from the utilization of the funds available with the society through the past contributions of its existing members and also the funds made available by the new members for membership in the society acquired much later in point of time than the existing members.
22. In the light of the above discussions the impugned additions are deleted. As we have deleted the additions on merit, we do not find it necessary to go into the validity of the re-assessment proceedings under section 147 of the Act.
23. In the result, the appeals are allowed.