Income Tax Appellate Tribunal - Mumbai
The Sindhi Immigrants Co-Op. Hsg. Soc. ... vs Department Of Income Tax
1
The Sindhi Immigrants Coop Hsg Soc Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ' I ' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI T R SOOD,
SOOD, AM & SHRI VIJAY PAL RAO, JM
ITA No. 5732/Mum/2009 ( Asst Year 2006-
2006-07)
Cross Objection No.112/Mum/2010
The Income Tax Officer Vs The Sindhi Immigrants Coop Hsg
Ward 22(2)( 2), Mumbai Soc Ltd
Little Malabar Hill, Sindhi Society
Chembur
Mumbai 71
(Appellant/Respondent
(Appellant/Respondent ) (Respondent/Cross
(Respondent/Cross Objector)
Objector)
ITA No. 246/Mum/20
246/Mum/2010
/Mum/2010 (Asst Year 2006-
2006-07)
The Sindhi Immigrants Coop Hsg Soc Vs The Income Tax Officer
Ltd Ward 22(2)( 2), Mumbai
Little Malabar Hill, Sindhi Society
Chembur
Mumbai 71
(Appellant/Respondent
(Appellant/Respondent ) (Respondent/Cross
(Respondent/Cross Objector)
Objector)
PAN No. AAATT0524E
Assessee by Sh Vimal Punmiya
Revenue by Sh A K Nayak
Dt.of hearing 29th Dec 2011
Dt of pronouncement 6th, Jan 2012
ORDER
PER VIJAY PAL RAO, RAO, JM These cross appeals and the Cross Objections by the assessee are directed against the order dated 12th Aug 2009 of the CIT(A) for the Assessment Year 2006-07.
2 In appeal ITA No. 5732/Mum/2009, the revenue has raised the only ground as under:
2
The Sindhi Immigrants Coop Hsg Soc Ltd "On the facts and circumstances of the case and in law, the ld CIT(A) has erred in taking the view that the Gymkhana is club run on the concept of mutuality and interest earned ` 7.95 lacs on deposits would quality for exemptions on grounds of mutuality and he failed to appreciate the facts that the interest is earned on the contributions/deposits from outsiders which will not come under mutuality."
2.1 The assessee is a cooperative society and also running Gymkhana, which is opened to its members and ex-members as well as outsiders also made members of the Gymkhana by accepting deposits. During the assessment proceedings, the Assessing Officer noted that for providing a good number of facilities, contractors are appointed and Gymkhana has taken trade deposits from the contractors. The assessee prepares separate income & expenditure account and balance sheet for Gymkhana and cooperative housing society and then consolidated accounts. The Assessing Officer was of the view that since the deposits are received in the ordinary course of running the business of Gymkhana, the interest received on such deposits partake the character of business income. Accordingly, the Assessing Officer was of the view that the interest earned on such deposits amounting to ` 7,95,497/- is to be taxed under the head 'business.
2.2 The assessee claimed deduction u/s 80P in respect of the interest received, which was rejected by the Assessing Officer and the said interest earned on the deposits received from non-members and trade deposits amounting `.7,95,497/- was assessed to tax.
2.3 On appeal, the CIT(A) allowed the claim of the assessee and held that the Gymkhana is a club and run on the concept of mutuality. Therefore, the interest earned on the deposits received during the course of running the Gymkhana, as per CIT(A), would quality for exemption on the ground of mutuality.3
The Sindhi Immigrants Coop Hsg Soc Ltd 3 Before us, the ld DR has submitted that it is not the interest on money received by the assessee from its members but it is the interest received that too on deposits from non-members. Therefore, the concept of mutuality would not apply on such interest. He has relied upon the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Common Effluent Treatment Plant, (Thane-Belapur) Association reported in 328 ITR 362. 3.1 The ld AR of the assessee has submitted that the Society has developed Gymkhana for recreational activities of its members, in the mean while, the society had allowed others and taken them as nominal and sympathizer members of the society and allowed them to use the Gymkhana. The ld AR has submitted that It is not a business but service of the Society to promote recreational facility, so that the members remain fit in their health. 3.2 Regarding the enjoyment facility benefit services and privileges of the society by the alleged non-members, the ld AR of the assessee as submitted that the lower authorities have a wrong notion about the use of club by the non- members. The facilities of the society are used only by the members or their relatives or by their guests. No person can even enter into the premises of the society without the recommendation of the member. It is only the members who take their relatives or guests to the club.
3.3 He has further submitted that as per the provision of the Maharashtra Co- operative Hsg Soc., any interest income earned can be further classified into interest earned from investments made in Cooperative Banks & interest from other Investments. Therefore, Interest earned from any investment made in Co- operative Banks qualifies for deduction @ 100% under section 80P(d) . Thus, the 4 The Sindhi Immigrants Coop Hsg Soc Ltd interest received by the assessee society is eligible for deduction u/s 80P of the Act.
4 We have considered the rival contention as well as the relevant material on record. There is no dispute that the interest received by the assessee on the deposits. Therefore, in view of the decision of the Hon'ble jurisdictional High Court in the case of Common Effluent Treatment Plant, (Thane-Belapur) Association (supra), principle of mutuality is not applicable. The Hon'ble Jurisdictional High Court in paras 29,30 & 32 has held as under:
"29 In order to fulfil the requirement of mutuality, a mutual association has to establish, as an essential requirement, the identity between participators and contributors to the fund. However, the fact that an association satisfies the norm of mutuality in respect of the receipts of contributions from its members does not necessarily lead to the conclusion that every activity of the association satisfies the test of mutuality. An association may engage in activities which can be described as mutual and in other activities which are not mutual. The Gujarat High Court recognized this in its decision in Sports Club of Gujarat Ltd. [1988] 171 ITR 504 ; [1988] 37 Taxman 38. Adverting to the decision in CIT v. Madras Race Club [1976] 105 ITR 433 (Mad), the court noted that the application of the principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character. However, in such a case, the principle of mutuality has to be confined to transactions with members possessing the essential character of mutuality. The two activities can in appropriate cases be separated and the profits derived from transactions which do not fulfil the requirements of mutuality can be brought to tax.
30.The assessee in the present case utilizes its surplus funds for investment in fixed deposits with banks. The interest that is generated on the investment of such funds is not income which is received from the members of the assessee but from third parties such as the banks with whom the funds are invested. Section 35(1) of the Bombay Public Trusts Act, 1950 provides that where the trust property consists of money and which cannot be applied immediately or at an early date to the purposes of the public trust, the trustees shall be bound to deposit the money, notwithstanding anything contained in the instrument of the trust in a scheduled bank, in a postal savings bank or in a co-operative bank approved by the State Government or to invest in public securities. What sub- section (1) of section 35 mandates is that moneys which are not 5 The Sindhi Immigrants Coop Hsg Soc Ltd required to be utilized immediately or at an early date for the purpose of the trust should be deposited in one of the forms which the Legislature has considered to be safe to protect the trust. Section 35(1) in any case does not contain a mandate that moneys will have to be invested in a fixed deposit. Where moneys are invested in fixed deposits of banks, the interest that is received on a deposit does not possess the same character of mutuality as the surplus funds derived by the assessee from the contributions of its members. The principle of mutuality applies to surplus funds generated from the contribution of members for the reason that the funds are contributed by the members of the society and there is an identity between the contributors and the participators in the fund. The decision to invest the funds of the association in bank fixed deposits is a prudent commercial decision motivated by the desire to earn interest that would not be available on moneys maintained in ordinary, current or savings accounts. Such interest does not fulfil the requirement of mutuality. While investing the funds with a bank or a financial institution, the assessee assumes the character of a customer of the bank or institution and the relationship that is engendered is that between a banker and its customer. The fact that the funds which are invested have their source in the contribution by the members of the assessee cannot be dispositive of the nature of the receipt obtained by the assessee on account of the interest payments on the deposits made. In determining the exigibility to tax of receipts on account of interest, it is the character of the receipt as interest that must play a determinative role. A payment on account of interest by the bank or a party with whom the deposit is placed is an arm's length transaction with a third party. The recompense which is received by the assessee by and as a result of the transaction does not fulfil the condition of mutuality to which the contributions received from the members of the assessee are subject.
32 At this stage, it would be necessary for the court to advert to a recent judgment of the Supreme Court Totgar's Co-operative Sale Society Limited v. ITO [2010] 322 ITR 283. In that case, the issue before the Supreme Court related to the deduction under section 80P. The Supreme Court dealt with interest which had accrued on funds which were not required immediately by the assessee which was a co-operative credit society, for the purposes of its business and which came to be invested in specified securities as investment. The assessee had contended before the Supreme Court that under the provisions of the Karnataka Co-operative Societies Act, 1959, a statutory obligation was imposed on co-operative credit societies to invest their surplus funds in specified securities and the submission was that in view of the statutory obligation, income derived from short-term deposits and securities must be considered as income derived from business activities. The assessee marketed the produce of its members whose sale proceeds were at times retained by the assessee and the court was concerned with the tax treatment of that amount. The Supreme Court held that such interest income would fall within the category of income from other sources and that it was 6 The Sindhi Immigrants Coop Hsg Soc Ltd correctly held to be taxable under section 56 by the Assessing Officer. In adverting to the judgment in the case of Totgar's Cooperative Sale Society [2010] 322 ITR 283 (SC), we must note that the principle of mutuality as such did not arise for consideration before the Supreme Court in that case. The submission that funds not immediately required for business were invested in specified securities/deposits under a statutory obligation and the receipt on account of interest would not constitute income from other sources was a specific issue which was raised before the Supreme Court. The Supreme Court held that such interest would fall for taxation as income from other sources."
5.1 It is clear from the decision of the Hon'ble Jurisdictional High Court that the interest income on deposits does not fulfil the conditions of mutuality.
6. As regards the claim u/s 80P is concerned, if any income by way of interest or dividend derived by the cooperative society from its investment with any other cooperative societies, then deduction u/s 80P is allowable in respect of the said income. We quote section 80P(2)(d) as under:
80P: Deduction in respect of income of cooperative societies:
(1)......
(2)The sums referred to in sub-sec (1) shall be the following, namely: ........
(d) in respect of any income by way of interest or dividends derived by the cooperative society from its investments with any other cooperative society, the whole of such income."
6.1 As per clause'd' of sub.sec (2) of sec 80P, if the interest income is from the deposits made with the cooperative society, then the same is eligible for deduction u/s 80P.
7 In the case in hand, this aspect has neither been claimed nor been examined by the lower authorities; therefore, we remand this issue to the record of the Assessing Officer for the limited purposes to verify whether the interest received by the assessee on the deposits made with the other cooperative society/cooperative Bank, then the claim of the assessee is allowable. 7
The Sindhi Immigrants Coop Hsg Soc Ltd CROSS OBJECTION NO. 112/Mum/2010 112/Mum/2010 8 The assessee has raised the following ground in its Cross Objection:
"The ld CIT(A) has rightly allowed deduction u/s 80P of the Act, of interest earned of `. 7,95 lacs from other cooperative banks, based on fact and circumstances of the case."
9 The assessee has not raised any separate issue in the Cross Objection but only supported the order of the CIT(A) on the issue raised in the revenue's appeal regarding the disallowance of interest on deposits. Therefore, in view of our findings on the issue, the Cross Objection filed by the assessee has become infructuous and disposed off accordingly.
ITA No. 246/Mum/2010
246/Mum/2010 ( Asst Year 2006- 2006-07) 10 The assessee has raised the following effective grounds in this appeal:
"1 The ld CIT(A) ought not have confirmed the amount of Rs. 24,69,052/- being amount collected over Rs.25,000/- per member, as transfer of properties, as amount collected is exempted under the principle of mutuality.
2.The ld CIT(A) ought no0t have confirmed the fund collected in the name of infrastructure fund for giving approval for utilizing additional FSI under TDR rules. The amount collected is not taxable under principle of mutuality.
11 Ground no.1 is regarding the disallowance of transfer fee collected over and above ` 25,000/- per member.
11.1 The Assessing Officer has noted that the assessee has collected ` 34,57,652/- from the Transferors of plots/units/shops of the assessee. This amount was not credited in to the income & expenditure account but the same has been transferred to the reserve account under the head 'amenity Fund". The assessee claimed that this amount is not taxable on the principle of 8 The Sindhi Immigrants Coop Hsg Soc Ltd mutuality. The Assessing Officer did not agree with the contention of the assessee and disallowed the amount over and above ` 25,000/- per transfer. Accordingly, a sum of ` 18,64,772/- was taxed as income of the assessee. 11.2 On appeal, the CIT(A) has confirmed the action of the Assessing Officer. 12 We have heard the ld AR of the assessee as well as the ld DR and considered the relevant material on record. The ld AR of the assessee has submitted that the bye-laws of the society permits to receive transfer fee. Therefore, in view of the decision of the Hon'ble jurisdictional High Court in the case of Sind Co-operative Housing Society v. Income-tax Officer reported in 317 ITR 47, the principle of mutuality would apply on this amount. He has also relied upon the decision of the Hon'ble jurisdictional High Court in the case of Mittal Court Premises.
12.1 On the other hand, the ld DR has submitted that as per the government notification, transfer fee upto ` 25,000/- is permitted and therefore, the same is covered under the principle of mutuality and balance is liable to tax. He has relied upon the orders of the lower authorities.
13 We have considered the rival contention as well as relevant material on record. At the outset, we find that this issue has been adjudicated by the Hon'ble Jurisdictional High Court in the case of Sind Cooperative Hsg Ltd (supra) wherein their Lordships have observed in paraa 35 & 36 as under:
"Considering these principles, the question is whether on the facts before us, the principle of mutuality would be attracted in respect of the transfer fee received by the housing co-operative societies governed by the provisions of the Maharashtra Co-operative Societies Act and the Rules. In Walkeshwar Triveni Co-op. Housing Society Ltd. [2004] 267 ITR (AT) 86 ; [2004] 88 ITD 158 (Mum) [SB], the Tribunal itself has held that the amount received from the transferor member would not be exigible to tax. It is only the amount received from the transferee, that is exigible to tax. We 9 The Sindhi Immigrants Coop Hsg Soc Ltd have noted that in so far as Sind CHS and National CHS Ltd. their bye-laws provide that the amount has to be paid by the transferor member. The issue, therefore, of the transferor or the transferee for those assessees really does not arise.
However, we will have to answer the issue considering what was considered in the case of Walkeshwar [2004] 267 ITR (AT) 86 (Bom) and considering the model bye-laws which are now adopted by most housing societies. We have noted the bye-laws as also the provisions under the Act and the Rules. The transfer fee can be appropriated only if the transferee is admitted to membership. The fact that a proposed transferee may make payment in advance by itself is not relevant. The amount can only be appropriated on the transferee being admitted as a member. As it is a transfer fee, if the transferee is not admitted as a member, the amount received will have to be refunded, as the amount is payable only on a transfer of rights of the transferor in the transferee. If it is held that payment of transfer fees is by a stranger, it will certainly be in the nature of gift and not income. If an amount is received more than what is chargeable under the bye-laws or Government directions, the society is bound to repay the same and if it retains the amount it will be in the nature of profit making and that specific amount will be exigible to tax. Considering the bye-laws, as the main activity of a co-operative housing society is to maintain the property owned by it and to render services to its members by way of usual privileges, advantages and conveniences, there is no profit motive involved in these activities. The amount legally chargeable and received goes into the fund of the society which is utilized for the repairs of the property and common benefits to its members."
6 Since in the case in hand, the amount has not received under pressure or coercion or contrary to the bye-laws of the Society; therefore, principles of mutuality will apply. Accordingly, following the decision of the Hon'ble jurisdictional High Court in the case of Sind Cooperative Hsg Ltd (supra), we allow the claim of the assessee."
13.1 Since in the case in hand, the assessee has claimed that the bye-laws of the society has been amended from time to time and under the amended bye- laws, the assessee is allowed to receive the transfer charges without any restriction of ` 25,000/-. Since the amended bye-laws has not been produced before us and as per the old bye-laws, transfer charges upto ` 25,000/- was permitted to receive by the assessee. Therefore, this issue is remanded to the 10 The Sindhi Immigrants Coop Hsg Soc Ltd record of the Assessing Officer to verify whether the amended bye-laws of the society permits to receive the transfer charges as claimed by the assessee and thereafter decide the issue as per law in the light of the decision of the Hon'ble jurisdictional High Court in the case of Sind Co-operative Housing Society (supra). Accordingly, this ground of the assessee is allowed for statistical purpose. 14 Next ground is regarding the amount received for utilised for additional FSI under TDR rules.
14.1 The assessee was granted additional FSI by way of purchase of TDR. The assessee has collected `. 60/- per sq.ft from its members totalling to ` 7,08,491/- from three of such members for allowing them to utilise the additional FSI. This amount has been shown in the balance sheet under the head 'infrastructure fund'. The Assessing Officer observed that as on 31.3.2006, the amount available under the infrastructure fund is ` 23 lacs and the State and the Municipal authorities who actually provide infrastructural facilities to the public collect only nominal charges of about ` 5/- per sqf.t depending upon the locality. Therefore, the Assessing Officer held that the amount of `60/- per sq.ft collected by the assessee society from its members, who are making additional construction in their own plots is not for any real intention of providing infrastructure facilities to its members but received at such a higher rate for additional FSI. Accordingly taxed the said amount of ` 7,08 491/- as income of the assessee.
14.2 On appeal, the CIT(A) confirmed the disallowance made by the Assessing Officer.
15 Before us, the ld AR of the assessee has submitted the main function of assessee society is to manage, maintain and administer the property of the 11 The Sindhi Immigrants Coop Hsg Soc Ltd society and also to raise the necessary funds for achieving the aforesaid purposes and the objects of the society. Further, the assessee is to undertake and provide the amenities and facilities for the benefits of its members etc. The ld AR has submitted that neither the society's object allows nor does the society engage into any trading or profit making activities and it is purely and simply a mutual association or an organization of persons who own plot premises in the society known as Sindhi Immigrants Coop Society Ltd.
15.1 The ld AR of the assessee has further submitted that any contribution made by present members towards any fund such as sinking fund, common amenity fund, repair fund etc irrespective of whether the benefit accrues to the same present members or other members in future does not imply profit in the hands of the society, since a coop society is a body of persons having no motive of profit or commercial activity. In case of society, contribution by members is always for their mutual benefit. The ld AR has contended that nowhere, in the Income Tax. Act, time/period of benefit accrual to the member is mentioned. Further it was submitted that mutuality simply means for the benefit of the associate persons. The Act does not require registration of such association of persons in any form. Mutuality concern requires that all participators in the surplus of the society should be the contributors but it is not necessary that all contributors are the participators in the surplus.
15.2 The ld AR has further submitted that no person trade with himself and make an assessable profit. If different persons combine themselves into distinct and a separate legal entity for the purpose of rendering services to themselves, the resulting surplus is not assessable to tax, if the surplus is refundable to members. It is immaterial whether the surplus is paid back to the members in cash or is put to revenue with the society for its development and for providing 12 The Sindhi Immigrants Coop Hsg Soc Ltd better amenities to its members immediately or in future. He has relied upon the decisions of the Hon'ble Gujarat High Court in the case of CIT vs Adarsh Coop Hsg Soc. Ltd reported in 213 ITR 677 (Guj) and in the case of CIT vs Shree Jari Merchants Asso reported in 106 ITR 542 (Guj).
15.3 On the other hand, the ld DR has supported the orders of the lower authorities and submitted that the assessee is collecting this fund by allowing the members to utilise the additional FSI and construction of additional area. Therefore, this fund is not for any facility or infrastructure for the members of the society. Hence, principle of mutuality is not applicable. 16 We have considered the rival contention as well as the relevant material on record. There is no dispute that the amount in question has been collected by the assessee society from its members. The disallowance made by the Assessing Officer on the ground that the rate of ` 60/- per sq.ft is higher than the rate charged by the local authority for providing the same facilities. When there is no profit motive or business by collecting such fund by the assessee society, then only because of the rate charged by the assessee society from its members is higher than the rate of local body cannot be a ground for rejecting the principle of mutuality. When the amount is collected from the members and has to be utilised for providing the facilities and infrastructure to the members of the society, then it is established that there is close nexus between the contribution and utilisation of the fund for its members. Accordingly, it fulfils the character of mutuality as the fund has been collected from the contribution of the members. Accordingly, we allow the claim of the assessee in respect of the collection made from the members under 'infrastructure fund'.
13
The Sindhi Immigrants Coop Hsg Soc Ltd 17 In the result, the appeal filed by the revenue is allowed for statistical purpose whereas the appeal of the assessee is partly allowed. The Cross Objection filed by the assessee is dismissed.
Order pronounced on the 6th, day of Jan 2012.
Sd/ Sd/-
( T R SOOD ) ( VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated: 6th, Jan 2012
Raj*
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai