Taxation of Co-operative Societies

(i)      Transfer fee or premium received by a co-operative housing society from the outgoing member on transfer of the flat, etc., upto the limit allowed by law, viz., Rs.25,000/- per flat is not liable to tax.

(ii)    Transfer fees or premium received from the incoming member or the transferee is liable to tax.

(iii)    Any amount received by the society from any member whether the transferor or the transferee on the sale of a flat, beyond the limits prescribed in the bye-laws or the Government Notification, is liable to tax.

Besides, the ITAT has also observed that if a society charges transfer fees or premium more than what is prescribed under the law, stern action should be taken against such society. In this context, paras 76, 85, and 86 of the aforesaid order of Tribunal are very relevant.  The same are reproduced as follows:

76. It transpires from the perusal of the aforesaid rule that the maximum amount of premium cannot exceed Rs. 25,000. It is as per the norms set out by the Government.  The society can raise funds only for achieving the objects of the society and not for any other purpose. So long as the society is charging the amount of premium within the framework of the law, no profit motive can be attributed to the society. However, if it is found that the society charges more than what is prescribed under the law, in that eventuality, of course, stern action should be taken against the society.

85. Co-operative housing societies in our country are playing a very special and prominent role in catering to the housing needs of our people. If the society is a voluntary association, created for mutual help without profit motive, no tax is being charged on the income of such society. This profit of taxation at times tempts human ingenuity to defile the law. Consequently the spirit of mutuality is abused with impunity. To hoodwink the law, premium is warded off under different names, viz donation, welfare fund, common amenities fund, etc; etc. Such contributions are compulsive to effect the transfer. The society can put an interdict on the transfer de hors such contributions.

Such charges are neither legal nor voluntary. Profit is the prime object for making such charges to effect the transfer. This amounts to malpractice. Such unlawful or illegal means should not be encouraged.

86. Bacon said “laws are like cobwebs; where the small flies are caught, and the great breakthrough” To maintain the majesty of law, it is imperative that the innocent should not suffer and the recalcitrant should not go scot-free. If a co-operative housing society indulged in malpractices and adopted unlawful or  illegal means to achieve the objective, it should face the consequences.  But if there is no evidence a propos any malpractice, it won’t be fair to view the society with suspicion.  If the premium is charged within the limits prescribed under law, no profit motive can be attributed to the society.  It is just to ensure an income to the society which is to be utilized for the common good.  However, if the excess amount is charged be it a donation or payment under any other nomenclature, the profit motive will pervade and mutuality will cease to exist.  Ex-consequenti, the profit will be exigible to tax.”

The aforesaid judgement of the Special Bench of the ITAT, suffers from a number of flaws/

According to the Supreme Court and the High Courts of Calcutta and Delhi, a co-operative  housing society is a mutual concern and income of any mutual concern, except those covered under section 2(24) (vii) of the IT Act, outside the purview of the levy of income-tax.  The relevant parts of the aforesaid judgements are discussed as follows:

  

(i) Chelmsford Club Ltd. v. CIT [2000] 243 ITR 89 (SC) – In this case the Apex Court has held that the activities of the assessee-club, being a mutual concern, were governed by the principal of mutuality and therefore, the surplus from the activity of providing recreational and refreshment facilities to the members, as also the income by way of annual value of the club house, as contemplated U/S 22 of the IT Act, would be outside the purview of the levy of income-tax.

 

 (ii)  CIT v. Apsara Co-operative Housing Society Ltd. (1933) 204 ITR 662 (Cal)  The Calcutta High Court has laid down  in the aforesaid judgement that a co-operative society, particularly  a co-operative housing society, is a mutual concern.