Many co-operative housing societies collecting transfer premium from the transferee would heave a sigh of relief by the Mumbai High Court decision dated 17th July, 2009. So far the income tax authorities in the State of Maharashtra and the Mumbai Tribunal were following the Mumbai Special Bench Decision in the case of Walkeshwar Triveni CHS wherein it was decided that the prescribed transfer premium collected from a member is not taxable but if the same is collected from a transferee, it is subject to taxation.
But in view of the High Court decision, whether the society has collected prescribed transfer premium from a transferor alone or a transferee alone or partly from a transferor and partly from a transferee, none of them would become taxable.
Collection of transfer premium/fee by a co-operative housing society, is subject to Notification dated 9.8.2001 by the Government of Maharashtra, Ministry of Cooperation and Textiles, wherein upper limits have been set out for various areas ranging from Rs. 5,000/- to Rs.25,000/-. A society can collect transfer fee under it bye laws subject to these limits. In Mumbai the applicable limit is Rs.25000/-.
The Walkeshwar Triveni Decision which was so far applied was based on the reasoning that at the time of payment of transfer fee, transferor is still a member of the society and payment made by such outgoing member is covered by the principle of mutuality. Whereas if transferee makes such payment, at that time generally he is not a member of the society and therefore such payment is not covered by the concept of mutuality and is therefore taxable.
Hon’ble Court has held that it does not make a difference whether the fees are collected from a transferor or a transferee. To that extent therefore, the decision in Walkeshwar Triveni CHS gets overruled in favour of societies.
The decision would provide a substantial relief to many housing societies as it is common practice to agree between the vendor and the purchaser that the transfer fee would be paid by both of them in equal proportions. Sometimes the transfer fee is paid by the transferee alone in terms of the mutual understanding between the transferor and the transferee. All these situations would now get covered by the Mumbai High Court decision and would not result into taxation.
While arriving at such a decision, the Court noted that most of housing societies in the State have adopted model bye laws. On consideration of the MCS Act, Rules and such model bye laws, the Court observed that the transfer fee can be appropriated by a housing society only if the transferee is admitted to membership. If the transferee is not admitted as a member, the amount received will have to be refunded, as the amount is payable only on a transfer of rights of the transferor unto the transferee. If an amount is received more than what is chargeable under the bye-laws or Government directions, the society is bound to repay the same and if it retains the amount it will be in the nature of profit making and that specific amount will be eligible to tax.
The transfer fee is paid under the bye-laws which constitute a contract between the society and its members. In a case when amount collected is more than permissible limits, under pressure or coercion, then considering section 72 of the Contract Act, the same will have to be refunded. At any rate if the society retains the excess the same will be eligible to tax as it has an element of profiteering.
The Court held that the transfer fee received by a housing society is not eligible to tax if there is no taint of commerciality in such collection.
Whether the transfer fee is paid by the outgoing member or incoming member, it goes to the common fund of the society. Such common fund is to be exclusively used for the benefits of the members as a class. As the main activity of a cooperative housing society is to maintain its property and to render services to its members by way of usual privileges, advantages and conveniences, there is no profit motive involved in these activities. Therefore, there is no taint of commerciality in collection of transfer fee by such a society. Various tests for applicability of concept of mutuality are satisfied by such a co-operative housing society.