Taxation of Co-operative Societies

Ludhiana Aggarwal Co-operative House Building Society Ltd. v ITO (1995) 55 ITD 423 (Chd-Trib)

In the above Chandigarh ITAT Bench case, it was observed that there was no evidence on record to show that the assessee-society was engaged in any trading or commercial activity. In the absence of any commercial activity whatsoever, the receipt in the hands of the society by way of transfer fee had to be looked at after ascertaining its utilization.  The society extended certain facilities to the members, including the facility of a hospital and community center. At the time of receipt of the transfer fee, the object was specifically mentioned on the receipt. It would be thus clear that the income was to be utilized for a specific charitable purpose. There was nothing on record to show that the income has been utilized for certain other purpose.  The assessee-society being a mutual concern, was entitled to exemption.  The transfer fee was being used for the benefit of the members and, therefore, the principle of mutuality was applicable to the case of the assessee.

Oval Shiv-Shanti Bhuvan Co-operative Housing society Ltd. v. ITO (2001)78 ITD 403 (Mum-Trib)

In this case, decided by the Mumbai Bench of Tribunal, transfer fee of Rs.3 lakhs was received by the assessee co-operative housing society from an outgoing member for giving a no objection certificate to the said member on the sale of a flat to a third party. Transfer fee received as such was credited to the common amenities fund in the balance sheet and was not offered as income of society. Before the assessing officer, the assessee as taxable society explained that transfer fee was not chargeable to tax on the principle of mutuality.  The assessing officer rejecting the assessee’s explanation, assessed the sum of Rs.3 Lakhs under the residuary head “income from other sources”. On appeal, the Commissioner (Appeals) confirmed the order of the assessing officer.  In further appeal the Tribunal held that contribution made in this case can, by no means, be said to be voluntary or with a view to reaping the 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 Co-operative Housing Society Ltd. (1997) 60 ITD 662 (Mum-Trib) with a view only to removing the clog put by society on the absolute ownership of the transferor.  The Hon’ble Bombay High Court has 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 a third party. The benefit is to be reaped by the members who continue their membership. 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 the cessation to be a member. The Hon’ble Supreme Court has clearly laid down in CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 (SC) 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, the principle of mutuality falls flat to the ground.

Therefore, in conclusion, the authorities below rightly treated transfer fee, received by society as its revenue receipt chargeable to income-tax.

CIT v. Presidency Co-operative Housing Society (1995) 216 ITR 321 (Bom)

In this case the issue was to ascertain whether the amount received by the co-operative society by way of transfer fee is a capital receipt or a revenue receipt. The High Court held that the payment is certainly not in repayment of capital on account of repayment of capital in installments. It cannot, therefore, fall in the category of a capital of a capital receipt. The assessee-society while granting a lease to each of its members has inserted a clause in the lease whereby it has retained a right to a share in the excess amount which the members may receive while transferring their rights. This also appears to be in the nature of a receipt rather than a capital receipt.