Principle of Mutuality for Housing Society approved by Supreme Court

By Legal Bureau

In a recent order by Supreme Court, on dropping the claim of Income Tax Department on imposing of tax on several receipts collected by societies.  It gave a huge aid to cooperative societies.  The controversy goes around the notification which was issued under Maharashtra Cooperative Societies Act, 1960, section 79A.

The Notification which was issued of August, 2001, on based of it the Income Tax Authority argued that since these particulars societies have received maintenance/service charges in surplus of 10% of the non-occupancy charges, it was conflicting the law and therefore, the principle of mutuality fails.

The decision given by the authority was overruled by the Income Tax Tribunal that the decision given by the authority does not apply on commercial societies.

It further held that the transfer fee paid by the transferee member was eligible to tax as the transferee did not have the status of a member at the time of such payment and, therefore, the principles of mutuality did not apply.

The Bombay High Court (BHC), while quashing the appeal of the tax authority, ruled that the receipts of the societies are not in the nature of business income, generating profits/ surplus and therefore, not taxable.

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. Section 2(24) of the Income Tax Act defines taxable income. The income of a co-­operative society from business is taxable, it observed.

Likewise, non ­occupancy charges were levied for the purpose of general maintenance of the premises of the Society and provision of other facilities and general amenities to the members. The fact that such members who were not in self-occupation may have had to pay at a higher rate was irrelevant so long as the receipts were utilised for the benefit of the members as a class. It is not the case of the Revenue that such receipts had been utilised for any purpose other than the common benefit of the members. Even if any amount was left over as surplus at the end of the financial year after meeting maintenance and other common charges, that would constitute surplus fund of the society to be used for the common benefit of members and to meet heavy repairs and other contingencies and will not partake the character of profit or commercial so as to be eligible to tax.

Further, the SC has not specifically mentioned anything about the income received by cooperative housing societies.


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