Mumbai ITAT Reiterates: Surplus from Members’ Contributions Not Taxable Under Doctrine of Mutuality

Nain Krupa Premises Co-operative Society Ltd. Vs AO Ward 22(1)(6) (ITAT Mumbai)

Mumbai ITAT Reiterates: Surplus from Members’ Contributions Not Taxable Under Doctrine of Mutuality

The Mumbai ITAT held that the surplus arising from maintenance charges, property tax recoveries and other contributions collected by a co-operative housing society from its members cannot be taxed, as such receipts are governed by the doctrine of mutuality. The Tribunal also deleted the fee levied under Section 234F for alleged delay in filing the return.

The society had collected ₹21.66 lakh from its members towards maintenance, property tax and other common expenses. After meeting the expenditure, a surplus remained, which the CPC treated as taxable while processing the return under Section 143(1). The CPC also levied fee under Section 234F on the assumption that the return had been filed beyond the due date.

The Tribunal found that the society had duly obtained audit under the Maharashtra Co-operative Societies Act and therefore the applicable due date for filing the return was 31.10.2018. Since the return was filed on the very same date, there was no delay, making the levy of Section 234F fee unsustainable.

On the issue of mutuality, the Tribunal relied extensively on the Supreme Court decision in ITO v. Venkatesh Premises Co-operative Society Ltd. (402 ITR 670) and observed that contributions received exclusively from members and utilised solely for their collective benefit do not constitute taxable income. The Tribunal emphasised that the crucial test is the identity between contributors and beneficiaries, and not whether a surplus arises at the end of the year.

The Revenue could not demonstrate that the society had dealt with outsiders, carried on any commercial activity, or applied funds for non-mutual purposes. The surplus merely represented an augmentation of the common fund available for future repairs, maintenance and contingencies, and therefore retained the same character as the original contributions received from members.

Accordingly, the ITAT held that the maintenance charges, property tax recoveries and other collections from members were protected by the doctrine of mutuality and that the resultant surplus could not be brought to tax. The additions made under Section 143(1) and the fee levied under Section 234F were therefore deleted in full.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the assessee against the order dated 20.01.2026 passed by the learned Addl./JCIT(A), NFAC, Hyderabad, arising out of the adjustment made while processing the return of income under section 143(1) of the Income Tax Act, 1961 for Assessment Year 2018-19. The assessee is aggrieved by the action of the CPC in bringing to tax the surplus arising from maintenance charges, property tax recoveries and other collections received from members of the society by disregarding the doctrine of mutuality and further levying fee under section 234F of the Act. The learned CIT(A) having affirmed the said action, the assessee is in further appeal before us.

2. The relevant facts, borne out from the record, are that the assessee is a co-operative premises society registered under the provisions of the Maharashtra Co-operative Societies Act. During the year under consideration, it had collected maintenance charges, property tax recoveries and other incidental charges from its members aggregating to Rs.21,66,208/-. Against such collections, the assessee incurred expenditure towards maintenance, repairs, administration and other common obligations of the society and, after meeting the said expenditure, a surplus remained in its hands. In the return of income filed for the year under consideration, the assessee claimed that the said surplus was not liable to tax in view of the doctrine of mutuality, since the contributions had been received exclusively from members and were utilized solely for their collective benefit. The assessee had also filed its return of income on 31.10.2018.

3. While processing the return under section 143(1), the CPC treated the surplus arising from the receipts collected from members as taxable income and made an adjustment accordingly. The CPC further levied fee under section 234F by proceeding on the basis that the return had been filed beyond the prescribed due date. Aggrieved by the said adjustment and levy of fee, the assessee preferred an appeal before the learned CIT(A).

4. The learned CIT(A), however, confirmed the action of the CPC. According to him, the assessee had failed to establish applicability of the doctrine of mutuality by furnishing adequate supporting material. The learned CIT(A) further proceeded on the footing that the assessee had not obtained audit of its accounts under the Maharashtra Co-operative Societies Act and, therefore, the due date applicable for filing the return was 31.08.2018. Consequently, the levy of fee under section 234F was also upheld.

5. Before us, the learned counsel for the assessee submitted that the very foundation of the impugned order is factually erroneous. He drew our attention to the audit report and audited financial statements placed in the paper book and submitted that the assessee had duly obtained audit under the Maharashtra Co-operative Societies Act on 18.07.2018. Accordingly, the due date applicable for filing the return was 31.10.2018 and since the return had admittedly been filed on 31.10.2018 itself, no fee under section 234F could have been levied. It was further submitted that the receipts in question represented maintenance charges, property tax recoveries and other contributions received from members of the society for meeting common obligations and common expenditure. Such receipts were utilized exclusively for maintenance, repairs, administration and upkeep of the premises occupied by the members. Any surplus remaining after meeting expenditure merely constituted an accretion to the common fund belonging to the members collectively and, therefore, could not be regarded as taxable income. Reliance was strongly placed upon the judgment of the Hon’ble Supreme Court in the case of ITO vs. Venkatesh Premises Co-operative Society Ltd. reported in 402 ITR 670.

6. Per contra, the learned Departmental Representative relied upon the orders of the lower authorities and submitted that the assessee had failed to establish before the authorities below that the conditions necessary for application of the doctrine of mutuality stood satisfied and, therefore, the adjustment made while processing the return deserved to be sustained.

7. We have carefully considered the rival submissions, perused the orders of the authorities below and examined the material available on record. Insofar as levy of fee under section 234F is concerned, we find that the very basis on which the CPC and the learned CIT(A) proceeded is contrary to the facts available on record. The assessee, being a co­operative society governed by the Maharashtra Co-operative Societies Act, was statutorily required to get its accounts audited and had admittedly obtained the audit report on 18.07.2018. Once this factual position is accepted, the due date applicable for filing the return of income was 31.10.2018. The return having admittedly been filed on 31.10.2018 itself, there was no delay whatsoever in filing the return. Consequently, the levy of fee under section 234F is unsustainable and is directed to be deleted.

8. The principal issue requiring adjudication is whether the surplus arising from maintenance charges, property tax recoveries and other collections received from members of the society can be brought to tax or whether the same is exempt on the doctrine of mutuality. The undisputed facts emerging from record are that the receipts in question have been received exclusively from members of the society and have been utilized for maintenance, repairs, administration and other common purposes connected with the functioning of the society. There is no allegation by the Revenue that the assessee has carried on any commercial activity with outsiders or that the receipts have been applied for any purpose other than the common benefit of the members. The controversy, therefore, has to be examined in the light of the settled legal principles governing the doctrine of mutuality.

9. The doctrine of mutuality and its applicability to co­operative societies now stands authoritatively settled by the judgment of the Hon’ble Supreme Court in the case of ITO vs. Venkatesh Premises Co-operative Society Ltd. (402 ITR 670). The principles emerging from the said judgment and having direct bearing on the controversy before us can be summarized as under:

(i) The doctrine of mutuality is founded on the settled principle that a person cannot make a profit out of himself. Consequently, amounts contributed by members to a common fund and subsequently applied for their collective benefit cannot ordinarily assume the character of taxable income.

(ii) The essence of mutuality lies in the complete identity between the contributors and the participators. The persons contributing to the common fund and the persons entitled to enjoy the benefits arising therefrom must constitute one and the same class.

(iii) The mere existence of a surplus at the end of the year does not convert a mutual receipt into taxable income. Such surplus represents only an augmentation of the common fund and continues to remain available for the benefit of the members.

(iv) Maintenance charges, property related charges, transfer charges, non occupancy charges, common amenity fund contributions and similar collections made from members retain the character of mutual receipts so long as they are utilised for maintenance, repairs, infrastructure, amenities and other common purposes of the society.

(v) The crucial test is not whether a receipt results in a surplus, but whether the receipt is generated from dealings amongst members for their common benefit and whether the identity between contributors and beneficiaries remains intact.

(vi) Differential contributions collected from certain members, such as transfer charges or non occupancy charges, do not destroy the principle of mutuality, provided the collections ultimately form part of the common fund and are utilised for the common benefit of all members.

(vii) The existence of a surplus fund available for future repairs, maintenance, contingencies or infrastructure requirements does not impart the character of profit or commerciality to the receipts.

(viii) Receipts collected by a co-operative society from its members in accordance with its bye-laws and utilised for the objects of the society cannot be regarded as business income merely because such receipts exceed the immediate expenditure incurred during the year.

(ix) Unless it is shown that the society is carrying on activities with a profit motive or is dealing with outside parties in a commercial manner, the principle of mutuality continues to govern the receipts from members.

(x) The decisive consideration is whether the common fund is contributed by the members, controlled for the benefit of the members, and ultimately expended or retained for the welfare of the members as a class. Once these conditions are fulfilled, the resultant surplus remains exempt on the doctrine of mutuality.

(xi) The Hon’ble Supreme Court accordingly held that receipts collected from members and utilised towards maintenance of premises, repairs, infrastructure, common facilities and amenities do not constitute taxable income, and any surplus arising therefrom is merely an accretion to the common fund of the members.

(xii) Thus, where contributions are received exclusively from members and are applied for the common benefit of those very members, the principle of mutuality excludes such receipts and the resultant surplus from the ambit of taxation.

10. The aforesaid principles make it abundantly clear that the focus of enquiry under the doctrine of mutuality is not on the quantum of surplus generated during the year but on the true character of the receipt itself. Once the receipts originate from members and are intended for the common benefit of those very members, the resultant surplus does not acquire an independent character of income merely because receipts exceed expenditure in a particular year. The Hon’ble Supreme Court has categorically held that such surplus only represents an augmentation of the common fund and continues to retain the same character as the original contribution. Therefore, an approach which proceeds to tax the surplus merely because it appears as an excess of receipts over expenditure is fundamentally contrary to the doctrine of mutuality as expounded by the Hon’ble Supreme Court.

11. Examining the facts of the present case in the light of the aforesaid principles, we find that the receipts under consideration represent maintenance charges, property tax recoveries and other charges collected from members of the society. Such collections are intrinsically linked with the day to day maintenance, upkeep, administration and management of the premises occupied by the members themselves. The Revenue has neither disputed the source of the receipts nor demonstrated that any part thereof has been received from non members. Likewise, there is no allegation that the funds collected from the members were diverted towards any object alien to the society or appropriated as profit. Thus, all the three essential tests governing mutuality, namely, identity of contributors and participators, existence of a common purpose, and utilization of funds for the common benefit of contributors, stand fully satisfied in the present case.

12. We further find that the learned CIT(A), while sustaining the adjustment, has not recorded any finding demonstrating as to how the chain of mutuality stood broken in the assessee’s case. There is no finding that the assessee dealt with outsiders, carried on any commercial activity, or applied the funds for any non mutual purpose. In the absence of any such finding, the mere existence of a surplus could never constitute a valid basis for denying the benefit of mutuality. The entire reasoning adopted by the authorities below proceeds on the assumption that once receipts exceed expenditure, the surplus automatically becomes taxable. Such an approach stands directly negated by the principles laid down by the Hon’ble Supreme Court.

13. In fact, in the very nature of a co-operative society, contributions collected from members may not necessarily be exhausted during the same year and a surplus may legitimately remain available for future repairs, maintenance, infrastructure requirements and unforeseen contingencies. Such surplus continues to retain the same character as the original contribution and remains impressed with the doctrine of mutuality. It cannot be treated as profit arising from any commercial venture merely because it remains unspent at the end of the year. In the present case, there is nothing on record to suggest that the chain of mutuality stands broken at any stage or that the receipts have lost their mutual character.

14. Thus, respectfully applying the principles laid down by the Hon’ble Supreme Court in the case of Venkatesh Premises Co-operative Society Ltd. to the facts before us, we hold that the maintenance charges, property tax recoveries and other collections received by the assessee from its members are governed by the doctrine of mutuality and the resultant surplus cannot be subjected to tax. Accordingly, the adjustment made under section 143(1) and sustained by the learned CIT(A) is directed to be deleted. Likewise, for the reasons discussed hereinabove, the levy of fee under section 234F is also directed to be deleted.

15. In the result, the appeal of the assessee is allowed.

Order pronounced on 11^th June, 2026.