Supreme Court explains the doctrine of mutuality. Receipts of non-occupancy charges, transfer charges, common amenity fund charges received by cooperative societies, from its members exempt from tax
ABCAUS Case Law Citation:
ABCAUS 2260 (2018) (03) SC
The question of law that arose for consideration of the Hon’ble Supreme Court was whether certain receipts by cooperative societies, from its members i.e. non-occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax based on the doctrine of mutuality. The challenge is based on the premise that such receipts are in the nature of business income, generating profits and surplus, having an element of commerciality and therefore exigible to tax.
However the respondent society challenged the finding that such receipts, to the extent they were beyond the limits specified in the Government notification was exigible to tax falling beyond the mutuality doctrine.
The respondent assessee was a cooperative society. 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 State Cooperative Societies Act stood excluded from the principle of mutuality and was taxable.
The order was upheld by the Commissioner of Income Tax (Appeals). The Income Tax Appellate Tribunal (ITAT) held that the notification issued in this regard was applicable to cooperative housing societies only and did not apply to a premises society. It further held that the transfer fee paid by the transferee member was exigible 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.
Doctrine of mutuality
The Hon’ble Supreme Court explained the doctrine of mutuality as under:
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 in general can be stated to be 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.
The Hon’ble Supreme Court observed that the proceedings in the instant appeals related to different assessment years based on information gathered by the Assessing Officer pursuant to notice under Section 133(6) of the Income Tax Act.
With respect to the different charges, the observation of the Hon’ble Court were as under:
Transfer charges were 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 is appropriated only after the transferee is inducted as a member. In the event of non-admission, the amount is returned. The moment the transferee is inducted as a member the principles of mutuality apply.
Likewise, no-noccupancy charges are levied by the society and was payable by a member who does not himself occupy the premises but lets 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 is 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 enures to the enjoyment, benefit and safety of the members.
The Hon’ble Supreme Court observed that these charges had been levied on the basis of resolutions passed by the society and in consonance with its byelaws and the receipts had indisputably been used for mutual benefit towards maintenance of the premises, repairs, infrastructure and provision of common amenities.
The Hon’ble Supreme Court observed that any difference in the contributions payable by old members and fresh inductees cannot fall foul of the law as sufficient classification exists. Membership forming a class the identity of the individual member not being relevant, induction into membership automatically attracts the doctrine of mutuality. If a Society has surplus FSI available, it is 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 inducts new members who are required to contribute to the common fund for availing common facilities, and then grants only occupancy rights to them by draw of lots, the ownership remaining with the society, the receipts cannot 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.
The Hon’ble Supreme Court observed that it was not the case of the Revenue that such receipts had not been utilised for the common benefit of those who have contributed to the funds.
Referring to the Notification issued in this regard, the Hon’ble Supreme Court opined that there was no reason to take a view different from that taken by the High Court as the notification was applicable only to cooperative housing societies and had no application to a premises society which consists of non-residential premises.
Consequently, all appeals preferred by the Revenue were dismissed.
