O/ITR/33/1998 CAV JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE NO. 33 of 1998 With INCOME TAX REFERENCE NO. 12 of 1999 With INCOME TAX REFERENCE NO. 12 of 2010 With INCOME TAX REFERENCE NO. 1 of 2014 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI With HONOURABLE MR.JUSTICE MOHINDER PAL and HONOURABLE MR.JUSTICE PARESH UPADHYAY ========================================================== 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder ? ================================================================ COMMISSIONER OF INCOME-TAX....Applicant(s) Versus PRABHUKUNJ CO-OP. HOUSING SOCIETY LIMITED....Respondent(s) ================================================================ Appearance: Page 1 of 27 HC-NIC Page 1 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT MR NITIN K MEHTA WITH KM PARIKH, ADVOCATE for Applicant(s) No. 1 MR SN SOPARKAR, SR COUNSEL WITH MRS SWATI SOPARKAR WITH MR RK PATEL, ADVOCATE for Respondent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE MOHINDER PAL and HONOURABLE MR.JUSTICE PARESH UPADHYAY Date : 24/04/2015 CAV JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. In these references, common question of taxability of receipts by cooperative housing society from portion of sale consideration received by its member at time of transfer of plot has arisen. In ITR No.33/98, question framed is as under : Whether on facts and in circumstances of case, Tribunal is justified in confirming order of CIT(A) deleting addition of Rs.3,25,387/ made on account of premium account received for transfer of plots? 2. group of Income tax applications came up for consideration before Division Bench where Revenue wanted such question to be referred in different cases but in similar factual background. Revenue was of opinion that amount received by cooperative society from portion of sale consideration received by its Page 2 of 27 HC-NIC Page 2 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT member at time of transfer of plot constituted its income and was therefore, taxable under Income Tax Act. assessees opposed applications basing reliance on Division Bench decision of Gujarat High Court in case of Commissioner of Income tax v. Adarsh Cooperative Housing Society Ltd. reported in 213 ITR 677. Division Bench noted that Bombay High Court in case of Commissioner of Income tax v. Presidency Cooperative Housing Society Ltd. reported in 216 ITR 321 had taken different view. Court unable to subscribe to view taken in case of Adarsh Cooperative Housing Society Ltd., (supra), directed Tribunal to furnish statement of case in all matters and further referred question for opinion of larger Bench. 3. For some reason, these proceedings remained dormant for long time and ultimately present larger Bench came to be constituted. Advocates appearing for Revenue as well as assessees made detailed submissions and relied on several authorities to which we would refer to at appropriate stages. 4. Since material facts are almost identical, for purpose of this judgement, we may refer to facts as arising in ITR No.33/1998. Assessee is cooperative housing society and was registered on 16.12.1943. For assessment year 1986 1987, assessee filed its return of income showing total income of Rs.17,879/ . assessee society had given its plots on lease to its members for purpose of constructing residential units. Bye laws of society provided that upon transfer of plot of land allotted Page 3 of 27 HC-NIC Page 3 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT to member to incoming member, society would collect 50% of excess received by such outgoing member. During year under consideration, society collected such premium of Rs.1,25,387/ upon transfer of four plots. society claimed that premium amount was not revenue receipt. Assessing Officer in his order dated 30.3.1989, however, held that assessee was not cooperative society but association of persons engaged in business and accordingly, added said sum of Rs.1,25,387/ as income of assessee. 5. society preferred appeal before CIT(Appeals) and argued that society is governed by provisions contained in Gujarat Cooperative Societies Act. bye laws of society stipulate that amount so collected is to be utilised partly for promoting development fund and partly for direct expenditure for development of area and providing civic amenities in society. According to society, therefore, as per principle of mutuality, such amount was not taxable in hands of society. CIT(Appeals), following decision of Income Tax Appellate Tribunal in case of Adarsh Cooperative Housing Society Ltd., allowed appeal. 6. Revenue carried matter in appeal before Tribunal. Tribunal noted that decision of ITAT in case of Adarsh Cooperative Housing Society Ltd. was also confirmed by Gujarat High Court in case of Adarsh Cooperative Housing Society Ltd. (supra) and dismissed Revenue's appeal. Page 4 of 27 HC-NIC Page 4 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT 7. On basis of such facts, learned counsel for Revenue submitted that when cooperative society receives portion of sale consideration upon its member transferring plot, such receipt would partake character of revenue receipt and would accordingly be taxed in hands of society. It was submitted that principle of mutuality in such case would not apply. It was strongly urged that decision of Bombay High Court in case of Presidency Cooperative Housing Society Ltd. (supra), laid down correct law. Decision of Supreme Court in case of Bangalore Club v. Commissioner of Income tax and another reported in (2013) 350 ITR 509 (SC) was heavily relied upon to contend that principle of mutuality has its inherent limitations. 7.1. Our attention was drawn to certain provisions of Gujarat Cooperative Societies Act, 1961 ( said Act for short). It was pointed out that section 65 of said Act provides that no part of funds or assets of society other than dividend equalisation fund, and net profits thereof, shall be paid by way of rebate or dividend or otherwise distributed to its members. It was pointed out that section 66 of said Act provides for appropriation of profits by society. Section 67 (1) provides that every society which derives profit, shall maintain reserve fund. Section 107 of said Act provides for winding up of society. Section 115 provides that any surplus assets of society which has been wound up, shall not be divided amongst its members but shall be devoted to any object or objects provided in bye laws of society, if they specify Page 5 of 27 HC-NIC Page 5 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT that such surplus shall be utilised for particular purpose. Where society has no such bye laws, surplus shall vest in Registrar who shall hold it in trust and shall transfer it to reserve fund of new society registered with similar object and serving more or less area which society to which surplus belonged was serving. Proviso to section 115 provides for manner in which Registrar shall distribute such surplus in case no such society exists or is registered within three years of cancellation of registration of society whose surplus is vested in Registrar. 7.2. On basis of such statutory provisions, it was contended that amount of premium collected over period of time from its outgoing members would remain fund of society in perpetuity and even upon winding up of society, would not be distributed amongst members. In addition to placing heavy reliance on decision of Bombay High Court in case of Presidency Cooperative Housing Society Ltd.(supra) and of Supreme Court in case of Bangalore Club (supra), following further decisions were cited before us. 1) English & Scottish Joint Cooperative Wholesale Society Ltd. v. Commissioner of Agricultural Income tax reported in (1948) 16 ITR 270(PC) where Privy Council found that activities of cooperative society closely conformed to pattern of ordinary profit making concern and held that profits earned by society upon sale of tea from its Page 6 of 27 HC-NIC Page 6 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT estate to its members would invite tax. 2) Commissioner of Income tax, Bombay City v. Royal Western India Turf Club Limited reported in 24 ITR 551 where assessee company carried on business of race course. company claimed that in computing its total income, various items of receipts such as season admission tickets from members, daily admission gate tickets from members, use of private boxes by members, etc. should be excluded. Supreme Court held that there was no mutuality between members inter se and that therefore, principle of mutuality was not applicable. 3) Delhi Stock Exchange Association Ltd v. Commissioner of Income tax reported in (1961) 41 ITR 495 (SC), in which assessee was Stock Exchange. income accrued was distributed amongst shareholders. It was held that receipts by Stock Exchange Association towards admission fee on account of authorised assistants and members are taxable as income from business and concept of mutuality would not apply. 4) Mantola Cooperative Thrift & Credit Society Ltd. v. Commissioner of Income tax reported in (2014) 50 taxmann. 278 (Delhi) in which assessee cooperative society was engaged in providing credit facility to its members. society deposited surplus funds in fixed deposits and earned interest thereon. Court held that such interest would be assessable as Page 7 of 27 HC-NIC Page 7 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT 'income from other sources' and not eligible for deduction under section 80P(2)(a)(i) of Act. 8. On other hand, learned advocates for assessees submitted that decision of this Court in case of Adarsh Cooperative Housing Society Ltd. (supra), needs no reconsideration. It was also been followed in later decision in case of Commissioner of Income tax IV, Ahmedabad v. Manekbaug Cooperative Housing Society Ltd. reported in (2012) 22 taxmann. com 220 (Guj.). It was further argued that in decision of Bombay High Court in case of Presidency Cooperative Housing Society Ltd. (supra), question of mutuality was not considered. It was argued that judgement of Supreme Court in case of Bangalore Club (supra), was rendered in entirely different fact situation. ratio laid down therein in no manner disturbs ratio in case of Adarsh Cooperative Housing Society Ltd. (supra). It was pointed out that similar view has been taken by other High Courts as well. Reference to all these judgements will be made at later stage. 8.1. It was further contended that bye laws of society provided for collection of 50% of excess from sale consideration upon member transferring plot to another person. Such amount would be utilised for maintenance of society and for providing other facilities and amenities to members. Thus in one form or other, members themselves were contributing to common fund of society which in turn was utilised for benefit of members of society. Counsel therefore, contended that principle Page 8 of 27 HC-NIC Page 8 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT of mutuality was applicable. There cannot be income from person from his own self. 9. Since bye laws of societies were not part of paper book, learned counsel Shri K.M. Parikh for Revenue provided set of bye laws of one such society and submitted that these bye laws being standard bye laws as prescribed by cooperative department, such bye laws may be taken as standard for purpose of all assessee societies. 10. As per bye laws, some of main objects of society are : 1) development of plots for allotment to members to enable them to construct their residential units on them. 2) to provide necessary funds to its members for construction of such houses. 3) to make necessary arrangements for health, education and social activities of members. 4) properly maintaining properties of society. Chapter 2 pertains to funds of society. Bye law no.4 permits society to raise funds from various sources such as membership fee, shares, by raising loans, accepting deposits, from donations and from sale consideration of lands. Page 9 of 27 HC-NIC Page 9 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT Chapter 10 pertains to distribution of profits. Various bye laws contained therein envisage that out of net profit, 25% would be kept in reserve fund. 9% dividend on share value could be distributed to members. After providing for these two items, 50% of remaining net profit would be paid to members in proportion of lease rent paid by them. 30% would be diverted to fund for other activities which would be utilised for health, education and social activities of members as per objects of society. Bye laws also envisage that upon transfer of plot by its member, 50% of premium i.e. net profit of outgoing member would be paid to society. 11. On basis of such bye laws we need to judge whether in facts of case, principle of mutuality would apply. 12. principle of mutuality has come up for consideration before various Courts earlier. We may briefly refer to some leading decisions of Supreme Court on point. In case of Royal Western India Turf Club Limited(supra), Supreme Court referring to decision in case of New York Life Insurance Co. v. Styles (Surveyor of Taxes) reported in (1889) 2 Tax Cas. 460, observed as under : Styles' case (supra) has recently been examined and explained by Judicial Committee in English & Scottish Joint Co operative Wholesale Society Ltd. V. Commissioner of Agricultural Income tax, Assam(16 ITR 270). After referring to various passages from speeches of Page 10 of 27 HC-NIC Page 10 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT different Law Lords in Styles' case, Lord Normand, who delivered judgment of Board, summarised grounds of decision in Styles' case as follows: "From these quotations it appears that exemption was based on (1) identity of contributors to fund and recipients from fund, (2) treatment of company, though incorporated as mere entity for con venience of members and policy holders, in other words, as instrument obedient to their mandate and (3) impossibility that contributors should derive profits from contributions made by themselves to fund which could only be expended or returned to themselves." In case of Commissioner of Income tax v. Bankipur Club Ltd. reported in 226 ITR 97,the Supreme Court held that excess over expenditure received by club from facilities extended to members as part of advantages attached to such membership, shall not be taxable on principle of mutuality. It was observed as under : Now we turn to main question canvassed be Revenue in appeals coming under Groups to D, namely, whether assessees, mutual clubs. are entitled to exemption for receipts or surplus arising from sales of drinks refreshments etc. or amounts received be way of rent for letting out buildings or amounts received by way of admission fees periodical subscriptions and receipts of similar nature, from its members? In all these cases. appellate tribunal as also High Court have found that amount received by clubs were for supply of drinks? refreshments or other goods as also letting out of building for rent or amounts received be way of admission fees. periodical subscription etc. from members of clubs were only for/towards charges for privileges, conveniences and amenities provided to members, which they were entitled to as per rules and Page 11 of 27 HC-NIC Page 11 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT regulations of respective Clubs. It has also been found that different clubs realised various sums on above counts only to afford to its members usual privileges, advantages, conveniences and accommodation. In other words, services offered on above counts were not done. with any profit motive and were not tainted with commerciality. facilities were offered only as matter of convenience for use of members. (and their friends, if any, availing of facilities occasionally) In light of above findings, it necessarily follows that receipts for various facilities extended by clubs to its members, as stated herein above as part of usual privileges, advantages and conveniences; attached to members of club, cannot be said to be "a trading activity." surplus excess of receipts over expenditure as result of mutual arrangement, cannot be said to be income" for purpose of Act. In case of Chelmsford Club v. Commissioner of Income tax reported in 243 ITR 89. facts were that assessee club provided recreational and refreshment facilities to its members and their guests. Facilities were not available to non members. club was run on no profit no loss basis and members paid for all their expenses and were not entitled to any share in profits. Surplus, if any, was used for maintenance and development of club. In that background, Supreme Court applied following triple test referred to in case of English & Scottish Joint Cooperative Wholesale Society Ltd.(supra) : (1) identity of contributors to fund and recipients from fund, (2) treatment of company, Page 12 of 27 HC-NIC Page 12 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT though incorporated as mere entity for convenience of members and policy holders, in other words, as instrument obedient to their mandate and (3) impossibility that contributors should derive profits from contributions made by themselves to fund which could only be expended or returned to themselves. It was held that applying such criteria to facts of case on hand, business of assessee was governed by doctrine of mutuality. In case of Bangalore Club (supra), Supreme Court observed that concept of mutuality has been extended to defined groups of people who contribute to common fund, controlled by group, for common benefit. Any amount surplus to that needed to pursue common purpose is said to be simply increase of common fund and as such neither considered income nor taxable. It was further observed that over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. 13. With this background, if we revert to case on hand, undisputed facts are that all assessees are cooperative housing societies. They own lands for residential use. Such lands are developed by society by providing common amenities such as internal roads, drainage, street lights if need be, common plot and club Page 13 of 27 HC-NIC Page 13 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT house. Individual plots are allotted to its members who enjoy occupational right, but ownership of land always remains with society. On plots of land so allotted, member would be allowed to construct his residential unit. Upon transfer of plot by member, society would collect 50% of excess or popularly referred to as 'premium'. fund so collected would be appropriated in common fund of society to be utilised as per bye laws which envisage development of common facilities and expenditure for common amenities. part of surplus would be diverted to reserve fund of society. Surplus could also be utilised for waiver of lease amount or for health, education and social activities of members. It can thus be seen that there is total identity of contributors of fund and recipients from fund. contribution comes from outgoing member in form of portion of premium and it is utilised for common facilities and amenities for members of society. Different modes of application of funds make it clear that funds would be expended for common amenities or for general benefit of members; or be distributed amongst members in form of dividend or lease rent waiver. It can thus be seen that it is impossible for contributors to derive profit from contribution made by themselves to fund since such fund could only be expended or returned to them. Creation of society was primarily for convenience of members to create housing society where individual members could construct their residential units and common facilities and amenities could be provided by society. It was essential thus that combined activity is Page 14 of 27 HC-NIC Page 14 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT carried on by group of persons who would be members in cooperative society. All tests referred to in Privy Council decision in case of English & Scottish Joint Cooperative Wholesale Society Ltd. (supra), stand fulfilled. 14. Reference to provisions of Gujarat Cooperative Societies Act would not change position. Such provisions and in particular section 115 only provide modality of diverting funds of society upon its winding up. We have already noted that contributors from members of society are to be expended for their benefit or would be returned to them while society is functioning. Merely because upon winding up of society, surplus fund would be utilised by Registrar as provided under Act and would not be returned to members would not break down relationship of mutuality since even in eventuality of winding up, there is no scope of profiteering by members. 15. Division Bench of this Court in case of Adarsh Cooperative Housing Society Ltd.(supra), under identical circumstances, held that principle of mutuality would apply. It was held as under : For arriving at any conclusion as to question of "mutuality" between assessee and its members, consistent tests applied since Styles' case [1889] 2 TC 460 (HL) have already been summarised. What is really required is that all participants must contribute to fund as against merely being entitled to contribute. It is also not necessary that participants in surplus need be same individuals who have contributed but Page 15 of 27 HC-NIC Page 15 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT they must bear same character, namely, contributor member. person who transfers his interest in land acts while he is member. It is only in his character as member that he incurs liability to contribute to society's fund to extent provided in bye laws, subject to which only he was entitled to derive benefits. contribution on happening of event is must and is not mere entitlement to contribute at his discretion. Therefore, argument that contribution is not by member who could participate in surplus is of no consequence and deserves to be rejected. It is to be noticed at pain of repetition that identity of individuals as contributors and participants is not essential but what is essential is identity of character as contributors and participants. When person transfers his interest in land, transferor goes out after paying contribution and purchaser enters as member in his place to derive benefit of expenses incurred by society. It is to be appreciated in this connection that there is room for change of name of member not only at time of transfer but also in case of devolution after demise of original member. What is to be reckoned is that character of contributor does not cease to exist in view of nature of enactment vis vis scheme of Act and principle of "mutuality" as propounded in Styles' case [1889] 2 TC 460 (HL), leading English case, as discussed earlier. Though it is contended that there is no participation in surplus by members because surplus, remaining with society in case of its cancellation does not return to contributors but is to be utilised for public purposes, question which arises is : what is meant by "return" of what has been contributed to common fund ? does it mean return of corpus of fund or does it include retention of control over corpus to be used in consonance with statute regulating association, company or society, as case may be ? It is to be noticed that as per findings of Revenue authorities amount which is contributed by Page 16 of 27 HC-NIC Page 16 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT outgoing member is in turn utilised by society for extending common amenities to members. Thus, according to this finding, surplus in any particular assessment year is utilised for extending amenities to members in succeeding years. That is to say, such surplus during existence of society returns to members by way of deriving benefit from amenities provided by society to its members by expending surplus. If inquiry is limited to assessment year concerned, test of return of surplus to contributors, viz., members is satisfied on Revenue authorities' own finding which is not in dispute. 16. In later decision in case of Manekbaug Cooperative Housing Society(supra), Court accepted same principle making following observations observed that : 13. As pointed out by Division Bench of this Court in case of Commissioner of Income Tax v. Adarsh Cooperative Housing Society, reported in [1995] 213 ITR 677, co operative society registered under Bombay Cooperative Societies Act, 1925 should be treated as a mutual concern and by virtue of income which it received from its members should held to be not liable to be taxed . It appears that Supreme Court in subsequent decision in case of Chelmsord Club v. Commissioner of Income tax, reported in [2000] 243 ITR 89 has adopted same principle. As pointed out in above decision, under Income tax Act, 1961, what is taxed is, income, profits or gains earned or arising , accruing to person . According to said decision, where number of persons combine and contribute to common fund for financing of some venture or object and in this respect, have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. Supreme Court further pointed out that there must be complete Page 17 of 27 HC-NIC Page 17 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT identity between contributors and participators. If these requirements are fulfilled, Supreme Court proceeded, it is immaterial what particular form association takes. Trading between persons associating together in this way, according to said decision, does not give rise to profits, which are chargeable to tax. Where trade or activity is mutual, according to Supreme Court, fact that, as regards certain activities, certain members only of association take advantage of facilities, which it offers, does not affect mutuality of enterprise. law, according to said decision, recognizes principle of mutuality excluding levy of income tax from income of such business to which above principle is applicable. Supreme Court referred to section 2(24) of Income tax Act, 1961, which shows that Act recognizes principle of mutuality and has excluded all businesses involving such principle from purview of Act, except those mentioned in clause (vii) of that section. three conditions, existence of which establishes doctrine of mutuality are (1) identity of contributors to fund and recipients from fund, (2) treatment of company, though incorporated as mere entity for convenience of members, in other words, as instrument obedient to their mandate, and (3) impossibility that contributors should derive profits from contributions made by themselves to fund which could only be expended or returned to themselves. 14. In said case, assessee, members club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non members. club was run on no profit no loss basis and that members paid for all their expenses and were not entitled to any share in profits. Surplus, if any, was used for maintenance and development of club. club house was owned by assessee. assessee claimed that it was mutual Page 18 of 27 HC-NIC Page 18 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT concern and so annual letting value of club house was not assessable. In such situation, Supreme Court held that assessee s business was governed by doctrine of mutuality and it was admitted fact that business of assessee did not come within scope of business referred to in section 2[24][vii] of Act. It was not only surplus from activities of business of club that was excluded from levy of income tax, according to Supreme Court, even annual value of club house, as contemplated in section 22 of Act would be outside purview of levy of income tax. 15. By applying aforesaid principles to facts of present case, we find that CIT [Appeals] and Tribunal below rightly applied above principles so far as addition of Rs. 2 Lac as transfer fees are concerned as all three conditions indicated above are satisfied. 17. Bombay High Court in case of Mittal Court Premises Cooperative Society Ltd. v. Income tax officer reported in (2010) 320 ITR 414 (Bom), on similar question of taxability of premium collected by society upon transfer of plot, held as under : ...We have referred to bye laws of both, Mittal Court Premises Co operative Society Ltd. and Maker Chambers III Premises Co operative Society Ltd. bye laws are nothing but contract between Society and member. Under these bye laws, it is member who has to make payment. Any inter se arrangement between incoming members and transferee is irrelevant in so far as society is concerned. There is agreement by which amount is paid by transferee. In so far as society is concerned, even if receipt is issued in name of transferee it is nature of admission fee which could be appropriated, only on transferee being admitted. Merely because amount may be appropriated Page 19 of 27 HC-NIC Page 19 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT earlier, it will not loose character of amount being paid by member. In these circumstances, identity of contributor and beneficiary being satisfied and considering provisions of Maharashtra Co operative Societies Act and Rules framed thereunder, surplus can be disposed off in favour of members only or for objects for which they may specify. As held by us in Income Tax Appeal No.931 of 2004 same reasoning will apply to appellants/petitioners before us. In these circumstances, question (a) as framed has to be answered in negative in favour of assessee and against Revenue. 18. In case of Commissioner of Income tax 21 v. Jai Hind CHS ltd. reported in reported in 349 ITR 541, once again Division Bench of Bombay High Court held that amount collected by society under head of transferrable development rights from member who desired to develop his plot by using extra FSI would be governed by principle of mutuality. It was observed as under : 4. admitted facts would indicate that TDR premium is liable to be paid by member of Society who desires to utilize additional FSI in form of Transferable Development Rights. principle of mutuality would clearly apply to situation as to present. In context of payment of non occupancy charges by member of Cooperative Housing Society to Society, Division Bench of this Court held in Mittal Court Premises Cooperative Society Ltd. vs. Income Tax Officer (2009) 184 Taxman 292/(2010) 320 ITR 414(Bom.) that principle of mutuality would apply. Division Bench noted that object of Society is to provide service, amenities and facilities to its members. Non occupancy charges are payable by member on account of fact that member is not in occupation of Page 20 of 27 HC-NIC Page 20 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT premises. In our view, same principle would apply to present case. TDR premium is payment made by member to Society of which he is member, as consideration for being permitted to make additional utilization of FSI on plot allotted by Cooperative Housing Society. Society which looks after infrastructure, requires payment of premium in order to defray additional burden that may be cast as result of utilization of FSI. point however, is that there is complete mutuality between Cooperative Housing Society and its members. 19. From above discussion, it could be seen that in various decisions, this Court as well as Bombay High Court consistently held that contribution made by members to general fund of society in various forms would be governed by principle of mutuality. Particularly, in case of premium collected by society from its outgoing member from out of portion of his profit, principle of mutuality would apply and receipt would not be taxable as income of society. Supreme Court in case of Chelmsford Club (supra), further held that surplus of club which provided recreational and refreshment facilities etc. to its members and guests cannot be taxed on principle of mutuality since such surplus would be used for maintenance and development of club. Similar view was also taken by Supreme Court in case of Bankipur Club Ltd.(supra). 20. In referring order, Division Bench had placed reliance on judgement of Bombay High Court in case of Presidency Cooperative Housing Society Ltd.(supra). In said case, question of taxability of premium on Page 21 of 27 HC-NIC Page 21 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT transfer of plot did come up for consideration. In such background, it was observed as under : 10. In present case, payment is certainly not in repayment of capital on account of parting with of any property of Housing Society; nor is it repayment of capital in installments. It cannot, therefore, fall in category of capital receipt. Looked at from commercial point of view, society receives payment under its contract with lessee every time lease changes hands. It is source of income for society. 18. Looked at from commercial point of view reason why such clause was inserted in lease deed was to enable society to earn income. It was submitted before us that this clause was inserted merely as deterrent to transfer. Looking to nature of clause, we do not see how clause deters any transfer by member. member may be required to transfer his interest for various reasons. For example, if he is required to move out of Bombay, he may have to sell his interest in property. All that clause provides is that society will receive half profits when member sells his interest. Therefore, it cannot be viewed as deterrent to transfers. This payment is also not payment for granting consent. consent of society is required because society may want to ensure that undesirable person does not become its member. Even in situation where society is likely to get money or transfer, society may decline to give its consent for transfer if it considers person to whom member's interest is being transferred as undesirable. Therefore, in our view, purpose for inserting clause is to ensure income to society whenever there is transfer of member's interest in favour of third party. 21. However, in such decision principle of mutuality Page 22 of 27 HC-NIC Page 22 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT was never pressed in service nor discussed by Court. said decision therefore, is not authority on question that we are trying to answer. 22. Under circumstances, we are of opinion that ratio laid down by this Court in case of Adarsh Cooperative Housing Society Ltd.(supra), and later on followed in case of Manekbaug Cooperative Housing Society Ltd.(supra), lays down correct principles in law. 23. Before closing, we may refer to decisions cited by Revenue. 1) In case of English & Scottish Joint Cooperative Wholesale Society Ltd.(supra), Privy Council was examining facts where advances were made to society for purpose of enabling it to produce tea on its own land. When tea was produced, it was sold to lenders, and price was set off against amount of loan. In this background, it was held that there was dual relationship between appellant and its members and there was mutual creditor debtor relationship and there was also buyer and seller relationship. There was nothing notional about either of these relationships and they were not mere conventional machinery to give efficacy to relationship which was in substance that of principal and agent. It was in this background held that principle of mutuality would not apply. 2) Case of Mantola Cooperative Thrift & Credit Society Ltd.(supra), before Delhi High Court arose in Page 23 of 27 HC-NIC Page 23 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT vastly different background. In that case, assessee was cooperative society engaged in providing credit facilities to its members. society would deposit surplus funds in fixed deposits and earn interest. It was in this background Delhi High Court held that such income would not be eligible for deduction under section 80P(2)(a)(i) of Income Tax Act since it would be assessable as 'income from other sources'. 3) In case of Delhi Stock Exchange Association Ltd (supra), assessee was stock exchange. It was company formed to promote and regulate business of exchange of stocks and shares, debentures, etc. Income accrued was distributed amongst shareholders. It was observed that body of trading members who paid entrance fees and shareholders among whom profits were distributed were not identical. It was therefore, observed that element of mutuality was lacking. 4) In case Royal Western India Turf Club Limited (supra), assessee was company which carried on business of running race course and providing other facilities such as refreshments. members of company were provided with separate enclosure to watch races for which admission fee was charged. Non members were not admitted in this enclosure. It was found that assessee gave to non members same or similar amenities such as facility to watch races and to bet on horses in races, use of facilities for refreshments, etc. daily ticket fee for admission into members' enclosure was same as that for Page 24 of 27 HC-NIC Page 24 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT admission into first enclosure to which public had access. assessee claimed that in computing its total income, receipts such as, season admission tickets from members, daily admission gate tickets from members, use of private boxes by members etc. should be excluded. It was in this background held that there was no mutual dealing between members inter se and principles laid down in Style's case would not apply. 5) Decision in case of Bangalore Club (supra), by Supreme Court was also rendered in different facts. Bangalore club, assessee, was association of persons. It sought exemption from payment of income tax on interest earned on fixed deposits kept with certain banks which were corporate members of assessee on principle of mutuality. assessee however, paid tax on interest earned on fixed deposits kept with non member banks. It was in this background held that for application of principle of mutuality, there has to be complete identify between class of participators and class of contributors. Second feature highlighted was, actions of participators and contributors must be in furtherance of mandate of association. third requirement of principle of mutuality highlighted was that there must be no scope of profiteering by contributors from fund made by members which could only be expended or returned to themselves. In facts of case, it was held that this condition of mutuality was not satisfied. It was observed as under : 31. facts at hand also fail to satisfy third condition of mutuality principle i.e. impossibility that Page 25 of 27 HC-NIC Page 25 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT contributors should derive profits from contributions made by themselves to fund which could only be expended or returned to themselves. This principle requires that funds must be returned to contributors as well as expended solely on contributors. True, that in present case, funds do return to club. However, before that, they are expended on non members i.e. clients of bank. Banks generate revenue by paying lower rate of interest to club assessee, that makes deposits with them, and then loan out deposited amounts at higher rate of interest to third parties. This loaning out of funds of club by banks to outsiders for commercial reasons, in our opinion, snaps link of mutuality and thus, breaches third condition. It can thus be seen that Revenue's reliance on this decision is wholly misconceived. As noted, it was case where association of persons deposited its funds with banks, some of whom were members of association and rest who were not members. On interest earned from such fixed deposits, assessee claimed exemption from tax on fixed deposits from member banks. It was in this background Supreme Court found that third principle, that contributor should not derive profit from contributions made, was not satisfied. Though fund was eventually returned to club, nevertheless, before that they were expended on non members i.e. clients of bank and in turn bank made profit in process. It was purely commercial transaction. 24. In fact, all three tests of mutuality laid down since decision of Privy Council in case of English & Scottish Joint Cooperative Wholesale Society Ltd. Page 26 of 27 HC-NIC Page 26 of 27 Created On Mon Feb 15 12:25:28 IST 2016 O/ITR/33/1998 CAV JUDGMENT (supra), which were reiterated, highlighted and refined in decision in case of Bangalore Club (supra), stands satisfied in our case. 25. In result, question is answered in affirmative i.e. against Revenue and in favour of assessee. All References are disposed of accordingly. (AKIL KURESHI, J.) (MOHINDER PAL, J.) (PARESH UPADHYAY, J.) raghu Page 27 of 27 HC-NIC Page 27 of 27 Created On Mon Feb 15 12:25:28 IST 2016 Commissioner of Income-tax v. Prabhukunj Co-Op Housing Society Limited