By Vimal Punmiya, Chartered Accountant
The importance of society has been increased from last 25 years ever since there has been growing needs of an urban community necessitating its accommodation in proximity to cities and towns, due to restrictions under various rent legislation’s.
The concept of co-operative society in the sector of housing industry has been introduced after Partition. Before Partition there were two types of systems which prevailed commonly namely.
- Landlord System or,
- Tenant System
But, soon after Partition the concept of Co.op. Societies have been introduced and has gained importance. In the year 1978, the offices at Nariman Point were available @ of Rs. 150/- per sq.ft. and the flats at Malabar hill, are available @ of Rs. 200/- per sq.ft., but, due to scarcity of office at Nariman Point and over population today, the value of office at Nariman Point is available @ of Rs. 7000/- per sq.ft. and flats at Malabar hill, are available from the rate of Rs. 10,000/- per sq.ft.
Due to such high increase in the prices of property in commercial and residential sector, the societies formed, have started charging the transfer fees from such transaction which is commonly prevailing as a matter of practices from Rs. 50 to 500/- per sq.ft. or which even varies from 1% to 5% in exceptional cases.
As regards legally, in Mumbai, Society can charge transfer fees upto the extent 2.5% of the agreement value or Rs. 25,000/- only, whichever is less and on other places it varies from Rs.5000/- to Rs.20,000/- respectively.
As, of today, the Co-op hsg. Society in our country is playing a very special and prominent role in catering to the housing needs of our people, There are many societies who have not paid Income – Tax on the Transfer fees under the understanding that the society is not liable to pay the same on the basis of the principles of Mutuality.
The concept of Mutuality is based on the principle that no man can make profit out of himself. So, when more then one person combine
themselves for some common purpose of mutual benefits and contribute for such common purpose and if the surplus is left out and the same is returned to those contributors, then the same does not amount to income tax seeks to tax income and not the savings……..”
If, the society is a voluntary association created for the mutual concern without any profit motive then no tax is being charged on the income
Of such society, on the principles of Mutuality, the concept of Mutuality is the foundation on which the entire superstructure of the theory of non-taxability of the transfer fees under the act is built-up.
The primary condition of Mutuality between Co-op. Hsg. Society and its members is that the Co-op. Society which collects money from its members, must apply the same for their benefit not as shareholder having any interest in its profit but as persons themselves who have put up the fund of contributing to it.
The identity of the recipient with the contributor is a condition precedent to enable the benefit of Mutuality.
NOTICE DATED : 09-8-01, : – While transferring the flat of the member of the Co-op. Hsg. Society and also transferring the flat of the member of the co.op. Hsg. Society and also transferring his shares and rights in the share capital/property of the society to another person, rate of premium decided by the General Body Meeting of the society, in any circumstances should not be more than 25,000/- in respect of Municipal Corporation and authority area. It was stated that this step was taken by the Government to arrest the profit earning qua the Co-op. Hsg. Society.
In many cases, the Honourable Tribunal has taken a view that, if a amount received from the transferor, it is not taxable upto the extent of Rs. 25,000/- in few judgements it has taken a view that if the amount received from Transferee it is taxable, thereby in view of above contradicting and conflicting views of various benches being constituted over a single issue of “Transfer Fee”, a special bench was constituted in Mumbai, before Shri M.K. Chaturvedi, Vice President, Shri R.V.Easwar Judicial member and Shri Satish Chandra, Account member of the Honourable Tribunal in the case of M/s. Walkeshwar Triveni Co-op. Housing Society Ltd. Mumbai (Appellant)
Income-tax Officer, ward 7(7), Mumbai.
Assessment year 1997-98
Appellant by : Shri V H Patil / Shri Vipul B Joshi / Mrs Jyothi N. Dadlani
Respondent by : Shri Girish Dave / Shri Ajit Korde
Facts : The member of the co-operative society being transferor had paid Rs. 12500/- and the transferee not being the member of the society received Rs. 25000/-.
Resultantly, the amount received from the Transferor is not eligible to tax whereas the amount from the transferee is eligible to tax, vide order dated 4.7.03.
Taxability of an amount would depend on the nature and character of the receipt at the initial stage. The true nature and character of the transactions have to be ascertained from the covenants of the contract in the light of the surrounding circumstances.
The aforesaid case was decided by taking the following factors into consideration from the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97(SC) wherein it was held that were a member 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 body, then any surplus returned to those persons cannot be regarded in any sense as profit and there must be a complete identity between the contributors and the participators.
ANDHRA PRADESH HIGH COURT in the case of CIT v. Merchant Navy Club…
The Principles of Mutuality that emerge from the decided cases may be stated thus : No person can trade with himself and make an assessable profit. If instead of one person, more than one person combine themselve into a distinct and separate legal entity, then the resulting surplus is to be refunded to the members.
The aforesaid facts can also be supported by landmarking judgements in :
CIT v. Adarsh Co.op Hsg. Soc. LTd. 213 ITR 677 (Guj) : Where the assessee was found to be a mutual concern and the income which it receives from its members is not liable to tax, and the same was not taxed on the principle that no one can make a profit by transacting with oneself.
Reference was also made to the decision fendered in the case of STYLES v. New York Life Company 2 Tax Case 460 : – Wherein the cardinal requirement was construed that there must be complete identity between the contributors and participators, and the receipt of mutual concern was not eligible to tax, whereby there has to be an absence of any profit motive.
CIT v. Apsara Co.op. Hsg. Society Ltd. 204 ITR 662 : – wherein it was held that the taxability of the transfer fee realised by the society for transfer of flats. It was noted that the persons have to become first the members of the society before they can be entitled to get flats transferred in their names or become liable to pay transfer fees. Court found that the transfer fee so realised is for the benefit of the members of the society. As such, it was held to be a mutual concern and the transfer fee was not liable to tax.
Shiv Shanti Bhuvan Co.op. Hsg. Society v. ITO 78 ITO 403 : – It was held 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.
CIT v. Madras Race Club 105 ITR 433 : – In this case, while considering the principle of Mutuality, for exemption of subscription collected from the members, Court held that Sine Qua Non to bear in mind two concepts. The first concept is that the principle of Mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a dozen persons gather together and agree to purchase certain commodities in bulk and distribute them amongst themselves in accordance with their individual requirements, they may collect a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it, ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselve a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent the Savings and not Income. The Income-Tax seeks to tax the Income and not Savings, if this principle is borne in mind then it would be easier to understand the decisions rendered on this point.
From the above discussion, it is clear that the Transfer Fee received by a society from its member on the Transfer of his flat is nothing but a form of construction for the mutual benefit of the society. If the Department attempts to encroach upon the Transfer Fe and tries to take a slice out of the same by way of Income – Tax, the societies would be unable to meet the increasing cost of repairs, maintenance and renewabless in the building and such building would become a public burden and may endanger the life of many residing in those buildings. Therefore, it would be wiser on the part of the department not to be revenue mindedly pursue the matter of taxation on the Transfer Fee which would be legally as well as morally quite unjustified and also unreasonably burden on the members of the Society.
We hope, that although there are number of litigations relating to this issue which is pending before the Commissioner of Income-Tax (a). Income-Tax Appellate Tribunal and after going through the above discussion there would be an end to litigation relating the taxability of the transfer fees and also not tax any amount from the transferor over and above the sum of Rs. 25,000/- to hoodwink the law premium which is worded under different names viz., DONATION, WELFARE FUND, COMMON AMENITIES FUND, etc, etc…