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EY Tax Alert
SC upholds the principle of
mutuality in case of
transactions between
members and co-operative
societies
[2] This is basis our understanding from the decision and we have not been [3]
[2013 (2) MHLJ 666]
able to source the Notification.
• On the receipt of premium for additional construction,
reliance was placed on Bombay HC decision in the case SC’s ruling
of CIT v Jai Hind Cooperative House Construction
Society[4] to contend that premium receipts payable by • The SC, on an analysis of various judicial precedents[7]
certain members, for allowing a member to construct on the matter, reiterated following principles on the
additional area using extra FSI[5] of societies was not principle of mutuality :
taxable on the principle of mutuality.
• The principle of mutuality is based on common law
• Once the test of determining mutuality and principles. It rests on the theory that a person cannot
commonality of interest are met, receipt is not taxable make a profit from himself/herself. An amount
under the general understanding of the principle of received from oneself cannot be regarded as income
mutuality that a person cannot make profits from so as to be liable to tax.
himself/herself[6]. • The distinctive feature of the principle of mutuality
lies in the commonness between the persons
contributing to and also participating in surplus of a
mutual organization which does not have any profit
• The First Appellate Authority upheld the Tax Authority’s
motive from the transactions with its members.
contentions. However, the Second Appellate Authority
• There should be complete identity between the
upheld the Taxpayer’s contention that Notification was
contributors and the participants as a class, in the
applicable only to housing co-operative society and not
sense, what is returned to members is contributed
to premises co-operative society. With respect to
by a member. Any surplus in the common fund shall
transfer charges it held that the transfer fee paid by
therefore not constitute income but will only be an
transferee member was taxable as he/she did not have
increase in the common fund meant to meet sudden
the status of member at the time of payment.
eventualities.
• A common feature of mutual organizations, in
• On further appeal, the High Court set aside the findings
general, can be stated to be that the participants
of Second Appellate Authority that transfer fee paid by
usually do not have the property rights to their share
transferee member was taxable, while upholding the
in the common fund, nor can they sell their share.
taxability of non- occupancy receipt beyond the specified
Cessation from the membership would result in the
limit as specified in the Notification.
loss of right to participate without receiving financial
benefit from the cessation of the membership.
• Aggrieved, the matter was appealed before the SC on
the issue whether the transfer charges, non-occupancy
• Basis the above principles and for the following
charges and premium on sale of additional construction
reasoning, the SC ruled that various receipts were not
rights of the Society’s property are exempt from income
taxable in the hands of the Taxpayer as the principle of
tax based on the principle of mutuality.
mutuality was applicable.
On transfer fee
[4]
[349 ITR 541]
[5]
Floor Space index [7]
[6] Commissioner of Income Tax, Bihar v. Bankipur Club Ltd., [(1997)
Reliance was placed on Commissioner of Income Tax, Mumbai v.
226 ITR 97 (SC )]; Bangalore Club v. Commissioner of Income Tax and
D.P.Sandhu Bros. Chembur (P) Ltd.,(2005) [273 ITR 1 (SC)]; CIT v. Royal Another, [(2013) 350 ITR 509 (SC)]; The Commissioner of Income Tax
Western India Turf Club Ltd., [AIR 1954 SC 85]; Commissioner of Income v. Common Effluent Treatment Plant, (Thane Belapur) Association,
Tax, Bihar v. Bankipur Club Ltd., [(1997) 226 ITR 97 (SC)];Bangalore Club v. [(2010) 328 ITR 362 (Bom)]; Styles v. New York Life Insurance
Commissioner of Income Tax and Another,[(2013) 350 ITR 509 (SC)]. Company, [(1889) 2 T.C. 460] by Lord Watson in the House of Lords.
On non-occupancy charges