Tuesday, 29 October 2013

The transfer fee and TDR premium charged by the Society from its members is a commercial transaction and not eligible for exemption on grounds of mutuality

Hatkesh Co-op Housing Society Ltd vs. ACIT (ITAT Mumbai)

A Co-op Hsg Society is not a mutual association because its members can earn income from its property. The transfer fee and TDR premium charged by the Society from its members is a commercial transaction and not eligible for exemption on grounds of mutuality

The assessee, a co-operative housing society, received transfer fee and TDR premium from its members which it claimed was exempt on the ground of mutuality. This stand was upheld by the Tribunal for the earlier years relying on the judgements in Sind Co-op Housing Society 317 ITR 47 (Bom), Mittal Court Premises Co-op Society 320 ITR 414 (Bom) & Jai Hind CHS Ltd 349 ITR 541 (Bom). In the present year, the Department argued that this view was not correct and that the transfer fee and TDR premium were not exempt on the ground of mutuality. HELD by the Tribunal upholding the Department’s plea:
(i) The three perquisites which form the essential conditions for mutuality are (a) complete identity between contributors and participants, (b) the actions of the participants must be in furtherance of the mandate of the society as determined from the memorandum and articles of association & rules & (c) there must be no scope of profiteering by the contributors from the fund made by them, which could only be expended on or returned to them. The principle or the notion of mutuality cannot be extended to a cooperative housing society, be it a flat owner’s society or a plot owner’s society;
(ii) There are three objections to treating a co-op housing society as a mutual concern. The first objection is that while a mutual concern cannot lead to any profit for the members, a member of a co-op housing society can earn income from the property such as by letting. The contributors, by virtue of their membership, obtain a valuable capital asset in their own hands, i.e., the leasehold right in the plots allotted to them, as well as the interest in the super structure. They may encash or capitalize on or even trade on the property. Such valuable rights that inure to the members are separate and distinct from the rights that vest in them as a part of the class of contributors and militates against the very notion of mutuality, which in its concept and operation cannot yield any income to them in their individual capacity. The second objection is that the assessee’s activities of charging premium at one half the amount of the premium received by the transferor-member from the transferee-member is a commercial transaction. As such, not only does the arrangement lead to creation and holding of wealth/property by the individual-members, it allows them to encash or otherwise exploit it, paying the society its share. That is, the society also partakes of the profit arising on the subsequent transfer by a member, to the extent of 50% thereof. The third objection is that the policy of allowing the individual members to purchase TDRs from outside and load them on to their existing structures and of allowing non-members residing in the flats built by the members on their plots to have access to and enjoy the common facilities means that there is a break-down in the identity between the contributors and participants and violates another basic condition of mutuality that there must be no dealings with the non-members;
(iii) Apart from that, transfer fees cannot be considered as tax-exempt because the income arises from the exercise of commercial rights, which is akin to a sale. The judgement in Sind CHS cannot be followed because the decision in Presidency CHS Ltd 216 ITR 321 (Bom) would prevail. Sind CHS was based on the fact that the amount there was reasonable and based on the bye-laws. The decision in Mittal Court PCS Ltd does not apply as it is in respect of non-occupancy charges. The TDR Premium is also not governed by the principle of mutuality. The judgement in Jai Hind CHS Ltd holding TDR premium to be exempt does not apply because the question whether commerciality is involved, or the transaction is guided by profit motive, is a matter of fact. The assessee’s charter as well as its’ operations have been found to be imbued with commerciality and common facilities are being enjoyed by the non-members (Bangalore Club 350 ITR 509 (SC) & Presidency Co-op Housing Society 216 ITR 321 (Bom) followed).

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