The Supreme Court has upheld the principle of mutuality, which states that a person cannot make profit from himself. We look at how this ruling will affect the levy of tax on receipts, such as non-occupancy charges, transfer fees, service charges, common amenity funds, etc. The Supreme Court (SC) of India recently provided a big relief to cooperative societies (societies), by dismissing the claim of the income tax authorities on levy of tax on various receipts (for example, non-occupancy charges, transfer fees, service charges, common amenity funds, etc.) collected by such societies. The dispute of the tax authorities revolved around a notification dated 09.08.2001, issued under section 79A of the Maharashtra Cooperative Societies Act, 1960 and its applicability on such societies.
Based on this notification, the tax department contended that since these societies have received service charges/ maintenance charges in excess of 10 per cent of the non-occupancy charges, it was contrary to the law and hence, the principle of mutuality fails in such cases. The tax department held that such receipts are in the nature of business, having an element of commerciality and hence, principle of mutuality does not apply. The Income Tax Tribunal overruled the decision of the lower tax authorities, on the ground that the said notification was applicable only to cooperative societies and does not apply to commercial societies.
Principle of mutuality and taxation on cooperative societies In this issue, the Bombay High Court, while dismissing the appeal of the tax department, ruled that the receipts of the societies are not in the nature of business income, generating profits/ surplus and therefore, not taxable. To claim the higher chunk of tax from similar issues, the tax authorities approached the SC. The SC observed that the doctrine of mutuality is based on the theory that a person cannot make profit from himself. An amount received from a member, therefore, cannot be regarded as income of the society and treated as taxable in nature. The tax department has never challenged that the receipts of such societies have been utilised for purposes other than for the benefit of the members. The essence of the principle of mutuality lies in the identification of the contributors and the participants, who are also the beneficiaries. Any surplus in the common fund, therefore, does not constitute income but will only be an increase in the common fund, meant to meet sudden/ future events.
Taxation on non-occupancy charges, transfer charges and contributions to the common fund it was also observed by the SC that transfer charges are generally paid by the outgoing member. If part of it is paid by the transferee, it would not partake the nature of profit or commerciality, as the amount is utilised only after the transferee is admitted as a member. The moment the transferee is included as a member, the principle of mutuality comes into picture. In the event of non-admission of such transferee, the amount is returned. The same applies for non-occupancy charges, which are levied by the society and are payable by a member, who does not occupy the premises but lets it out to a third person. The charges are, again, utilised only for the common facilities and amenities for the members of society. Similarly, any contribution to the common fund, by a member disposing of a property, is utilised for meeting sudden or regular heavy repairs, to ensure continuous and proper maintenance of the society, which ultimately accrues to the enjoyment, benefit and safety of the members.
The SC further ruled that once a member is admitted to the society, the members form a class and accordingly, the identity of such members is irrelevant and the principle of mutuality is attracted automatically. The SC, relying on a plethora of rulings, went on to conclude that there was no profit motive or sharing of profits amongst the members. The surplus, if any, was not shared amongst the members but was available for providing better facilities to the members. There was a clear identity between the participants and the contributors, to the common fund of the society.
Conclusion By bringing an end to the prolonged war between such societies and the tax department, the decision of the SC would be welcomed by such societies, as going forward, they would be free from tax hassles and will be governed by the principle of mutuality, leading to all receipts from the members being tax-exempt.
Further, the SC has not specifically mentioned anything about the income received by cooperative housing societies. It is interesting to note that although the decision is restricted to non-residential societies; it should also provide shelter to residential societies, as the underlying principle of mutuality remains the same for all types of societies. Further, once the principle of mutuality is established, all the receipts shall be exempt from tax, even though the same are in excess of the quantum as specified under some other law for time being in force.
VENKATESH PREMISES COOPERATIVE SOCIETY LTD - SC CIVIL APPEAL NO.2706 OF 2018
1. Receipts taxable once ’Mutuality’ ends;
2. Receipts taxable if they have ‘Element of Profit’;
3. Benefit of ‘Common Identity between Contributors and Participants’ not the Final Test;
4. ‘Mutuality’ should be present at ‘All times/ points/ events of the Transaction’
5. Receipts beyond those ‘Permitted by Law’ are illegal and also attract ‘Profitability/ Commerciality’
And therefore should be subject to tax
1. ‘Doctrine of Mutuality’ is Supreme and above Taxability if ‘Contribution by Members is Utilized for Common Benefit of Members’;
2. If in principle, the Contribution is required from Member, its payment/ discharge by ‘any other person’ is irrelevant so long as the amount is utilized for common benefits;
3. Every Receipt ‘ipso facto’ cannot be considered as ‘Income’.
Hon. Supreme Court Observations
1. ‘Doctrine of Mutuality’ is based on Common Law Principles that ‘Person Cannot Profit from ‘Self’.
Therefore, amount received from self cannot be considered as ‘Income and accordingly Taxable’
2. Section 2(24(vii) defines Taxable Income in a specific condition. It states that ‘Business Income
Of Coop Societies is Taxable u/s 2(24) (vii) and stands ‘EXCLUDED’ from Principles of Mutuality’.
– Specifically ‘Business Income’ is taxable/s 2(24) (vii) over-riding Mutuality.
3. Mutuality = Common Contributors and Participants who are also Beneficiaries
4. Contribution to Common Fund ~ Entitled to Surplus and vice-verse. Therefore, Distribution ~ Part
5. Participants do not have Property Right to Common Fund nor can Sale their Share of Common Fund. Cessation of membership results in loss of right to participation in Common Fund.
Based on the above, the Hon. SC analyzed various earlier decisions (its own and subordinate HCs) as follows:
A. Regarding Taxability of ‘Non Occupation Charges’ exceeding stipulated limits
The amount would still be considered ‘Non Taxable’ under the principles of ‘Doctrine of Mutuality’
Provided (i) the Commonality between Contributor and Participants is established; and (ii)
Contribution utilized for common benefits of all members - The New India Cooperative Housing
Society vs. The State of Maharashtra, 2013 (2) MHLJ 666,
B. Transfer Fees levied to Member (but discharged by others – partly or otherwise)
Once a person was admitted to membership, the members forming a class, and the identity of the
individual member being irrelevant, the principle of mutuality was automatically attracted. The receipt
essentially was from a member and the fact that for convenience, part of it may have been paid by
the transferee, was irrelevant as ultimately the amount was utilized for the mutual benefit of the
members including the fresh inductee member.
C. Surplus amount at the close of year
Any amount left over as surplus at the end of the financial year after meeting maintenance and other
common charges, that would constitute surplus fund of the society to be used for the common benefit
of members and to meet heavy repairs and other contingencies and will not partake the character of
profit or commerciality so as to be exigible to tax.- CIT, Bihar vs. M/s. Bankipur Club Ltd., (1997) 226
ITR 97 (SC) = (1997) 5 SCC 394 and Bangalore Club vs. Commissioner of Income Tax and
Another, (2013) 350 ITR 509 (SC) - (2013) 5 SCC 509.
D. Corpus / Premium on Re-development of Society Asset received by Coop Society
Premium receipts by a housing society for allowing a member to construct using extra FSI was also
not taxable on principles of mutuality as the receipts were utilised by the society for maintenance and
infrastructure including to defray the extra burden on account of the additional FSI constructed.
Fresh construction by a society itself, utilising extra FSI available, with grant of occupancy rights only
to member who may have had to pay more as membership fees than an existing member will
likewise not detract from the principle of mutuality as the contribution was ultimately to be used for
the maintenance, repairs and facilities to members in the society including the additional
construction. There could be no bifurcation between the receipts and costs to deny exemption to the
extent paid by the new members to qualify the same as non-mutual.
Commissioner of Income Tax – 21 vs. Jai Hind Cooperative House Construction Society, (2012) 349
ITR 541 (Bom)
E. Doctrine of Mutuality revisited and affirmed
Styles vs. New York Life Insurance Company, (1889) 2 T.C. 460
The Commissioner of Income Tax vs. Common Effluent Treatment Plant, (Thane Belapur)
Association, (2010) 328 ITR 362 (Bom),
Latest Supreme Court Judgment on principle of Mutuality in Calcutta Club decision.
The Supreme Court has said in this case (Calcutta Club Case) that service tax need not be charged by clubs for services to its members. The same should hold true for the GST, which replaced service tax. The decision was that clubs are not entitled to charge, collect and pay service tax on any services made to members. The rationale for the decision was that if there are no members, there is no club and vice-versa. A few years earlier, the Jharkhand High Court gave a similar ruling in a case involving the Ranchi Club.
Conclusion: Any other Income such as Mobile Tower Rent, Hoarding Rent or Income Received from Outsiders for use of Society`s Infrastructures ( such as Ground, Hall or Terrace) would be taxed as Income from House Property as “ Mutuality” principle would not apply.