Receipts by Co -operative society form its members are exempt from income tax based on the principle of mutuality
A mutual concern or association is an association of persons (AOP), who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out in the same capacity in which they have made the contributions. Therefore, the capacity as contributors and participants remains the same. The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves.
There are a number of entities, the income / surplus of which is governed by the principle of mutuality and therefore, such income / surplus is not liable to income-tax. In other words, any surplus in the case of mutual concerns is exempt from income-tax and therefore, it would not form part of the gross total income of such mutual concerns. The mutual concerns like social clubs and co-operative societies have various sources of income, some of which are governed by the principle of mutuality and hence not liable to income-tax, whereas others not so governed, are liable to income-tax.
Let us refer to the case of ITO v. Venkatesh Premises Co -operative Society Ltd (2018), which shed light on the applicability of the principle of mutuality.
Facts of the Case:
- The Assessing Officer (AO) held that receipt of non-occupancy charges by the society from its members, to the extent that it was beyond 10% of the service charges/maintenance charges permissible under the notification dated 09.08.2001, stands excluded from the principle of mutuality and was taxable.
- The order was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].
- The Income Tax Appellate Tribunal (ITAT) held that the notification dated 09.08.2001 was applicable to cooperative housing societies only and did not apply to a premise’s society.
- It further held that the transfer fee paid by the transferee member was eligible to tax as the transferee did not have the status of a member at the time of such payment and, therefore, the principles of mutuality did not apply.
- The High Court set aside the finding that payment by the transferee member was taxable while upholding taxability of the receipt beyond that specified in the government notification.
Observations of the Supreme Court (SC) on doctrine of mutuality
- The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself.
- An amount received from oneself, therefore, cannot be regarded as income and taxable.
- Section 2(24) of the Income Tax Act defines taxable income. The income of a cooperative society from business is taxable under Section 2(24)(vii) and will stand excluded from the principle of mutuality.
- The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries.
- The contributors to the common fund must be entitled to participate in the surplus and the participators in the surplus are contributors to the common fund.
- The law envisages a complete identity between the contributors and the participants in this sense.
- The principle postulates that what is returned is contributed by a member.
- Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities.
- A common feature of mutual organizations is that the participants usually do not have property rights to their share in the common fund, nor can they sell their share.
- Cessation from membership would result in the loss of right to participate without receiving a financial benefit from the cessation of the membership
Observations of the SC
- In the present appeals, transfer charges are payable by the outgoing member.
- If for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount was appropriated only after the transferee is inducted as a member.
- In the event of non-admission, the amount was returned.
- The moment the transferee is inducted as a member the principles of mutuality apply.
- Likewise, non-occupancy charges were levied by the society and was payable by a member who did not himself occupy the premises but let it out to a third person.
- The charges were again utilised only for the common benefit of facilities and amenities to the members.
- Contribution to the common amenity fund taken from a member disposing property was similarly utilised for meeting sudden and regular heavy repairs to ensure continuous and proper hazard free maintenance of the properties of the society which ultimately led to the enjoyment, benefit and safety of the members.
- These charges were levied on the basis of resolutions passed by the society and in consonance with its byelaws.
- The receipts in the present cases were indisputably used for mutual benefit towards maintenance of the premises, repairs, infrastructure and provision of common amenities.
- Any difference in the contributions payable by old members and fresh inductees could not fall foul of the law as sufficient classification existed.
- Membership forming a class, the identity of the individual member not being relevant, induction into membership automatically attracted the doctrine of mutuality.
- If a Society had surplus FSI available, it was entitled to utilise the same by making fresh construction in accordance with law.
- Naturally such additional construction would entail extra charges towards maintenance, infrastructure, common facilities and amenities.
- If the society first inducted new members who were required to contribute to the common fund for availing common facilities, and then granted only occupancy rights to them by draw of lots, the ownership remaining with the society, the receipts could not be bifurcated into two segments of receipt and costs, so as to hold the former to be outside the purview of mutuality classifying it as income of the society with commerciality.
Observations of the SC on the provisions of law
According to Section 79A of the Maharashtra Cooperative Societies Act:
- If the State Government, on receipt of a report from the Registrar or otherwise, is satisfied that in the public interest or for the purposes of securing proper implementation of cooperative production and other development programmes approved or undertaken by Government, or to secure the proper management of the business of the Society generally, or for preventing the affairs of the Society being conducted in a manner detrimental to the interests of the members or of the depositors or the creditors thereof, it is necessary to issue directions to any class of societies generally or to any Society or societies in particular, the State Government may issue directions to them from time to time, and all societies or the societies concerned, as the case may be, shall be bound to comply with such directions.
- The State Government may modify or cancel any directions issued and in modifying or cancelling such directions may impose such conditions as it may deem fit.
- Where the Registrar is satisfied that any person was responsible for complying with any directions or modified directions issued to a Society and he has failed without any good reason or justification, to comply with the directions, the Registrar may by order:
- if the person is a member of the committee of the Society, remove the member from the Committee and appoint any other person as member of the committee for the remainder of the term of his office and declare him to be disqualified to be such member for 6 years from the date of the order
- if the person is an employee of the Society, direct the committee to remove such person from employment of the Society forthwith, and if any member or members of the committee, without any good reason or justification, fail to comply with this order, remove the members, appoint other persons as members and declare them disqualified
According to the notification dated 09.08.2001, in the larger interests of the people in the State, it was ordered that the rate of premium to be charged for the transfer Flat/Premises as well as the rights and share in the share capital/property of the Cooperative Housing Society by a member in favour of another, should be determined at the General Meeting of the Society.
Conclusion by the SC
SC did not find any reason to take a view different from that taken by the High Court, that the notification dated 09.08.2001 was applicable only to cooperative housing societies and had no application to a premises society which consisted of non-residential premises.
In simple words, receipts by housing co-operative societies such as non-occupancy charges, transfer charges, common amenity fund charges and certain other charges from their members are exempt from income-tax based on the doctrine of mutuality. The fact that the receipts are in excess of the limits prescribed by the State Government does not mean that the Societies have rendered services for profit attracting an element of commerciality and thus was taxable