Tuesday, October 26, 2010

Taxation of Co-operative Societies


The relevant observations of the High Court on pp.664,665 and 666 of the Report, are reproduced as follows :

(a)   “The question of assess ability in terms of Section2(24) (vii) only arises if the co-operative society is engaged in business. In this case, it is a housing co-operative society and it does not carry on business. It only provides residential apartments to the members of the society”.

(b)   “This principle, in our view, is applicable to a mutual concern and shall apply in the case of a co-operative society. It is the members who form themselves into a co-operative society for the purpose of having a co-operative housing society and there was no question of any profit element in such an association or in having a transfer fee. The Tribunal has not found that there was any profit element involved. It is a mutual concern”.

(c)   “ We are of the view that the aforesaid principles applicable to the members’ club will equally apply to the facts of a co-operative society, particularly of a co-operative housing society which does not carry on any business and where no element of profit is involved.”


The ITAT in the aforesaid case, suffers from major/fatal flaws, as the relevant judgements of the Apex Court and High Courts have not been considered therein.

The Special Bench has very elaborately discussed the concept of mutuality, vis-à-vis, co-operative housing society vide its observations in paras 60-70 on pp 689 to 692 of the report. In the aforesaid paras, the ITAT has accepted the fact that co-operative housing societies are governed by the principle of mutuality. In para 81, on p.694 of the Report, the ITAT states –no one can make profit out of himself.  In short this is the principle of mutuality.  The cardinal requirement is that the contributor to the common fund is entitled to participate in the surplus , etc.

The ITAT has however, gone off at a tangent while restricting the exemption to Rs.25,000/- which is not, at all relevant, once we accept that under the principle of mutuality, the income of a co-operative housing society is not at all taxable.  As far as the restriction of Rs.25,000/- is concerned, it is a part of the model bye-laws and a co-operative housing society may always change its bye-laws.  It may be stated here that if the members wish to have their own bye-laws, they may get the same duly registered with the Registrar of Co-operative Societies and in such bye-laws, the society may charge transfer fees exceeding Rs.25,000/-.

It is respectfully submitted that the opinion which holds transfer fees as liable to tax is incorrect.




In view of the judgement of the Apex court in the case of CIT v. Bankipur club Ltd. (1997) 226 ITR 97 (S.C.), the transfer fees received from the incoming members of the society will also be tax-free.  Besides, the society gets a right to  retain transfer fees only after the incoming member is admitted as its member and therefore, there is no logic in the aforesaid view taken by the I.T.A.T.  On the other hand, in the case of contribution/transfer fees received from an incoming member, he would be there to enjoy the benefit of the aforesaid contribution/ transfer fees received from him hence there is a strong point for the exemption.

In view of the aforesaid judgement of the ITAT, Special Bench, Mumbai, requires to be re-consider.

The department is of the view that since the transfer fee collected from an outgoing member is not utilized by the participant the concept of mutuality is violated. But as discussed above, the holistic view as “a class of member” should be taken into consideration. The controversy has not been resolved.

I am of the opinion that at present only the transfer fee from incoming members should be collected until a final decision from the court is given.


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