R.B.POPAT. B.COM, F.C.S,F.C.A.

1. As per the order/ notification dated 09.08.2001, issued by the Government of Maharashtra, Department of Co-operative, specifying new premium rates to be paid while transferring flats/units in Co-operative Housing Societies. The new rates have been fixed in the general body meeting and the rates should not exceed the rates specified by the State of Government of Maharashtra. The rate prescribed by the municipal limit area of state of Maharashtra is Rs.25, 000/-. Any amount received in excess of Rs. 25,000/- under the bye-laws or the government notification, the assessee’s society is bound to repay the amount and if retained, the amount it would be in the nature of amount received outside the purview of principle of mutuality and in the nature of profit making and that specific amount is exigible to tax.

2. It transpires from the perusal of the aforesaid notification/rule that the maximum amount of premium cannot exceed Rs.25,000/-. This is as per the norms set out by the Government. The society can raise fund only for achieving the objects of the society and not for any other purpose. So long as the society is charging the premium within the fame work of law, no profit motive can be attributed to the society’s action. However, if it is found that the society charged more than what is prescribed under the law as explained earlier, leads to breach of statutory provisions and against the public policy that has to be liable to be taxed and taxed accordingly.

3. Further, The Hon. Bombay high court in the case of New India Co-operative Housing Society Ltd. Vs State of Maharashtra & Anr. Vide Writ Petition No. 4567 of 2007, decided on 1-2-2013 cited in 2013 DGLS(AHC) 4005 / 2013 (6) Bom.C.R. 310 vide para 21 wrt charging transfer premium exceeding Rs. 25000/- have held as under :

Para : 21………the stand taken by the petitioner society is not only contrary to the law laid down by aforesaid Division Bench judgments in the cases of Mont Blanc Co-operative Housing Society 2007(2) Bom.C.R. 533(O.S.) and Matru Ashish Co-op. Hsg.Soc.Ltd. 2011(6) Bom.C.R. 307(O.S.) but it is also against the public policy.

4. In the case of The Poona Hindu Middle Class Co-operative Housing Society Limited v. Shri Sudhakar Gopal Palsule,1991 C.T.J. 326, the Maharashtra State Co-operative Appellate Court, held that the practice of demanding donation or transfer fees deserves not only to be discouraged but also to be condemned.

5. General body of the society is not supreme, hence cannot fix transfer charges above Rs. 25000/- :

5.1 The Hon. Bombay High Court in Atomica Co-Operative Housing Society vs B.R. Ballal And Ors. on 9 February, 1988 (1988) (2) Bom CR 104 have held that a resolution passed by the General Body which in not in conformity with the MCS Act is unlawful and invalid.

5.2 The Hon. Bombay High Court in Sunanda Janardan Rangnekar Vs Rahul Apartment No. 11 Co-Operative Housing Society Ltd. on 10/8/2005 [2006 (1) MhLj 734]

Para 6….The general body cannot pass arbitrary and unreasonable resolutions merely because it is supreme and it has a large majority in favour of any issue on the agenda.

6. The very basis of functioning of any co-operative society would be the principle of mutuality. If we go through the principle of mutuality, the three important basic conditions of the Principle are as under:

1) There must be a complete identity between the contributors and participators.

2) The actions of the participators and contributors must be in furtherance of the mandate of the association.

Furtherance of object of the society should always be based on principle of equality among all the members, merely charging excessive amount do not lead to satisfaction of test of furtherance of object as excessive money would be deployed to earn more interest by deploying surplus fund in FDR’s etc.

As the incoming person is not a member and outgoing person do not want to be part of mutuality, principle of equality among all members gets distorted. Further, either outgoing member is paying or incoming member is paying exorbitant amount for transfer fee beyond prescribed limit by the state government and at the same time not all members are contributing like amount for common objective e.g. for common property tax or common watch and ward or common electricity charges etc….This proves the fact of absence of principle of equality at that given point of time also.

3) There must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves.

Charging excessive money impliedly means profiteering.

Further, either outgoing member is paying or incoming member is paying exorbitant amount for transfer fee beyond prescribed limit by the state government is nothing but intending to have profiteering out of the event of transfer.

However, all the above conditions are not satisfied in the, case of excessive or illegal donation taken beyond Rs. 25000/- in the grab of voluntary donations.

The Hon. Supreme Court in the case of CIT vs. Kumbakonam Mutual Benefit Fund Ltd., 53 ITR 241 (SC) wherein it was held that if the profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. Further, in a very recent land mark judgment in the case of M/s. Bangalore Club vs. Commissioner of Income tax, The Hon’ble Supreme Court of India has gone into minute details for deciding the nature/character of “Principle of Mutuality”, under which the tax exemption has been claimed by various Societies. The Honorable Supreme Court held that “in our opinion, unlike the surplus amount’ itself, which is exempt from tax under the doctrine of mutuality, the amount of interest earned by the assessee (Bangalore Club) from the member banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club”. In this case, the surplus funds in the hands of the assessee were placed at the disposal of the corporate members viz. the banks, with the sole motive to earn interest, which brings in the commerciality element and thus, the interest so earned by the assessee has to be treated as a revenue receipt, exigible to tax.

7. Concept of mutuality did not apply to the case of transfer fees whether received from transferor or transferee for the reasons – (1) the amounts received were not voluntary contributions, (2) element of commerciality was attached to such receipts, (3) the amounts were collected with the clear intention to earn profit, and (4) the receipts in question were like windfall profit.

1) Oval Shiv-Shanti Bhuvan Co-op. Housing society Ltd. v. ITO [2001] 78 ITD 403 (Mum.)

2) Regent Chambers Premises Co.-op. Society Ltd. v. ITO [2002] 82 ITD 13 (Mum.), respectively, wherein it has been held that transfer fees received by the co-operative society from the incoming and outgoing members would be treated as revenue receipt chargeable to tax in the hands of the society.

3) In the case of Sea Face Park Housing Society, wherein it was held by the Tribunal that principle of mutuality was not applicable to such receipts, as such fees could not be considered as a voluntary contribution.

4) Hon’ble Bombay High Court in the case of CIT v. Presidency Co-operative Housing Society Ltd. [1995] 216 ITR 321.

8. In view of the above explanation and after careful consideration, the contribution received by the society towards Donation from the outgoing member in excess of Rs.25,000/- cannot be treated as exempt and therefore treated as income under the head Income from Other sources and added to the total income. Since, the assessee has concealed the income and furnished inaccurate particulars of income, penalty proceedings u/s. 271(1)(c) of the Act, may be initiated separately.

(The author is can be reached at his email id rbpopat@gmail.com)

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