Sinking fund

Part 1

v     Propriety

A sinking fund is usually created by setting aside a part of the society’s income and accumulated interest. Such a fund may be used in some business Organisations for the replacement of wasting assets.  In a Co-operative housing society, the necessity of creating such a fund is to provide for a sum of money, required for repairs or reconstruction of the building when the existing building is not safe for human habitation. A Co-operative Housing Society being merely a service organization has no source of income and naturally it cannot build up such a fund by setting aside a part of its income for the purpose. The alternative is to collect contributions from members in such manner as is provided under the bye-laws towards this fund.

v     Provisions For Creation

(1)    The basis is on which sinking fund contribution is fixed

                

Every building has its normal life.  Its life is extended by some more years by carrying out certain repairs.  It is however risky to continue occupation of a building which has run its life. A Co-operative housing society has therefore to reconstruct the building after it has run its life.  A Co-operative housing society has therefore to reconstruct the building after it has run its life.  As it may be difficult for any Co-operative Housing Society to raise the funds for reconstructing the building from its members in a short time, it becomes necessary to establish a Sinking Fund right from the inception of the society.  A provision has, therefore been made in the Bye-laws, enabling a Co-operative Housing Society to collect contributions towards this fund from its members at a fixed rate per month.  The rate fixed under Bye-law No.13© is 0.25 percent per annum of the cost of construction of a flat payable in equal monthly installments. It may be noted that the area of land is to be excluded while computing the contribution rate.  A building does tend to sink in course of time due to its wear and tear but the land remains as it is even if the building collapses.

(2)    The procedure for ascertaining the cost of construction of a flat in a flat owner, society

In case of an open plot type Co-operative Housing Society (which has purchased or taken a piece of land on lease and constructed building/buildings thereon) it is not difficult to work out the cost of construction of a flat arises in certain cases, particularly the flat owners society (in which flats are taken by purchasers under agreements under Section 4 of the Maharashtra Owners Flat (Regulation of the promotion of construction, Sale Management and Transfer) Act, 1963. A builder-promoter sells the flats on different occasions to different purchasers at different prices, even though the flats are identical and there is no difference in the type of construction and the amenities provided. The price paid for a flat purchased from a builder- promoter includes the proportionate value of the land. Further, the cost of construction of a flat of a flat is not on the basis of the actual amount recorded in the agreements. In a majority of cases the actual price paid by a purchaser is more than that mentioned in the agreement. It would thus be wrong to recover construction from members at the fixed rate towards the sinking fund on the basis of the value shown in the agreement. The Costs may then be apportioned among the members on the basis of the area of their flats. The builder may be most unwilling to give the actual cost of construction. A Co-operative Housing Society has therefore to employ the agency of an architect or a valuer, approved by the general body meeting of the society, to work out only the cost construction of the building. It may then apportion such cost amongst the members on the basis of the areas of their flats. The cost of a so arrived at may be taken as the basis for fixing the contribution to be collected towards the sinking fund in respect of the flat/shop garage etc