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Taxation of Co-operative Housing Societies & Income Tax Return

In general the perception is that income of Co–operative Societies is not chargeable to tax and therefore many societies do not bother to take PAN No. & file Income Tax returns. This is a wrong perception since though certain types of income of CHS are exempt there are other incomes which are chargeable to Tax.

Tax Audit for Cooperative Housing Society

A Co-operative Society is subjected to audit as per Co-operative Societies Act under which it was registered.

As regards Tax Audit provisions, following is required:

Report of audit of accounts to be furnished under section 44AB. Rule 6G. (1) The report of audit of the accounts of a person required to be furnished under section 44AB shall,- (a) in the case of a person who carries on business or profession and who is required by or under any other law to get his accounts audited, be in Form No. 3CA; However, in Budget 2021, Government announced major relief for persons who are subject to tax audit under the Income Tax Act, 1961 (“Act”). In order to incentivise digital transactions and to reduce the burden of compliance of SMEs, the government has now changed and increased the turnover threshold limit to Rs. 10 crore for the applicability of tax audit under section 44AB of the Act for those who are undertaking 95% of their transactions digitally.

Thus Cooperative Housing Society should ensure that their almost all transactions should be carried on digitally and thus avoid tax audit.

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.

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

Of Contribution

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:

We now examine on a case by case basis the income which is normally earned by a Co – Operative Society’s:

a) Contribution from Members:

This are the most commonly credited accounts in profit &loss account of any CHS. They are credited under different heads namely Maintenance charges Municipal Taxes, Electricity Charges, Lift Maintenance Charges, Water Charges etc. It may be emphasized that the society merely acts as an agent who collects this charges on behalf of members & spends the same to meet the various joint expenses of the society. Any surplus generated due to these types of income is not chargeable to tax as it is exempt based on the ‘concept of Mutuality’. The basic principle of Mutuality is a mutual association arises when persons forming a group; associate together for a common object and contribute money for achieving that object and divide the surplus amongst them in the character. The cardinal requirement in case of mutual association is that “All the contributors to the common fund must be entitled to participate in the surplus & all the participators to the surplus must be contributors to the common trade. In other words there should be complete identity between the contributors and the participators.

b) Interest Charged on member Outstanding:

Interest charged by society on outstanding dues of members again forms a part of contribution from members. Moreover it qualifies the test of mutuality since the contributors & participators are the same persons. Thus this is also exempt on concept of Mutuality.

c) Interest Income Earned on Investments:

Interest income earned on investments is fully taxable subject to provisions of Section 80(p) (2)

d) Dividend:

Dividend income received from Indian Companies is fully exempt u/s 10 (34). Dividend received from Co-operative Banks qualifies for exemption under 80P (d) is therefore 100% deductible.

e) Rental Income from Advertisement Hoardings:

This is fully taxable under the head Income from Income from House Property/Business Income / Income from other sources. However expenses which can be directly attributable to earning of this income can be claimed against this income on a proportionate basis.

f) Rental from Mobile / Cable Towers etc.:

Rental from mobile & Cable Towers is taxable under the head Income from House Property; considering the same it is eligible for standard deduction u/s 24 (a) @ 30 % of the rent. Also if society has borrowed capital to construct said building in which the tower has been erected than a proportionate deduction can be claimed for interest paid on borrowed capital.

g) Rentals from use of open Spaces / Terrace:

If the Rentals are received for use of open ground or terrace the point is noted is whatever it is received from Members or Non-members. If it is received from Members than it can be argued that it is not taxable on the grounds of “Mutuality”. If it is received from Non-members or outsiders it shall be fully taxable under the head Income from House Property & will qualify for deductions as mentioned earlier.

h) Non –Occupancy Charges:

Though non – occupancy charges are being collected from members in their periodic Bills the income tax departments view point has been that this amount is received from a members who has not been staying in the premises of the society. Therefore though he is a contributor he is not enjoying the amenities of the society is thus not a participator. Considering the same the mutuality concept is not satisfied & therefore this income is chargeable to tax. However this view point is debatable and can always be argued in society’s favour as in some of the courts case’s the ruling given is that “While comparing the contributors and participators in concept mutuality they should be compared as a class and not isolated or individual contributors”.

i) Parking Charges: Again in this case the point to be seen is whether the collections are from members or Non – members. In case of collections from members they are covered by concept of Mutuality. However in case of Societies having shopping complexes parking charges collected from outsiders would be taxable.

j) Transfer Fees:

Transfer Fees received from Existing member falls in the category of “Mutuality” and hence exempt. As regards Transfer Fees received from incoming member, the receipt of transfer fee before induction to membership under some of the by-e­laws shall not be liable to tax as the money was returned in the event that the person was not admitted to membership. The appropriation by the society took place only after admission to membership. 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 utilised for the mutual benefit of the members including the fresh inductee member.

We have covered most of the incomes likely to be earned by Co-operative Housing Society. Moreover it may be hereby specified that all CHS earning business income qualify for a general deduction under section 80 P(2)(c) of Rs. 50000/-.This deduction can be claimed against business income and not against interest or any other income.

Also we may hereby emphasize that since most of the incomes of societies can fall in tax net it is compulsory to file Income tax return. Also if society is not having taxable income due to deduction available u/s 80 P (d) (i.e. interest from Co-operative Banks being considered as exempt) it is imperative on the part of the society to prove the same and this can be done only if Income Tax return is filed. Thus it may me said in conclusion that it is compulsory on the part of CHS to filing Income Tax returns regularly.

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.

Caution: 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.

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