Doctrine of Mutuality in Cooperative Housing Societies

By I C Naik

The Income Tax Authorities in India generates issues from non-issues.  Waste a lot of time and money and finally only settle with what the Supreme Court of India says. Every CA taken up after successful plea under SLP should have a stringent damage clause for suitably compensating to the respondent for wasting their money and time.

In a very recent Apex Court judgment more than 60 Civil Appeals filed by the Tax Authorities were heard to gather to dismiss them all against the Revenue. The leading case was of Venkatesh Premises C S Ltd [C A NO.2706 OF 2018] [SLP (C) No.30194 of 2010] was decided in favour of the respondent by the Division Bench of the learned judges Rohinton Fali Nariman J. and Navin Sinha J on 12th March 2018.

The controversy revolved round about a global principle of mutuality in mutual benefit associations including Cooperative Housing Societies propounded by Lord Watson in the House of Lords 125 years ago. [ Styles (Surveyor of Taxes) vs. New York Life Insurance Company, (1889) 2 T.C. 460.] Subsequently this doctrine has been applied by the Supreme Court of India in many cases for example, in Bangalore Club vs. Commissioner of Income Tax and Another, (2013) 350 ITR 509 (SC)= (2013) 5 SCC 509. In the words of Lord Watson:

“When a number of individuals agree to contribute funds for a common purpose, such as the payment of annuities or of capital sums, to some or all of them, on the occurrence of events certain or uncertain, and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them, I cannot conceive why they should b regarded as traders, or why contributions returned to them should be regarded as profits.”

1. The Division Bench succinctly summarises the common issue in these cases namely whether certain receipts by co-operative societies, from its members i.e. (i) non-occupancy charges, (ii) transfer charges,(iii)common amenity fund charges and (iv) certain other charges [e.g. interest on delayed payment of society charges, parking charges, penalties for breach of bye-laws etc] are exempt from income tax based on the doctrine of mutuality”.

2. Facts as summarised by the Hon Bench:
3. “The assessing officer held that receipt of non-occupancy charges by the society from its members, to the extent that it was beyond 10% of the service charges/maintenance charges permissible under the notification dated 09.08.2001, stands excluded from the principle of mutuality and was taxable.
4. The Bombay High Court quashed the ITO’s finding that payment by the transferee member was taxable, but at the same time upheld the taxability of the receipt beyond that specified in the government notification issued U/S 79A of the MCS Act 1960 [No. SAGRUYO2001/PRA.KRA.188/14-SA  Co-operation and Textile Department,  Mantralaya,  Mumbai-32 Dt. 9th August, 2009. ]

3. The Bench examined all the arguments of the CIT’s advocates 32 in number, and expressed its views in Paragraph 13,15, 19,20 as under:
4. Para 13 “The doctrine of mutuality, based on common law principles, is premised on the theory that a person cannot make a profit from himself. An amount received from oneself, therefore, cannot be regarded as income and taxable.” ……..”The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries……… “The law envisages a complete identity between the contributors and the participants in this sense. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities. A common feature of mutual organizations in general can be stated to be that the participants usually do not have property rights to their share in the common fund, nor can they sell their share. Cessation from membership would result in the loss of right to participate without receiving a financial benefit from the cessation of the membership.”
5. Transfer charges are payable by the outgoing member. If for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount is appropriated only after the transferee is inducted as a member. In the event of non-admission,   the   amount   is   returned.

iii.  Likewise, non-occupancy charges are levied by the society and is payable by a member who lets the premises out to a third person. The charges are again utilised only for the common benefit of facilities and amenities to the members.

1. Contribution to the common amenity fund taken from a member disposing property is similarly utilised for meeting sudden and regular heavy repairs to ensure continuous and proper hazard free maintenance of the properties of the society which ultimately enures to the enjoyment, benefit and safety of the members.
2. “Membership forming a class the identity of the individual member not being relevant, induction into membership automatically attracts the doctrine of mutuality. If a Society has surplus FSI available, it is entitled to utilise the same by making fresh construction in accordance with law. Naturally such additional construction would entail extra charges towards maintenance, infrastructure, common facilities and amenities. If the society first inducts new members who are required to contribute to the common fund for availing common facilities, and then grants only occupancy rights to them by draw of lots, the ownership remaining with the society, the receipts cannot be bifurcated into two segments of receipt and costs, so as to hold the former to be outside the purview of mutuality classifying it as income of the society with commerciality.

4. In Bangalore Club vs. Commissioner of Income Tax and Another, (2013) 350 ITR 509 (SC)= (2013) 5 SCC 509 after referring to Styles  (Supra), the doctrine of mutuality was explained further as follows :-

“The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax;……. The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of  the   common   fund   and   as   such neither considered income nor taxable

Hon’ble Mr. Justice Navin Sinha pronounced the Reportable judgment of the Bench comprising Hon’ble Mr. Justice Rohinton Fali Nariman and His Lordship.