Income Tax Appellate Tribunal - Mumbai
Oval Shiv-Shanti Bhuvan Co-Operative ... vs Income-Tax Officer on 16 June, 2000
Equivalent citations: [2001]78ITD403(MUM)
ORDER
S.C. Tiwari, Accountant Member
1. In this appeal filed by the assessee the only dispute is regarding assessment of a sum of Rs. 3,00,000 being transfer fee charged by the assessee. The facts of the case leading to this ground of appeal, in brief, are that the assessee is a typical co-operative housing society in the metropolitan city of Mumbai. During the relevant previous year, one of the flat owners, namely, Dr. M.C. Batra, requested the assessee to give No Objection Certificate for the proposed sale of his flat No. 15 in the building named and styled as Shiv Shanti Bhuvan, 146, Maharshi Karve Road, Churchgate Reclamation, Mumbai. The society demanded from Dr. Batra a contribution of Rs. 3,00,000 to the society's Common Amenity Fund and resolved that till the said contribution was received, the proposed transfer should not be effected and transferee should not be actually admitted to the membership of the society. On these terms, contribution of a sum of Rs. 3,00,000 was received by the assessee-society which was credited directly to common amenities fund in the balance sheet and was not offered to tax as the income of the society. The Assessing Officer asked the assessee to explain as to why this transfer fee should not be subjected to tax as income in view of the judgment of Hon'ble Bombay High Court in the case of CIT v. Presidency Co-operative Housing Society Ltd. [1995] 216 ITR 321 and also in view of the decision of ITAT, Bombay Bench 'B' in the case of Sea Face Park Co-op. Housing Society Ltd. [IT Appeal Nos. 5314 to 5316 of 1984]. In response, the assessee replied that in the case of Presidency Co-operative Housing Society Ltd. (supra), the Hon'ble Bombay High Court did not consider the applicability of the doctrine of mutuality to the transfer fees received from members. Regarding the decision of Tribunal in the case of Sea Face Park Co-op. Housing Society Ltd. (Supra), the assessee submitted that the Tribunal was not justified in holding that the principle of mutuality was not applicable. The assessee further pleaded that in view of the judgment of Hon'ble Andhra Pradesh High Court in the case of CIT v. Merchant Navy Club [1974] 96 ITR 261 and Hon'ble Gujarat High Court judgment in the case of CIT v. Shree Jari Merchants Association [1977] 106 ITR 542 the transfer fee received by the assessee should be held as not chargeable to income-tax on the principle of mutuality.
2. The learned Assessing Officer found that the facts of the case of the assessee were similar to the case of Sea Face Park Co-op. Housing Society Ltd. (supra) in which case the Tribunal had also taken into consideration the judgment of Hon'ble Gujarat High Court in the case of Shree Jari Merchants Association (supra). In that decision the Tribunal had also considered the principle of mutuality and found that in the case of a co-operative housing society when transfer fee is charged, neither the decision of Hon'ble Gujarat High Court in the case of Shree Jari Merchants Association (supra) nor the principle of mutuality spelt out therein were applicable. The learned Assessing Officer emphasised that the sum of Rs. 3,00,000 was borne by Dr. M.C. Batra who was the outgoing member and not by Deutsche Bank, which was the incoming member. The contribution/transfer fee received by the society was not a voluntary payment. It was not possible to hold that there was no profit motive on the part of the assessee. The charging of transfer fee was a coercive method adopted by the society to derive some income. On these grounds, the learned Assessing Officer assessed the sum of Rs. 3,00,000 under the residuary head "Income from other sources".
3. Aggrieved by assessment order, the assessee preferred appeal before the learned CIT(A). During the course of first appellate proceedings the assessee once again relied upon the two High Court judgments on the principle of mutuality and argued that at the point of receipt of contribution of Rs. 3,00,000 by the society, the transferor who made this contribution was a member of the society. The transferee was admitted as member of the society only after the prescribed contribution from the transferor was received. Thus the capacity of the contributor and the beneficiaries was identical. Furthermore, what was required in terms of the principle of mutuality was identity of contributors and beneficiaries as a class. It was not necessary that all the members should contribute or pay transfer fee, which was impossible. The learned CIT(A) considered these arguments of the assessee and held that the facts of the case of the assessee were similar to that of Presidency Co-operative Housing Society Ltd's case (supra) decided by the Hon'ble Bombay High Court. He therefore upheld the assessment order and dismissed the assessec's appeal. Still aggrieved, the assessee is in appeal before us.
4. During the course of hearing before us, the learned authorised representative of the assessee pointed out that in the balance sheet of the assessee-society as at 31st March 1993, common amenities fund account had a balance of Rs. 3,00,000 which was contribution received during the year from Dr. Batra. A Note to this effect had also been made to the Income & Expenditure Account. Thus in the books of society this contribution was duly accounted for and as a contribution from member as distinguished from income. He also pointed out the Resolution passed at the Special General Meeting of the assessee-society held on 12-4-1992 that a contribution of Rs. 3,00,000 shall be received by the assessee from the transferor and that no transfer shall be accepted and no transferee shall be considered for admission as a member of the society, or admitted to its membership, unless the said contribution by the transferor to the society's Common Amenities Fund had been fully received. The argument of the Assessing Officer that in this way the society may incur expenses from the amount collected and in doing so it may incur profit or loss was not legally tenable. The principle of mutuality clearly prohibited the assessment of contributions from members of an association as income of the association. He relied upon the following judgments :--
(a) CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC);
(b) CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC);
(c) CIT v. Madras Race Club [l976] 105 ITR 433 (Mad.);
(d) Presidency Club Ltd. v. CIT [1981] 127 ITR 264 (Mad.);
(e) CIT v. Cawnpore Club Ltd. [1984] 146 ITR 181 (All.);
(f) CIT v. West Godavari District Rice Millers Association [1984] 150 ITR 394 (AP); and
(g) Addl CIT v. Secunderabad Club [l984] 150 ITR 401 (AP).
5. The learned authorised representative of the assesses took us closely through the judgment of Hon'ble Supreme Court in the case of CIT v. Bankipur Club Ltd.. [1997] 226 ITR 97. According to this judgment, 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 party, then any surplus returned to those persons cannot be regarded in any sense as profit. If these requirements are fulfilled, it is immaterial what particular form the association takes. The learned authorised representative argued that it was vital that at the point of time when the contribution was made. Dr. Batra was continuing to be a member of the assessee co-operative housing society, The decision to charge transfer fee by way of contribution to amenity fund was a common decision of all members of the society. It did not matter that every member did not similarly contribute. He pointed out that the Supreme Court has held in the case of Bankipur Club Ltd. (supra) that 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. On such facts it was held that the receipts of an association for the various facilities extended to its members could not be said to be a trading activity.
6. The learned authorised representative of the assessee also relied upon certain Tribunal decisions made in the context of co-operative housing societies. He relied upon the unreported decision of Single Member of Bombay Tribunal in the case of Vasant Mahal Co-operative Housing Society Ltd. [IT Appeal Nos. 4672 and 4673 Bom. of 1994] wherein it was held that transfer fee charged by a co-operative housing society for the mutual benefit of all the members cannot be brought to tax. Further, ITAT, Bombay Bench 'A', in the case of Lohtse Co-op. Housing Society Ltd. v. Seventh ITO [1994] 51 ITD 608 held that when a payment was received towards common amenities fund voluntarily as a gesture of goodwill it did not constitute income chargeable to tax. Above all, Hon'ble Calcutta High Court had in the case of CIT v. Apsara Co-op. Housing Society Ltd. [1993] 204 ITR 662 held that there was no question of any profit element in having a transfer fee. The learned authorised representative also cited the judgments of Hon'ble Andhra Pradesh High Court and Gujarat High Court relied upon by the assessee during the course of assessment proceedings. As to the judgment of Hon'ble Bombay High Court in the case of Presidency Co-Operative Housing Society Ltd. (supra), the learned authorised representative urged that the same was not applicable because in that judgment the Hon'ble High Court did not consider the principle of mutuality.
7. The learned Departmental Representative argued that "Contribution to Common Amenities Fund" in the case of the assessee was a misnomer. Contribution meant voluntary payment. There was nothing voluntary about transfer fee of Rs. 3,00,000 received by the assessee from the transferor. The transferor was rendered without any choice in the matter. Referring to the Hon'ble Supreme Court judgment in the case of Bankipur Club Ltd. (supra), the learned DR pointed out with reference to page 104 of 226 ITR that unlike a club in a co-operative housing society there was no fixed membership. The society comprised of floating membership only. Further, the test laid down by the Hon'ble Apex Court that there should be complete identity between the contributors and participants was not met in the case of assessee-co-operative housing society. This contribution was invariably made by the outgoing member whereas the benefit was derived only by non-contributing members. In the present case, the contribution was made by a person who was disabled to enjoy it, simultaneously.
8. We have carefully considered the rival submissions and perused the orders of the authorities below. Before proceeding further we would like to highlight some aspects of the facts of the case as emerged from the various documents furnished to us during the course of hearing. In this case, one Dr. M.C. Batra was owner of Flat No. 15 in the society's building premises and was holder of the corresponding share certificate issued by the assessee-society. As per his letter dated 30-11-1991 Dr. Batra requested the society to give no objection to sell his flat No. 15 to the Deutsche Bank. The society took up the assessee's request in its Special General Meeting held on 12-4-1992. In this meeting Dr. Batra's letter objecting to transfer fees was considered. Afterwards, in this meeting the following resolution was adopted :--
"1. Resolved that a contribution from an outgoing member upon sale of his flat shall be received by Oval Shiv Shanti Bhuvan Co-operative Housing Society Ltd., at 146, Maharshi Karve Road, Bombay-400 020 (i.e., flat allotted to a member of the Society). The contribution shall be to the Society's Common Amenities Fund, and shall be not exceeding 5% of the difference between the book value of the flat and the price realized, or the prevailing market price for such flats at the time of transfer, whichever is higher; and that the above Resolutions be entered in the Society's Bye-laws as Clause III 3(i)(g) (Funds).
2. Resolved further that no transfer shall be effected and no transferee shall be actually admitted to membership till the said contribution has been received,
3. Resolved further that the outgoing members in respect of flat No. 15 shall pay Rs. 3.00 lacs only (instead of Rs. 3,75,000 calculated at the maximum rate adopted)."
Subsequently, a sum of Rs. 3,00,000 as demanded by the society was paid and share certificate was transferred in the name of the Deutsche Bank.
9. During the course of hearing before us, the learned authorised representative of the assessee has relied upon a number of High Court judgments, most of which have been given in the context of various clubs. The learned authorised representative laid special emphasis on the judgment of Hon'ble Supreme Court in the case of Bankipur Club Lid, (supra). He strongly relied upon the observations of the Apex Court that 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. On going through this judgment we find that Hon'ble Supreme Court made it clear at the outset that the income received by the clubs by extending facilities to non-members was not an issue in that case. The sole question arising for consideration in that case was whether or not the surplus receipts of the clubs by affording facilities to their members are "income" and so, taxable. For that reason, Their Lordships delinked appeals in the case of Cawnpore Club Ltd. (supra) where the dispute was in respect of income derived from property let out and interest income etc. On careful consideration it appears to us that the judgment of Hon'ble Supreme Court in the case of Bankipur Club Ltd. (supra) is on the set of facts widely different from those in the case before us. Even otherwise, the dispute before us is not that as regards certain activities, certain members only of the Association take advantage of the facilities. The dispute is rather that as regards certain funds the contributors cannot take advantage of the benefits springing from the fund.
10. The question as to whether transfer fees charged by a co-operative housing society from the transferor is income chargeable to tax came to be considered by the Special Bench of the Tribunal in the case of Jai Hind Co-operative Housing Society Ltd. v. Sixth ITO [1983] 3 ITD 625 (Bom.). After consideration, the larger Bench of the Tribunal held that by stipulating in its bye-laws that in every permitted disposition or devolution or of dealing with the plot or buildings in the society, half of the premium and excess of capital cost received by a member shall be paid to it, the society has clearly secured to itself a source of income. The obligation of the member to pay to the society the share of this surplus realised from the transfer was a contractual obligation and no specific services were contemplated to be rendered by the assessee-society in regard to those transfers which were entirely the members' own look-out. Therefore, the transfer fee charged were the assessee's revenue receipts chargeable to tax.
11. Somewhat similar view has been taken by Hon'ble Bombay High Court in the case of Presidency Co-operative Housing Society Ltd. (supra). The Hon'ble High Court held that when a member transfers his lease to another person, the rights of the society as the lessor were not varied nor were they affected in any manner. This was not an amount which was received by the society for the transfer of any of its capital assets or for the creation of any new rights in the capital assets. The rights of the society in its capital assets were not affected in any manner by the transfer in question. Hence it could not be viewed as a capital receipt. There was no regularity about the receipt of such an amount. It depended on the member transferring his interest. But this in itself was not sufficient to take away from the receipt the character of income. The Hon'ble High Court held that the clause by which the society was enabled to charge transfer fee was from a commercial view-point to earn an income. In this context, the Hon'ble High Court observed as under :--
"Looked at from a commercial point of view the reason why such a clause was inserted in the lease deed was to enable the society to earn an income. It was submitted before us that this clause was inserted merely as a deterrent to transfer.
Looking to the nature of the clause, we do not see how the clause deters any transfer by a member. A member may be required to transfer his interest for various reasons. For example, it he is required to move out of Bombay, he may have to sell his interest in the property. All that the clause provides is that the society will receive half the profits when the member sells his interest. Therefore, it cannot be viewed as a deterrent to transfers. This payment is also not a payment for granting consent. The consent of the society is required because the society may want to ensure that an undesirable person does not become its member. Even in a situation where the society is likely to get money on transfer, the society may decline to give its consent for transfer if it considers the person to whom the members' interest is being transferred as undesirable. Therefore, in our view, the purpose for inserting the clause is to ensure an income to the society whenever there is a transfer of the member's interest in favour of a third party."
12. The decision of the Special Bench of the Tribunal in the case of Jai Hind Co-operative Housing Society Ltd. (supra) and of Hon'ble Bombay High Court in the case of Presidency Co-operative Housing Society Ltd. (supra) both have been sought to be inapplicable on the ground that in both these decisions the principle of mutuality was not considered. It is seen that in both these decisions it has been held that by stipulating in the bye-laws of the society that on transfer of immovable property by an existing member, certain part of the gains thus may by the transferring member would be paid to the society as transfer fee, the society created for itself the source of profit or income. While arriving at this conclusion, the fact that the transfer fee was payable by a member of the society who continued to be so until transfer fee was paid and not by any third party cannot be said to have been lost sight of. In other words, the ratio of these decisions is that the society reserved a source of profit or income from such members who elected to transfer their membership in favour of third party.
13. There are, however, judgments of Hon'ble Gujarat High Court in the case of CIT v. Adarsh Co-op. Housing Society Ltd. [1995] 213 ITR 677 and Hon'ble Calcutta High Court in the case of Apsara Co-op. Housing Society Ltd (supra) where it has been held that the transfer fee realised was not income liable to tax as it was for the benefit of members of the society. The learned authorised representative of the assessee has also relied upon the unreportcd decision of Single Member of Bombay Tribunal in the case of Vasant Mahal Co-operative Housing Society Ltd. (supra) and the decision of ITAT, Bombay Bench 'A', in the case of Lohtse Co-op. Housing Society Ltd. (supra). We may state here that insofar as the later decision is concerned, the same does not pertain to transfer fee at all. In that case, one M purchased land opposite assessee-society's property and on M's request, assessee-society released restrictive covenant permitting M to raise a building above 35 ft. height. M, as a gesture of goodwill, paid certain amount to assessee towards Common Amenities Fund. The Tribunal found that it was not commercial transaction and, therefore, it failed the test to calf itself income as understood by a general connotation. The principle of mutuality was not applied at all. As against this, the learned DR has placed reliance on unreported decision of the Tribunal in the case of Sea Face Park Co-op. Housing Society Ltd. (supra). In that decision the principle of mutuality was not accepted.
14. There is yet another decision of the Tribunal in the case of Hatkesh Cooperative Housing Society Ltd- v. ITO [1997] 60 ITD 662 (Mum.) (SMC). In that case also, the assessee argued that transfer fee received was not exigible tb tax in view of the principle of mutuality. The Tribunal held that as the assessee-society permitted its members to execute transfer only after taking transfer fee and thus put a clog over their right of disposition which is one of essential ingredients of ownership, such a charge was not a voluntary contribution, but a cost for effecting change. Under such circumstances, identity between contributors and participators did not exist as the contributor went out after executing transfer and in his place a new person came. The Tribunal therefore held that amount of transfer fee received by assessee was exigible to tax.
15. In our view, while deciding upon the principle of mutuality it has to be borne in mind that it is not every payment from a member to the association of which he is a member which would per se be governed by the principle of mutuality. This aspect has been made very clear in the judgment of Hon'ble Supreme Court in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. (supra). In that case the assessee carried on banking business which was restricted to its shareholders only. It received monthly contributions by way of recurring deposits from the shareholders and at the end of a fixed period returned an amount covering the deposits and guaranteed interest thereon for that period. Loans were granted to those shareholders who applied for them and interest was realised on those loans. A shareholder was entilled to participate in the profits as and when dividend was declared, even though he had not taken any loan from the company. On these facts, Hon'ble Supreme Court held that there was no such complete identity between the contributors and the participators in a common fund as attracted the principle of mutuality. A shareholder in the company was entitled to receive his dividend as long as he held a share. He did not have to fulfil any other condition. His position was in no way different from that of a shareholder in a banking company. While delivering this verdict, Hon'ble Supreme Court pronounced that the essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed to shareholders as shareholders the principle of mutuality is not satisfied.
16. On consideration of various aspects, in our considered opinion, the situation in this case is not such as may be perceived to be falling in the ambit of the principle of mutuality. The contribution made in this case can by no means be said to be voluntary or with a view to reap advantages of contribution at a later date. Contribution is made under compulsion, as rightly stated in the decision of the Tribunal in the case of Hatkesh Cooperative Housing Society Ltd. (supra), with a view only to remove the clog put by society on the absolute ownership of the transferor. Hon'ble Bombay High Court have held that by such bye-laws the society created a source of income in its favour. Contribution to this income pool of the society is not by the members of the society in general but only by those few members who opt to transfer their proprietary rights in favour of third party. The benefit is to be reaped by the members who continue their membership. In our opinion, much cannot be made of the fact that at the point of time the contribution was made by the transferor he was still a member of the society. The stark fact is that the contribution is made on the eve of cessation to be a member. Hon'ble Supreme Court have clearly laid down in Kumbakonam Mutual Benefit Fund Ltd.'s case (supra) that the essence of mutuality lies in the return of what one has contributed to a common fund. In the present case there is no return to the contributor. The return to other members is for no particular contribution made by them but for reason only that they continue to be members. On these facts, we are of the view tha't the principle of mutuality falls flat in the ground.
17. In view of the discussion in the foregoing paragraphs, we hold that the authorities below rightly treated the transfer fee of Rs. 3,00,000 received by the society as its revenue receipt chargeable to income-tax. We therefore dismiss this appeal.