Conveyance Problems

v     Issues & Replies

      Are conveyance and registration of the property are accompanied by huge amount of stamp duty?

A.  The stamp duty payable on the conveyance of building and the land thereunder in favor of a co-operative society by the builder and/or the owner of the land shall be paid on the true market value of each unit.  All non-resident units will attract stamp duty at the concessional rate as provided under Article 25(d) of Schedule-I to the Bombay Stamp Act, 1958. The Stamp Duty already paid on purchases of units by the members will be adjusted towards total stamp duty leviable on the conveyance as per explanation -1 to the Article 25 of Bombay Stamp Act, 1958. Provided further that, where subsequently a conveyance is executed in pursuance of such agreement of sale, the stamp duty, if any, already paid and recovered on the agreement of sale which is deemed to be a conveyance, shall be adjusted towards the total duty leviable on the conveyance.

It is economical to pay stamp duty on the individual agreements and get it registered, rather than the payment of stamp duty on conveyance deed at the future date as per then market value of the whole property.

      What remedies are available to a society if the builder refuses to execute the conveyance in favor of a society?

A.  According to Rule 9 of MOF Rule, it is mandatory to take necessary steps to execute the conveyance within a period of four months of registration of the society or limited company. If builder does not comply with these provisions

(1)    He can be prosecuted u/s 13 of MOF Act.

(2)    If builder is found guilty, the criminal court may punish the builder.

(3)    If builder is still adamant a civil suit under the Specific Relief Act can be executed.

      What are the consequences of non-execution of conveyance in the form of the society?

A.  The consequences of non-execution of conveyance can be disastrous in the long run. If conveyance is not executed, it means that the society does not have legal rights or ownership of the land on which the society’s building stands.

If the Society does not have ownership of land, it may not be possible to reconstruct the building. Even for using additional F.S.I. or for carrying out major repairs, municipal authorities will insist on NOC from the land-owner. In such cases, losses to the members will be huge.

      What are the legal provisions in the existing laws to enable housing   Society to obtain the conveyance?

A.  Section-11 of MOF Act casts a statutory obligation on the promoters to execute a deed of conveyance in favour of housing societies within the prescribed period if the promoter fails to comply with the provision, the Society can file a suit in the civil court and obtain a decree against the promoter.

Usually, when a civil suit is filed, the party who files the suit has to pay court fees on the basis of valuation of property. However, in a judgement which is very beneficial to housing societies, Bombay High Court held that in a suit filed by a Co-operative Society against the promoters for conveyance, it is not necessary to calculate the value of property for the purpose of court fees. (Reported in 1982 Maharashtra Law Journal, page 607)

In view, the housing societies can file suits against the promoters for conveyance by paying a nominal amount of court fees, which otherwise would have been in lakhs.

Secondly under chapter-II of the Specific Relief Act, the purchaser of the flat can file suit for specific performance of the contract.  The housing society can apply to the court for directions to the promoter/landowner to executive the deed of conveyance in favour of the society.

The provision of Rules 21 and 34 of the Civil Procedure Code provides the remedy to face a situation when a landowner/promoter does not execute the conveyance even after a decree is passed by a court. In such a situation the Society which filed the suit should prepare a draft of conveyance and submit it to court. The court will issue a notice to a landowner/promoter along with a copy of the conveyance deed. After considering the objection if any raised by the landowner/promoter, the court will finalise the conveyance deed. If the land owner/promoter still fails to execute the document, the court will authorise an officer of the court to execute the deed of conveyance in favour of the society.

It may be noted that civil suits are likely to take few years to conclude but delay is better than never.

      What about the conveyance in case of a society more than 20 years old and the building firm as well as the builder are no more existing/traceable?

A.  The society can file a case in the Consumer Court or in the Civil Court and obtain ex-parte decree in favour of the Society. The same decree can be registered with Sub-registrar as conveyance and the property card can be changed in the name of the society thereafter.

      In a project of 8 buildings, 4 buildings are completed and their 4 societies are registered. The builder when asked about conveyance says that it will be hand over only when all the 8 buildings are completed and their respective society are registered. What is the correct position?

A.  The builder can give the conveyance to individual societies and need not to wait for the project’s to complete.

      If a member is not having any documents regarding his flat i.e., agreement, stamp duty, registration fee receipt etc. then what is the solution if the society is going for conveyance?

A.  At the time of conveyance the concerned member will have to pay Stamp duty at the market value and the rate applicable on the date of executing the conveyance.

Conveyance Problems

v     Stamp Duty and Registration

Many Societies avoid conveyance under the impression that they have to incur a lot of expenditure on stamp duty and registration.

The maximum registration fee is Rs.10,000/- for conveyance and if owners of all the flats/shop/galas of the Society have already paid the stamp duty and registered their agreement  with the sub-registrar, the additional stamp duty for conveyance will be negligible.

      The office bearers of the Society should contact the Sub-registrar of Assurances and obtain an estimate of the expenditure e.g. stamp duty and registration fees and prepare the conveyance deed at the earliest in their own interest.

v     Remidy

If the builder does not co-operate in executing the conveyance in favor of the society, the Society can file a Civil Suit under the Specific Relief Act in order to get the conveyance executed.

v     Conveyance is Compulsory

The Government of Maharashtra has recently introduced the bill (L. A. Bill No.XLVII of 2002) to amend the Maharashtra Ownership flats (Regulation of the promotion of construction, sale, management and transfer) Act, 1963. these amendments are o ease out various problems related to conveyance in favour of societies.

The amendments are:

(i)                 “If the promoter fails to execute the conveyance in favor co-operative society formed under section 10 or as the case may be the company of the association of apartment owners as provided by sub-section (1) within the prescribed period, the member/s of such co-operative society or as the case may be the  company or the association who have purchased the flats and all other relevant documents (including the occupation certificates) for issuing a certificate that such society, or as the case may be company or association is entitled to have an unilateral deemed executed in their favor and to have it registered.

(ii)               “When any promoter is convicted of any offence u/s. 12A, such promoter shall be disqualified from undertaking constructing of flats for a period of five years from the date of such conviction.

Conveyance Problems

Conveyance Problems

v     General

Getting an ownership title for a co-operative housing society is indeed a great problem that haunts several societies in Mumbai and elsewhere. This has become a perennial problem causing anxiety to Society members for no fault of theirs.

The problem of executing a conveyance in favor of the co-operative housing society has become difficult and complicated. The purchasers of flats and co-operative societies are put to great hardship and inconvenience.

Abnormal delays in executing conveyance deeds is worrying many societies since the builder who is supposed to respond first, loses nothing and the flat owners continue to stay in flats which they really do not own on paper. The owner, without the necessary title finds himself in a peculiar situation which needs to be corrected as early as possible by some special measures.

Section 11 of the Maharashtra Ownership Flats Act, 1963 states that promoters should convey the right, title, interest etc. and execute documents according to agreements.

In spite of this mandatory provision, the promoters do not take the necessary steps to complete the title and convey the property to the Builder. The Builders may be co-operative societies or companies or association of flat or apartment owners in the building. The Promoters avoid executing all relevant documents in accordance with the agreement executed under Section 4 of the Maharashtra Ownership Flat Act, 1963. The promoter is expected to execute the conveyance within a prescribed period mentioned in the agreement. However, if the period is not mentioned, he is required to execute the conveyance within the prescribed period under the rules and deliver all documents of title relating to the property which may be in his possession or power. The rules are also prescribed under this Act.

According to rule 9 of the Maharashtra Ownership Flat Act, it is mandatory to take necessary steps to execute the conveyance within a period of four months of registration of the Society or limited company.

It must be noted that promoters are basically Builders or Developers before they enter into agreements with the owners of the land that may be an individual or joint family or a firm or a trust on whose behalf they take the work of developing the property. Many irregular powers of attorney are collected by the Builder/Developers from the persons purchasing the property.

v     Some of The Major Difficulties of not Executing Conveyance are

(i)                  The Original owner of the land finds it difficult to get a certificate under Section 230(A) of the Income Tax Act as he has not cleared his liabilities.

(ii)                Internal disputes between the members of the family, Board of Directors in case of limited companies, or among trustee in case of trust.

(iii)               Difficulty in getting certificate under Urban Land (Ceiling & Regulation) Act, 1976 also creates difficulty in executing conveyance.

(iv)              The promoter delays or avoids the work of executing conveyance as he wants to retain control over ownership of land and building because:

(a)    Directly or indirectly he is benefited if there is additional FSI as well as Transfer of Development Right (T.D.R.) due to change in the Law from time to time for the purpose of construction.

(b)   When the flats are transferred from one purchaser to the other he gets transfer money or a share in the second sale.

Taxation of Co-operative Societies

(iv)  Non-occupancy charges

A member of the society may give his flat to an outsider on rent etc. The society may collect from its members non-occupancy charges. The amount collected is used for the benefit of the existing members of the society.

Therefore in the above case the principle of mutuality is not violated and hence it is non-taxable.

(v)  Additional floor space index (FSI) and transfer of development rights (TDR)

There are two conflicting views on the tax liability of the owner of the Development of Rights Certificate (DRC) on transfer of the same. As DRC is acquired through the surrender of immovable property, the cost of the land that is surrendered will be considered to be the cost of DRC. The grant by the government of Transfer of the Development Right (TDR), thus results in the acquisition of a capital asset. Hence the transfer of the same gives rise to the transfer of capital gain. If it is transferred before 3 years of its acquisition, it will be considered short term capital gain. In case it is transferred after 3 years, it is considered to be long term capital gain and taxed accordingly. This view was upheld in A.R. Krishna Murphy & Anr. V. CIT reported in 176 ITR 417 (S.C.).

On the other hand, the other view considers such income as non taxable. Here, it is considered that TDR received is different and there is no cost of acquisition. Therefore, the right to TDR itself is surrendered and there is no capital gain tax liability. This is based on the understanding that TDR ca not be expressed in terms of actual value. The Supreme Court in CIT v. B.C. Srinivas Setty 128 ITR 294 laid down the proposition that a gain, arising from the transfer of assets for which no cost could be identified, would be outside the computation provisions of Section 48 of the Income Tax Act, 1961.

It must be noted here that the first view is the correct view. Floor Space Inbox (FSI) is the factor that makes the land valuable from the point of view of construction. Thus FSI, when transferred through the DRC, must be considered to be a conveyance of immovable property. Consequently, it should be considered to be capital gain and taxed accordingly. 

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.

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.

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.

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.

Taxation of Co-operative Societies

Part 1

      Special Feature

In India the co-operative Society has always enjoyed concessional treatment for the purpose of Income-tax. Every co-operative society like every other assessee has to compute the income under different heads and then look for permissible deductions. The taxation of co-operative societies revolves around two aspects.

(i)      Class of Income

(ii)    Concept of Mutulity

      Housing Societies And The Principle Of Mutuality

A Co-operative Housing Society mainly provides the following services to its members:

(i)            Security,

(ii)          Water,

(iii)         Normal Maintenance of the premises of the society,

(iv)        Common Lighting,

(v)          Operation and maintenance of lifts,

(vi)        Maintenance of common health club house etc.

In order to provide such service or amenities a co-operative housing society collects contributions in advance from members on budgeted expenses, hence it is likely to have some surplus or deficit. The provision of the aforesaid facilities/services is governed by the principle of mutuality.  In simple language, it would mean that any surplus out of the payments received from the members for the provision of the aforesaid amenities or services would be exempt from income-tax. As such, a surplus would not take on the character of income.

      Application of Section 80p(2)(C)

After discussion of the above we try to apply the same to the case of a housing society, Section 80P (2)(c) does not use the word “business” but refers to “profits and gains” attributed to such activities. The expression such “activities” refers to activities other than those specified in clause (a) or clause (b) of Section 80P(2). The clauses (a) and (b) refers to business activities. The rule of construction on the principle of EJUSDEM GENERIS would apply to the construction of clause (c). The above view gets strengthened when we read section 80P(3). Therefore, normally housing societies are outside the purview of Section 80P(2)(c).

      Rate of Tax

Tax is charged to a Co-operative Housing Society as per rates prescribed under paragraph B of Part I of the first Schedule to they Finance Act’ 2006.

      Filing of Return of Income

A housing society does not do business. Its main activity is to provide residential/commercial accommodation to its members. Excess collected from members is not income on the principal of Mutulity. However, incidental activities earn income. Every co-operative Housing society has to compute the income under different heads and then look for permissible deduction.

Auditor's Report Issue

      Action on Auditors Report

Defects in the working of the society pointed out by the auditor appointed to audit the accounts of the Society under section 81 are to be rectified and irregularities are to be remedied by the Society within three months from the date of the audit report.

(i)  Failure to rectify

If the Society fails to rectify the defects disclosed in the course of or as a result of the audit, within the time specified by him, the Registrar may himself take steps to have the defects rectified and may recover the costs from the officer or officers of the society whose duty it was to rectify them – section 87(4).

(ii)  Rectification Report

When the order is issued under Section 82, directing the society to rectify the defects, the Society has to submit a rectification report to the Registrar and Auditor in Form ‘O’. See Rule 73.

      Issues & Replies

¯     Can the petty cash limit be increased?

Ans. The petty cash limit is Rs. 300 only. However this limit can be increased by amending the relevant bye-law at the General Body meeting.  The amendment proposal is required to be submitted in prescribed form to the Deputy Registrar of the Ward in which the society is located, within two months from the date of the General meeting, in which, approval to the amendment is obtained. It may be noted that generally such approval is not granted.

      Whether Registrar has power to ask for Re-audit of a society?

Ans. Under section 81(6) if it appears to the Registrar, on an application by a society or otherwise, than it is necessary or expedient to re-audit any accounts of the society, the Registrar may by order provide for such re-audit. He is authorised to do so for reasons to be recorded in writing.

      If a member observes that the Annual Accounts doesn’t give true and fair view of financial status and the managing committee is not accepting his point of view can the member write to the auditor about his observation?

Ans. An auditor is a professional person and expert in his field.  He has given his observation in his audit report. If a member writes to him giving his views it is up to the auditor to consider the observation or not. So it better to write to the Registrar about the matter.  The Registrar may go for re-audit u/s 81(6) of MSC Act. Master Key – 14.8, 14.9 & 14.10.

Auditor's Report

      Auditor’s  Report

The Auditor Report is to be submitted to the Society and a copy of the same to the Registrar and Federation of the Housing Societies concerned immediately on completion of the audit.  In addition to the statutory report which is the same as the one given in the case of the audit of limited companies the auditor of the Co-operative Housing Society has to append thereto a further detailed report which can be divided into the following parts:

(i)     In Form 1 and Form 28 ( Audit Memos )

(a)    The Form 1 requires information in respect of the name, address of the Society, period of audit, audit classification for the year and previous 3 years, no. of members and their classes, details regarding members and the registers of share capital, outside borrowings, meetings, Rectification Reports, audit fees, internal audit, staff members, breaches of Bye-laws, Rules and the Act, Income and Expenditure Account, Cash and Bank Balances, Securities, Assets and whether the draft audit memo was discussed at the managing committee meetings.

(b) Form 28 is applicable only to housing societies and requires information regarding borrowing, repayments, government assistance, membership, Land and Building, Members’ Contributions and their adequacy or otherwise, loans to members and whether the expenditure is approved of from time to time.

(ii) Auditor’s General Remarks and Suggestions Part I

Part I deals with the auditor’s general remarks and suggestions regarding the society’s working, objects and policies, progress of the society, borrowings and repayments, adherence to the terms of loans, impractical, illegal and/or harmful resolutions passed at the various meetings, comments on the Balance Sheet, and Income & Expenditure Account, Books of Account, staff members, cases of arbitration, Rectification Reports and classification of Society and reasons therefore.

(iii) Auditor’s General Remarks and Suggestions Part II

Part II deals with the mistakes, errors, inadequacies and omissions in the books of account and vouchers.

(iv)  Schedules required under Rule 69(6)

The four schedules deal with the infringement of the Bye-laws, the Rules and the Act, accounting omissions, improper and irregular payments, irregularities in the realization of money, doubtful and bad debts and other assets.