Taxation of Co-operative Societies

      Typical Income

·        Rental Income

If a society gives a certain part of building on a rental basis to non-members for storing or for an advertisement advertising hording or mobile tower etc., the rental income is generally treated as income under the head – Income from house property. It can claim permissible deduction under section 24 (a) standard deduction @ 30% of rent and (b) interest on borrowed capital if any. (Morntreal Olympic Premises CSL v. ITO- CIT (A) - XIX. Mithila Shopping Centre Premises CSL v. ITO 21(3) OF Mumbai Tribubnal – ITA No.3519/2004)

In case of Mukherjee Estate Pvt. Ltd. v. CIT – 244 ITR (1) (Cal.) Hon’ble High Court has upheld the finding of the tribunal that letting out of open space does not inolve space of room of house property. It was held that putting a hoarding cannot be treated as part of the building and income therefrom is assessable under the head Income from Other sources and not income from house property.

·        Interest/Dividend Income

Interest & dividend income from investment with any co-operative Banks or other co-operative societies are fully exempted u/s 80P(d).  However, income interest from nationalized banks is taxable income even if it is credited to different funds, under the head ‘Income from Other sources.’

·        Transfer fees :

Some of the hurdles which present themselves regarding the principle of mutuality and which are associated with the term transfer fee are discussed below:

The term “transfer fees” means contribution to the common fund of a mutual benefit association, i.e. the society by its members on the occasion of the transfer of a flat etc. which is going to be used either immediately or at a future date, for the common benefit of all members of the society. It has been clearly established that once the identity between the contributors to the common fund and the participators in the benefit and surplus is known, the fact of incorporation of mutual benefit association does not damage the applicability of the principle of mutuality to it.

All the members are liable to pay the transfer fee and no particular section or category of members is liable to pay the transfer fee.  The person paying the transfer fee is paying in his capacity as “a member” of the society and not as an outsider or in any other capacity. While comparing the contributors and the participators, they should be compared as “a class” and no isolated or individual contributor and participator is to be compared. The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus.

In the event of winding up of a society, the following options are available for the disposal of surplus assets:

(a)    The same may be divided by the Registrar with the previous sanction of the State Government amongst its members in such manner as may be prescribed, or

(b)   The same may be devoted to any object provided in the Bye-laws of the society, or

(c)    If the same is not divided amongst the members of the society or has not been utilized for its objects, the surplus shall vest in the Registrar who shall hold it in trust and transfer the same to any other society having similar objects or if no such society having similar objects exists, for some public purposes.

In option (c) as per the decision of various courts, it has been held that the principle of mutuality is not mitigated. Taking into account the provision of the various society Acts, and the objects for which the Societies are formed, there is little possibility that the surplus available to a society would go into the hands of non-members at the will of the members. Keeping in mind this fact and the principles laid down by a society, the applicability of the principle of mutuality to transfer the fee received by a society is not imparted on the ground that the surplus might be distributed amongst non-members and consequently the identity between the contributors and the participators in the surplus might be lost.

There are various decisions which throw light on the taxability of transfer fee received from members by a Co-operative Housing Society.  These cases are discussed hereunder in brief so as to give a clear understanding in this regard.

Madhuvana House Building Co-operative Society v. Assistant CIT (2003) 35 DTC(Bang-Trib): (2002)76 TT (Bang-Trib)948

In this Bangalore ITAT case, the assessee co-operative society was formed solely with the objective of providing housing sites to its members. It was held that where there was complete identity between contributors and participants of a mutual benefit society and as there were no outsiders the income derived by the mutual benefit society was eligible for the exemption applying the principle of mutuality.