Income Tax Appellate Tribunal - Delhi
Surya Kiran Maintenence Society ... vs Department Of Income Tax on 12 May, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'G' BENCH
BEFORE SHRI RAJPAL YADAV, JM & SHRI A.N. PAHUJA, AM
ITA no. 2728/Del/2008
Assessment Year: 2004-05
DCIT Circle- 31(1), V/s.
M/s Surya Kiran Maintenance
C.R. Building, Society (Regd.),Surya Kiran
New Delhi Building,19, Kasturba Gandhi Marg,
New Delhi.
[PAN: AACTS4927N]
(Appellant) (Respondent)
ITA no. 2837/Del/2008
Assessment Year: 2004-05
M/s Surya Kiran Maintenance V/s. ITO Ward- 31(4),
Society (Regd.),Surya Kiran C.R. Building,
Building, 19,Kasturba Gandhi Marg New Delhi
New Delhi.
(Appellant) (Respondent)
ITA no. 4379/Del/2010
Assessment Year: 2007-08
ITO Ward- 31(2),Room no. 334A, V/s. M/s Surya Kiran Maintenance
C.R. Building, Society (Regd.),Surya Kiran
New Delhi Building, 19,Kasturba Gandhi Marg,
New Delhi.
(Appellant) (Respondent)
Cross Objection no. 381/Del/2011
(In ITA no. 4379/Del/2011)
Assessment Year: 2007-08
M/s Surya Kiran Maintenance V/s. ITO Ward- 31(2),
Society (Regd.),Surya Kiran Room no. 334A
Building, 19,Kasturba Gandhi Marg, C.R. Building,
New Delhi. New Delhi
(Appellant) (Respondent)
ITA nos.2728 & 2837/D/08 2
& 4379/D/10 & CO no. 381/D/11
Assessee by Smt. Lalita Krishnamurthy,AR
Revenue by Smt. S. Mohanthy ,DR
Date of hearing 1-12-2011
Date of pronouncement 16-12-2011
ORDER
A.N. PAHUJA: These four appeals- cross appeals for the A.Y. 2004- 05 filed on 19.8.2008 by the Revenue and on 3.9.2008 by the assessee against an order dated 12th May, 2008 and appeal filed on 28.9.2010 by the Revenue for the A.Y. 2007-08 and the corresponding cross objection[CO] filed on 24.11.2011 by the assessee against an order dated 13th August, 2010 of the ld. CIT(A)-XXVI, New Delhi, raise the following grounds: -
ITA No. 2728/D/2008:[Revenue]"In the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of ` 8,73,709/- and of ` 5,40,045/- made on account of unspent balance of contributions from members and tenants and on account of interest earned on deposits respectively."ITA No. 2837/D/08:[Assessee] -
1. "That once the ld. CIT(A) has arrived at a finding that the assessee is a mutual benefit Society and has exempted the total income assessed by AO from levy of tax, then the taxation of ` 20,94,130/- being surplus of Income over Expenditure contributed either by flat owner or by tenant on behalf of flat owner, is contrary to his own finding, and deserves to be expunged and deleted.
2. That without prejudice to ground no. 1 above, contributions made by flat owner or by tenant on behalf of flat owner for maintenance of Surya Kiran Building by the assessee Society and carried out in subsequent years, is in fact a form of trust money for work to be executed in subsequent years and/or a form of advance reimbursement of expenses and consequently the sustaining of addition of ` 20,94,130/- is bad in law and should be deleted."
ITA No. 4379/D/10[Revenue]"On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the additions of ` 38,91,961/-
ITA nos.2728 & 2837/D/08 3 & 4379/D/10 & CO no. 381/D/11 and of ` 13,98,508/- made on account of unspent balance of contributions from members and non-members and on account of interest earned on deposits respectively."
CO No. 381/D/11[Assessee] "That without prejudice to the Principle of Mutuality as claimed by the assessee, the ld. AO ought not to have taxed the gross receipts collected for the maintenance and upkeep of the building and receipts incidental thereto but should have considered and reduced the expenses incurred on such maintenance and upkeep, for which purpose such amounts were received."
Since issues in these appeals were similar, these appeals were heard simultaneously for the sake of convenience and are being disposed of through this common order.
2. Adverting first to the grounds raised in the cross-appeals for the A.Y. 2004-05,facts, in brief, as per relevant orders are that return declaring income of ` 35,07,883/- filed on 27.10.2004 by the assessee, providing various facilities to the members of the aforesaid society, being flat owners, after being processed on 21.12.2004 u/s 143(1) of the Income Tax Act, 1961( hereinafter referred to as the 'Act'], was selected for scrutiny with the service of a notice u/s 143(2) of the Act issued on 1st August, 2005. During the course of assessment proceedings, the Assessing Officer (AO in short) noticed that the income of ` 35,07,883/- included interest on FDR- ` 3,59,928/- interest from Ansal Properties -` 63,800/- and interest from balance in Saving Bank Account-.` 1,16,316/-. The remaining receipts were from members of the society. Relying upon the decisions in Sports Club of Gujarat Ltd. Vs. CIT, 171 ITR 504 (Guj.), Rajpath Club Ltd. Vs. CIT, 211 ITR 379 (Guj.) and CIT vs. Ranchi Club,196 ITR 137(Pat.), the AO concluded that principles of mutuality were not applicable to interest income, as claimed by the assessee and accordingly, brought to tax the aforesaid interest income .
2.1. The AO further noticed that the society received contributions from tenants of the flat owners i.e. non-members. Out of 214 flats, 151 ITA nos.2728 & 2837/D/08 4 & 4379/D/10 & CO no. 381/D/11 were occupied by the tenants. Since the maintenance charges were paid by the tenants themselves and not the members, the AO allocated ` 8,73,709/- to members out of surplus of ` 29,67,839/-.As regards contribution by the tenants, since identity between the contributors and participators was found to be completely lost, relying upon the decision in CIT Vs. Bankipur Club Ltd. 226 ITR 97(SC), the AO concluded that transactions with non-members were tainted with commerciality and profit making motive, the charges being on fixed basis i.e. per sq. ft. of area under occupation and had no relation with the expenditure incurred for maintenance. Accordingly, the amount of ` 20,94,130/- from non- members, was brought to tax..
2.2 Moreover, since the members did not have control over funds of the society while referring to para 13 of the Memorandum of Association of the society, the AO further concluded that even receipts of `8,73,709/- could not be claimed exempt in view of decision of Hon'ble Punjab & Haryana High Court in Haryana State Cooperative Labour & Construction Federation Ltd. Vs. CIT, 252 ITR 265 (P&H) and Chelmsford Club, 243 ITR 89 (SC).
3.. Following his findings in the A.Y. 2004-05, the AO brought to tax interest income of ` 13,56,336/- on account of FDR, interest from balance in saving bank account-` 42,172/- besides `38,91,961/- on account of contribution from members and non-members.
4. On appeal, the ld. CIT(A) while referring to the decisions in , DIT(E) vs All India Oriental Bank Of Commerce Welfare Society,184 CTR 274 (Del.); The Country Club in ITA 84/2003 (Del.). and. Shivalika Cooperative Group Housing Society Ltd. (Del.), 101 ITD 391(Del.) concluded on the taxability of interest income in the following terms:
"I have heard the AR and have carefully perused the record with reference to the written submissions filed by the appellant society. If find that the issue is squarely covered by two decisions of the Hon'ble Delhi High Court - All India Oriental Bank (supra) and The Country Club (supra). In the ITA nos.2728 & 2837/D/08 5 & 4379/D/10 & CO no. 381/D/11 case of The Country Club the Hon'ble Lordships of the High Court of Delhi had held as follows:
"The assessee club earns income from its members and their guests. Surplus funds are deposited in banks and these surplus funds are attributable to amounts received from members of the assessee club towards their dues and for expenses incurred by members and their guests in restaurants and other facilities of the club like billiard room, tennis and squash courts and swimming pool, etc. There is no dispute about the fact that all these facilities are available only to members of the assessee club and their guests.
Applying the doctrine of mutuality, the Tribunal held that income received by the assessee for the use of facilities by guests of the members is exempt from taxation. This being the position, we are of the view that deposits made as a result of this income received and the interest received thereon from the banks cannot be said to be outside the doctrine of mutuality.
Ld. Counsel for the assessee has relied upon DIT vs. All India Oriental Bank of Commerce Welfare Society, [2003] 130 Taxman 575 (Del.), in which this Court has relied upon in Chelmsford Club vs. CIT [2000] 243 ITR 89 (SC). It was held, following the decision of the SC, that where a number of persons combine to contribute to a common fund and have no dealings or relations with any other body, then any surplus generated cannot, in any sense be regarded as profits chargeable of tax. On this basis, the doctrine of mutuality was applied to the facts of that case. We see no distinction in the decision rendered by this Court in all India Oriental Bank of Commerce Welfare Society and the present case.
Under the circumstances, we answer the question of law in the affirmative, in favour of the assessee and against the Revenue."
I, therefore, hold respectfully following the decisions of the Hon'ble Delhi High Court and the decision of the Hon'ble Delhi Tribunal in Shivalika Cooperative Group Housing Society Ltd. (supra) that the interest income of Rs. 5,40,045/- is exempted on the principle of mutuality and delete the addition made by the Income Tax Officer."
4.1. As regards, the amount of ` 8,73,709/- allocated by the AO to members, the ld. CIT(A) deleted the addition in the light of principles laid ITA nos.2728 & 2837/D/08 6 & 4379/D/10 & CO no. 381/D/11 down in the case of Bankipur Club Ltd.,226 ITR 97(SC) in the following terms:
" I have heard the Authorised Representative and have carefully perused the record with reference to the written submissions filed by the appellant society. I find that the Income Tax Officer had not fully reproduced clause 13 of the Memorandum of Association of the appellant society (copy of the Memorandum of Association of the appellant society has been placed at pages 7 to 17 of the paper book).Clause 13 further goes to say that if upon dissolution, there remains any property, whatsoever after satisfaction of its debts and liabilities, the same shall not be distributed among the members of the society or any one of them, but shall be given to some other Society which shall be agreed upon by at least 3/5 of the members present personally or by proxy, at the time of dissolution. This clearly means that the members of the appellant society together are in full control of the common fund through their voting power. They have a right to vote and decide the destiny of the appellant society on windings up. I find that in West Godavari District Rice Millers Associationm150 ITR 394(AP),it was held that the participation envisaged in the principles of mutuality is not that the members should take surplus to themselves .It is enough that they have a right of disposal over the surplus. In fact such a clause is mandatory in all bodies that are registered as a society under section 14 of the Societies Registration Act,1860.
I therefore, respectfully following the aforestated decisions relied upon by the appellant hold that as on winding up the surplus of the appellant society is available for disposal only in accordance with the decision of the members, the funds of the appellant society are fully under the control of its members on the ratio of the principle laid down in Bakipur Club Ltd. (supra) the amount of Rs. 8,73,709/- is covered under the principle of mutuality and should have been exempted from taxation by the Income Tax Officer. I accordingly delete the addition of Rs. 8,73,709/-."
4.2. However, the ld. CIT(A) upheld the addition of `. 20,94,130/- on account of receipts from non-members, holding as under:
"I have heard the Authorized Representative and have carefully perused the record with reference to the written submissions filed by the appellant society. Under clause 14 of the Rules and Regulations of the appellant society read with clause 15 of the Flat Buyers Agreement the buyer agrees to contribute and pay his/her share proportionate to the flat area towards the cost, expenses and outgoings of the collective maintenance society. It is seen that as per the ITA nos.2728 & 2837/D/08 7 & 4379/D/10 & CO no. 381/D/11 clauses of the agreement the appellant society places the liability of payment of monthly subscription on the flat owner/member only. It does not recognize any tenant/non- member whereas the payment in certain cases has been made admittedly by non-members/tenants. The issue is whether anybody else can make the payment on behalf of the member to the society for the services actually utilized by those others and still the appellant society can claim the existence of principle of mutuality?
During the course of the appellate proceedings it has been stated by the appellant that the appellant society has been set up as a mutual benefit society to afford to its members certain facilities. It is stated that the society carries out its activities on no profit no loss basis i.e. on the basis of principle of mutuality. It is stated that the receipts of the appellant comprise of incomings on account of maintenance charges in respect of all flats in Surya Kiran Building and the interest received from bank on deposits of the available amount at any given time pending utilization. This incoming amount is statedly spent on building maintenance staff salary and sundry expenses etc. It is seen that the AO has taxed the surplus of Rs.20,94,1301- on the ground that the contributors to the fund are tenants whereas on the other hand the society recognizes only the owners/members, concluding thereby that the identity between the contributors and the participators is completely lost. Under clause 14& 15 of the flat buyers agreement, it is the buyer who agrees to contribute and pay his share proportionate to the area of the flat towards costs/expenses and outgoings etc. in respect of the matters specified in the second schedule to the above mentioned agreement. These clauses are stated by the appellant to be conclusive, final and binding on the buyer. It is stated that so far as the appellant society is concerned, the liability for monthly subscription is that of the flat owner/member only. However, the appellant has taken the stand that how and in what manner such liability will be discharged by the member is a question only of mutual arrangement between the flat owner and the tenant/occupier. It is also stated that hypothetically speaking if the appellant society did not exist, all these facilities like painting of building, service and operation of lifts etc. would have to be arranged by individual flat owners who are permanents. It is stated that the appellant society acts only as an agent of the flat owner and not that of the occupier. On this ground the appellant has contended that there is no taint of commerciality in the activities of the appellant society and hence the principle of mutuality will squarely apply.
The above contentions of the appellant have been carefully examined along with the assessment order passed by the ITA nos.2728 & 2837/D/08 8 & 4379/D/10 & CO no. 381/D/11 AO. From the above certain facts emerge. Firstly that some of the flats have been given to tenants and the monthly subscriptions have also been made by such tenants who are in fact not members of society.
The AR's contention that whether the member makes the payment himself or somebody else pays or the member pays by borrowing from anyone else or from a tenant is immaterial, cannot be accepted. This is so because the services and utilities have been found by the AO to be utilized by various tenants to whom various premises have been sub-let by the flat owners/members. But these tenants are not recognized by the appellant society as its constituent members. In other words it can be said that in some cases utilities have been actually enjoyed by the non-members/ tenants and the payments have been camouflaged as having been paid by the members themselves. The appellant also admits that in some cases the tenant directly pays to the society whereas in other cases, the tenants make the payments through the members. The Ld. AR of the appellant admits that in some cases in fact the contributions are actually made by the tenants who are also admittedly not members of the society. Therefore, the Ld. AR contention that payment of periodic contribution to the society was an internal matter between the tenant and the flat owner and that it was a mutual arrangement between the two of them cannot be accepted. The AO has specifically found that since the flats have been sub-let and periodic payments are accepted from tenants, it cannot be said that there was no taint of commerciality involved in the activities of the appellant society so far as these contributions paid by the tenants are concerned. To the extent of these payments which are made actually by the tenants and received by the society as such, payments are emanating from the tenants and not from the members of the society, therefore, the principle of mutuality stands diluted to that extent. Therefore, it is concluded that various facilities have been in fact availed of by non members which were actually as per the terms and conditions of the agreement to be enjoyed only by the members against payment of periodic charges, which clearly does not fall in the line with the principle of mutuality. The appellant has relied .upon the case of Industrial Engineering Projects Private Limited 202ITR 1014 (Del) stating that reimbursement of expenses can under no circumstances be regarded as a revenue receipt. The appellant has contended that whatever has been collected by the society - whether it be from members or from non-members has been ultimately spent on the welfare of the members of the society only. Therefore, these contributions received comprise of reimbursement of certain expenses incurred or to be incurred by the society only. Under 'the circumstances it is ITA nos.2728 & 2837/D/08 9 & 4379/D/10 & CO no. 381/D/11 contended that such receipts which are actually in the nature of reimbursement cannot be treated as revenue receipts.
The above case law has been examined with reference to the fact of the appellant's case. It is seen that the appellant society collects the money from the members only and then expends it on various maintenance and welfare activities. There is no initial corpus available with the society out of which expenditure can be incurred which could be reimbursed to the society by the members later on. Even if it is accepted that expenses incurred also include expenses to be incurred in subsequent time by the maintenance society, it cannot amount to acceptance of the principle of mutuality in the appellant's case when the contributions are received in the first place from individuals/tenants/non-members. This is specially so because on the one hand the appellant society does not recognize the non-members as per clause 14 & 15 of the agreement mentioned above and secondly that on the other hand the contributions from such non-members are claimed by the appellant society to be in the nature of reimbursement expenses on account of expenditure incurred on behalf of the members of the society. Hence, the reliance placed on this judicial pronouncement apparently does not help the appellant. The appellant has also placed reliance on 243 ITR 89- Chelmsford Club (SC) wherein the Supreme Court upheld the impossibility that contributors should derive profit from contributions made by themselves to a fund which could only be expended or returned to themselves. It was also stated that where a number of persons combine together and contribute to a common fund for 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. The facts of this judicial pronouncement have also been examined vis-a-vis the facts of the present case. Whereas the Chelmsford Club decision applies to that congregation of persons who have no dealings or relations with any "out-side body",In the present case the collections have been made from non-members and such persons who are merely tenants/occupiers of the flats. Such outsiders whom the society not even recognizes cannot be equated with the original members who had come together in the first place to form the society. Such a resultant society with a mix of the members as well as non members contributing to the kitty and simultaneously enjoying the services in spite of being non members cannot be held to be falling within the four comers of the principle of mutuality. Therefore, to the extent that such contributions have been generated from the non members as discussed by the AO did not qualify to avail the benefit of principle of mutuality. Therefore, it is held that the principle of mutuality does not apply and the receipt of ITA nos.2728 & 2837/D/08 10 & 4379/D/10 & CO no. 381/D/11 Rs.20,94, 130/- added by the AO deserves to be upheld."
5. Similarly in the AY 2007-08 the ld. CIT(A) following his order for the A.Y. 2004-05 deleted the addition of ` 13,98,508/- on account of interest. As regards receipts from members and non-members towards maintenance charges, the ld. CIT(A) while following the decision dated 31.12.2008 in the case of M/s Heritage Resident Welfare Association Vs. ITO,19 DTR 108 (Del.) deleted the entire addition.
6. The Revenue is now in appeal before us, against the deletion of addition of interest in these two assessment years besides deletion of addition of ` 8,73,709/- in the AY 2004-05 and 38,91,961 in the AY 2007- 08 while the assessee is in appeal against upholding of the addition of ` 20,94,130/- in A.Y. 2004-05. In the CO for the AY 2007-08, the assessee pleaded ,without prejudice to their claim of principle of mutuality ,that the AO could, at the most, tax net receipts and not the gross receipts collected for maintenance and upkeep of the building. The ld. DR while carrying us through the impugned order relied upon the decision of Hon'ble Karnataka High Court in M/s Prabha Shankar Plaza Vs. ITO ;2010-TIOL-243-HC-Kar-IT and contended that principle of mutuality is not applicable to interest received on investment of surplus funds or receipts from members and their tenants especially when the ld. CIT(A) upheld the addition in A.Y. 2004-05 in relation to receipt from non-members. Inter alia, the ld. DR relied upon the decision in Sports Club Of Gujarat Limited. Vs. CIT,171 ITR 504 (Guj.), Rajpath Club Limited.Vs. CIT,211 ITR 379 (Guj.), Haryana State Co-operative Labour And Construction Federation Ltd.vs. CIT,252 ITR 265 (P&H), .CIT vs. I T. I. Employees Death And Superannuation Relief Fund.234 ITR 308 (Kar.).
6.1. On the other hand, ld. AR on behalf of the assessee while referring to decision of the ld. CIT(A) in A.Y. 2007-08 relied upon the decision of ITAT Delhi Bench in Heritage City Residents Welfare Association Vs. ITO, 19 DTR (Del.) 108 ,decision dated 16.10.09 in the ITA nos.2728 & 2837/D/08 11 & 4379/D/10 & CO no. 381/D/11 case of Wellington Estate Condominium Association in ITA No. 2846/Del/07 for the A.Y. 2003-04,and decision of Hon'ble Delhi High Court in CIT Vs. Standing Conference of Public Enterprises, 319 ITR
179. The ld. AR added that SLP filed by the Revenue against the decision of Hon'ble Delhi High Court in Standing Conference of Public Enterprises(supra) has been dismissed. by the Hon'ble SC vide their judgment dated 7thJuly, 2010.
7.. We have heard both the parties and gone through the facts of the case and the aforesaid decisions cited by both the parties. The issue before us in these appeals is whether or not receipts on account interest and from members as also non-members of the aforesaid society arise from mutual activities of the members of the society. The said society was registered on 28th August,1998 for the care and maintenance of the property at Surya Kiran Building at Kasturba Gandhi Marg,New Delhi and lay down requirements for the owners of the flats in the building to conserve and protect the property and provide common services apart from providing security and promote all such activities as are conducive to the general welfare of the members. Every owner of the flat or his nominee is member of the society and was required to pay ` 500/- by way of admission fee besides monthly subscription. The receipts from members towards maintenance charges were utilized for providing cleanliness, water ,electricity, security, fire fighting, safety measures etc. As per clause 13 of the Rules and regulations of the society, on dissolution of the society, surplus was not to be distributed amongst members but would be given to a society as agreed upon by at least 3/5th of the members present at the time of dissolution. Clause 14 of the Rules and regulations specified that even if the flat is rented out, owner shall be responsible to get the occupier dues paid to the society. As per clause 15 of the buyers' agreement , the buyer was required to pay his share towards costs, expenses and outgoings and any other taxes etc. The first issue before is as to whether interest earned by the society on bank fixed deposits, savings bank a/c etc. with the investment of surplus funds out of contribution by members of the ITA nos.2728 & 2837/D/08 12 & 4379/D/10 & CO no. 381/D/11 society is covered by the principles of mutuality. The AO while relying on certain decisions concluded that interest so received from non members was not covered by the principles of mutuality while the ld. CIT(A) following decisions of jurisdictional High Court held otherwise. Before proceeding further, we may refer to certain decisions in the case of societies, wherein similar issue of applicability of principle of mutuality was involved. In C.I.T. Versus Apsara Coop. Housing Society Ltd. 204 ITR 662(Cal), the assessee was a cooperative Housing Society which provided residential premises to the members of the society which received transfer fees for transfer of flats. The AO held that the receipt was taxable as income. The Hon'ble Calcutta High Court while relying on the judgment in Bankipur Club Ltd. (supra) and other judgments noted that the principles applicable to the members of the club were equally applicable to the Co-operative Housing Society, particularly Housing Cooperative Society which does not carry on any business and where no element of profit is involved. The assessee cooperative housing society was a mutual concern, the court held and that the transfer fee received by the society for transfer of flat was not taxable income of the assesee.
7.1 . In C.I.T. Vs. Adarsh Cooperative Housing Society Ltd. ,213 ITR 677 (Guj), the issue was as to whether on transfer of lease, the amount received by the society from the member out of the premium received by him from the purchaser was exigible to tax. After considering the provisions of the Gujarat Cooperative Societies Act, 1961, the Hon'ble Gujarat High Court noted that the corpus of fund was not divisible as such pro rata between the members on the winding up of the society. However, such surplus was to be devoted to any object or objects provided in the bylaws of the society if they specify that such a surplus shall be utilized for particular purpose. The Hon'ble High court therefore, held that the right of the members to deal with the surplus was not destroyed and that did not detract from the concept of return of surplus to members which they had contributed. There was identity of contributors and beneficiaries. It was also concluded that it is not necessary that the participants of the surplus need be the same ITA nos.2728 & 2837/D/08 13 & 4379/D/10 & CO no. 381/D/11 individuals who have contributed but they must bear the same character, namely, contributor member.
7.2. In the instant case, there is nothing to suggest that the society carry on any business nor any element of profit is involved.In the light of aforesaid principles, the question is whether on the facts before us, the principle of mutuality would be attracted in respect of the interest income or receipts from members or tenants of the members. On analyzing the various tests which are to be considered for applying the principle of mutuality to a case of a society , which does not carry on any business and where no element of profit is involved ,we have to look as to whether any commerciality is involved. This has to be found from the byelaws of the society. As is apparent from the Memorandum of Association and byelaws of the society before us , object of the society is to provide various facilities and services towards maintenance and use of the building to the owners/occupiers. There cannot be any commerciality involved. Once there is no commerciality , it can be inferred that the profitability does not exist. From the moneys received are the services offered in the nature of sharing of privileges, advantages and conveniences. In case of a housing maintenance society, the only activities which it can carry out in terms of its bye-laws are basically maintenance of its property. The subscription and/or contributions received from 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. The class of members are clearly identifiable. Members are ordinary members or associate members. The participants and contributors are the members. The members may come in or go out. The fact that only some members from those who contributed may participate in the surplus, is irrelevant as long as the class is identifiable. In terms of the bye laws, the surplus can only be dealt with in the manner provided therein or be transferred to another society with similar object. In the instant case, interest income has been earned from fixed deposits and funds available in savings bank account out of contributions received from members/occupiers. The reservation of the Revenue is that the ITA nos.2728 & 2837/D/08 14 & 4379/D/10 & CO no. 381/D/11 transaction with non-members should not merit exemption because of lack of mutuality. But the Hon'ble Supreme Court in Bankipur Club Ltd.'s case (supra) did not accept this as long as such income is from activity "not tainted with commerciality", quoting with approval, the head note summarising the decision of the Full Bench of Patna High Court in CIT v. Ranchi Club Ltd.(1992) 196 ITR 137 (Patna) (FB) in following words:
"... that merely because the assessee-company had entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost. The assessee was a mutual concern. The income derived by it from its house property let to its members and their guests and from the sale of liquor,etc., to its members and their guests was not taxable in its hands."
7.3 Coming now to the issue of applicability of principle of mutuality the interest income, we find that the ld. CIT(A) accepted the claim of the assessee in the light of view taken the decision in Shivalika Cooperative Group Housing Society Ltd. (supra),where in it was held that interest income earned by an assessee on surplus funds of a mutual society deposited with a banking institution are covered by the principle of mutuality, as held by Hon'ble Delhi High Court in their judgment in the case of DIT v. All India Oriental Bank of Commerce Welfare Society [2003] 184 CTR (Delhi) 274. In taking this view, the Hon'ble Delhi High Court took a cue from the decision of the Hon'ble Supreme Court in Chelmsford Club v. CIT, 243 ITR 89, where the Hon'ble Supreme Court had laid down the principle that where a number of persons combine together to a common fund for 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.The decision of Hon'ble Delhi High Court in All India Oriental Bank of Commerce Welfare Society (supra) was followed by the Hon'ble jurisdictional High Court in their decision dated 11.5.2007 in the case of Country Club . Hon'ble Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund v. Dy. CIT, 308 ITR 202 (Kar.) held that .
"2.8 Taking into consideration the objects of the assessee, the source of funds during the relevant years and the applicability of the funds for the ITA nos.2728 & 2837/D/08 15 & 4379/D/10 & CO no. 381/D/11 benefit of its members, and keeping in mind the interest on investments and dividend earned on shares was only a small portion of the total earned by investment of the surplus funds wholly contributed by the members of the assessee, the Karnataka High Court held that the interest earned on investment and dividend received on shares was deemed income from the property of the assessee contributed by its members, and was governed by the principle of mutuality and was therefore exempt."
7.4 In the case of SCOPE(supra), the AO declined to accept the contention of the assessee that principle of mutuality was applicable ,inter alia, to interest income. The Tribunal however, accepted that principle of mutuality would apply. On appeal by the Revenue regarding applicability of principle of mutuality to receipt from members and interest earned from surplus funds deposited with the banks, the Hon'ble Jurisdictional High Court following the view taken in Bankipur Club Ltd. (supra) ,Chelmsford Club vs. CIT,243 ITR 89 (SC) and Dalhousie Institute Vs. AC, Service Tax 3 STR 311 (Cal.) rejected the appeal of the Revenue. The Hon'ble SC also dismissed the SLP filed by the Department on 7.7.2010. The decision in SCOPE(supra) was followed by a co-ordinate Bench in another decision dated 16.10.2009 in Wellington Estate Condominium (supra).
7.5 In the light of view taken by the Hon'ble jurisdictional High Court in their aforesaid decision in the case of DIT(E) v. All India Oriental Bank of Commerce Welfare Society, 130 Taxman 575, followed in subsequent decisions mentioned above, we have no alternative but to uphold the findings of the ld. CIT(A),concluding that the principle of mutuality applies to interest income derived by a co-operative society from deposits made out of contributions made by members of the society. Therefore, ground raised by the Revenue in these two assessment years in relation to applicability of principle of mutuality to interest income is dismissed.
8. As regards contributions by members and the tenants of the members of the society, the ITAT in the case of Heritage City Residents Welfare Association (supra) while adjudicating the applicability of ITA nos.2728 & 2837/D/08 16 & 4379/D/10 & CO no. 381/D/11 principle of mutuality to interest income and receipt from non-members i.e. tenants concluded as under: -
"11. We have considered the rival submissions and also perused the relevant material on record. It is observed that the principle of mutuality has been held to be not applicable in the case of the assessee by the authorities below mainly for the reasons that the contribution was received by it also from the tenants who were non- members and even the interest income and miscellaneous income was received by the assessee from the outsiders. A reference was also made to the relevant clauses of the memorandum of association to allege that the said clauses permitting the assessee to invest the excess funds in banks and also to let out the vacant common area were tainted with commerciality.
12. Insofar as the contribution received from the tenants is concerned. We find ourselves in agreement with the ld. Counsel for the assessee that the said contribution was actually paid by the tenants to the assessee on behalf of owners of the flats who were its members. The same, therefore, cannot be regarded as received from the outsiders in real sense. Moreover, the tenants occupying the flats in the society were getting benefited from the expenditure incurred on maintenance etc. from the contribution collected by the assessee society and in this way they were participants in the benefits thereby forming part of class of particpators. As held by the Hon'ble Calcutta High Court in the case of CIT vs. Darjeeling club Ltd. (supra) identity between the contributors and participators has to be seen as a class and not as individuals. The test of mutuality as laid down by the Hon'ble Supreme Court in the case of Chelmsford Club (supra) thus was fully satisfied in the case of the assessee and there was no reason to deny the benefit of mutuality.
13. As regards the miscellaneous income received by the assessee from Bharti Telenet Ltd., it is observed that the same was on account of recovery of the actual damage caused to the society as a result of laying down of telephone cables of the said party in its complex. The said amount thus was not in the nature of income and as the assessee society had actually suffered a loss as a result of less recovery made from M/s Bharti Telenet Ltd.
than the actual amount spent by it on this account, there was no reason to deny the benefit of mutuality to it on this basis. Even the interest income was received by the assessee society on the surplus funds invested with the bank as authorized by its memorandum of association and as held by the Hon'ble Delhi High Court in the case of Director of IT (Exemptions) vs. All India Oriental Bank of ITA nos.2728 & 2837/D/08 17 & 4379/D/10 & CO no. 381/D/11 Commerce Welfare Society (supra) relying on the decision of Hon'ble SC in the case of Chelmsford Club vs. CIT (supra), the principle of mutuality was applicable to such income.
14. As regards the regards the relevant clauses of memorandum of association referred to by the authorities below permitting the assessee society to invest money and to retain and rent or license suitable portion of the common areas to outsiders for commercial purposes, which are held to be tainted with commerciality, it is observed that no such activity was actually carried on by the assessee society during the year under consideration and this being so, we are of the view that the benefit of mutuality cannot be denied to it merely on the basis of some activities permitted by the memorandum of association which had not been actually carried on during the year under consideration. As such considering all the facts of the case, we are of the view that the principle of mutuality was applicable in the case of the assessee and the ld. CIT(A) was not justified in confirming the action of the AO in denying the assessee the benefit claimed on the basis of the said principle. His impugned order is, therefore, set aside and the AO is directed to allow the benefit claimed by the assessee society on the basis of principle of mutuality."
8.1 Similarly, the ITAT Delhi Bench in another decision dated 16.10.2009 in Wellington Estate Condominium (supra) while examining the applicability of principles of mutuality to interest income and receipts from tenants i.e. non-members concluded as under: -
"5. We have heard the rival submissions and have gone through the material available on record and have gone through the orders of the authorities below and the Tribunal decision cited by the ld. AR of the assessee. We find that clause No. 18(b) of the Bye Laws of the assessee is regarding winding up or dissolution of the society, as per which, any surplus remaining after satisfaction of its debts and liabilities, shall not be paid to or distributed among the members of the society but shall be given or transferred to some other institution having objects similar to the objects of the society to be determined by the members of society at the time of dissolution. We find that this clause is similar to clause No. (xxiv) referred to by the Tribunal in the case of SCOPE (supra). This aspect of the matter has been decided by the Tribunal in favour of the assessee in that case by following the judgment of Hon'ble Apex Court rendered in the case of Bankipur Club (supra) and hence for this reason, in the present case ITA nos.2728 & 2837/D/08 18 & 4379/D/10 & CO no. 381/D/11 also, we are of the considered opinion that the claim of the assessee regarding mutuality cannot be rejected on the basis of this clause in the bye laws. Regarding other reasoning given by ld. CIT(A) that there is no identity between the contributors and participators in view of clause 2 &4 of the bye laws as per which the assessee could invest or deposit money and could let out suitable portion of common areas to outsiders for commercial purposes and to accumulate the common profit for building up reserve fund. This aspect has also been dealt by the Tribunal in the case of SCOPE (supra). In that case also, interest income was earned from surplus funds and rental income was received from non members also.
Regarding interest income, it was held by the Tribunal that this issue is covered in favour of the assessee by the judgment of Hon'ble Delhi High Court rendered in the case of All India Oriental Banking Commerce of Welfare Society reported 184 CTR 274 in which it has been held that principle of mutuality applies to interest income received from the deposits made out of contribution by the members. Regarding rental income from non members, it was held that such income is not entitled for exemption as per the judgment of Hon'ble Kerala High Court in the case of Trivendram Club (2006-TIOL-130) and it was held that rental income from non members could be taxable but only after excluding the expenses incurred in relation to earning of the said rental income. Hence, we find that for this reason also, it was not held that the assessee society is not a mutual concern and only rental income was directed to be taxed. In the present case, we find that there is no rental income received by the assessee because we find that as per the income and expenditure account appearing on page No. 4 of the paper book, there is no rental income received by the assessee. Regarding this allegation that when the flats are rented out, maintenance charges are received by the assessee from non members, we are of the considered opinion that the liability of payment of maintenance and other charges is of the member i.e. the owner and even if the same is paid to the society by the tenant of the members, it cannot be said that the society is receiving the same from non members because in case of default, the assessment can collect the same from members only and not from the tenants. As per clause 4(b) of the bye laws all the owners are obliged to pay monthly assessment imposed by the association to meet all expenses relating to Wellington Estate Condominium which may include an insurance premium for a policy to recover repair and reconstruction work in certain cases. We are of the considered opinion that even if such payments are made by the tenants of the members, it has to be considered as received from the ITA nos.2728 & 2837/D/08 19 & 4379/D/10 & CO no. 381/D/11 members because it is a liability of the member to pay such amounts to the assessee association and even if the same is paid by the tenants, the tenants are paying only on behalf of the members of society. We feel that for this reason, it cannot be held that the assessee is not a mutual concern. Under these facts, we feel that the assessee has to be assessed as mutual concern and hence the receipts from members cannot be assessed as income in the hands of the assessee. Income from interest on fixed deposit with bank of Rs. 26,182/- is already offered to tax by the assessee as per the computation of income available on page No. 2 of the paper book. Hence, we delete the addition made by the AO and direct the AO to assess the income of the assessee as per return of income filed by the assessee."
8.2. As regards decision relied upon by the ld. DR in the case of Prabhashankar Plaza, in that case the assessee , a partnership firm carried on the business as property developers, traders in general merchandise and commission agents. The firm pooled their resources from all the partners. A building owned by the firm was rented to partners and rental income was claimed exempt on the principles of mutuality. However, the ITAT and subsequently the Hon'ble High Court on these facts ,after perusing the agreements concluded that funds of the firm being available to outsiders, the assessee firm was not governed by the principle of mutuality. Apparently , the said decision was rendered on altogether different facts and is thus, not applicable to the facts of the instant cases.
8.3 In the instant case , the ld. CIT(A) has allowed the claim of the assessee in the AY 2007-08 for application of principle of mutuality to receipts from members and non-members i.e tenants of the members, following the aforesaid decision in Heritage City Residents Welfare Association (supra) . As per clause 14 of the Rules and Regulations, even if the flat is rented out, owner member is responsible to get the occupier dues paid to the society. In view of the foregoing, especially when identity between the contributors and participators has to be seen as a class and not as individuals, in the light of view taken, in Heritage City Residents Welfare Association (supra) ,. Wellington Estate ITA nos.2728 & 2837/D/08 20 & 4379/D/10 & CO no. 381/D/11 Condominium (supra); and SCOPE(supra), we have no hesitation in upholding the findings of the ld. CIT(A) in the AY 2007-08 and reject the appeal of the Revenue in the AY 2004-05 in relation to receipts from members while allowing ground no.1 raised in the appeal of the assessee in the AY 2004-05 in respect of receipts from non-members .
9. As a corollary , ground no.2 in the appeal of the assessee in the AY 2004-05 as also ground raised in CO for the AY 2007-08 do not survive for our adjudication and are therefore, dismissed. Even otherwise, the ld. AR did not make any submissions on these grounds..
10. No other plea or argument was made before us.
11.. In the result, both the appeals of the Revenue and the CO filed by the assessee in the A.Y. 2007-08 are dismissed while appeal of the assessee in the A.Y. 2004-05 is partly allowed.
Order pronounced in open court
Sd/- Sd/-
(RAJPAL YADAV) (A.N. PAHUJA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
*Kavita
Copy forwarded to: -
1. DCIT Circle- 31(1),/ ITO Ward- 31(2) & Ward 31(4),C.R. Building,
2. M/s Surya Kiran MaintenanceSociety (Regd.),Surya Kiran Building, Kasturba Gandhi Marg,New Delhi
3. CIT Concerned
4. CIT(A)-XXVI, New Delhi
5. DR ITAT'G' Bench,New delhi
6. Guard File.
TRUE COPY By Order, DEPUTY REGISTRAR,ITAT