1. Under Section 255(3) of the IT Act, 1961 (hereinafter called the Act), the President of the Income-tax Appellate Tribunal (hereinafter called the Tribunal) has constituted this Special Bench to consider the question "Whether the transfer fee received by the co-operative housing society is exempt from income-tax by the principle of mutuality ?" 2. At the time of hearing it was made clear that the word "transfer fee" was loosely used. The dispute in the present appeal was in regard to the premium on transfer of occupancy as described under Clause 7(h) of the bye-laws of the cooperative society. This fact was clarified before the CIT(A). We have also taken note of the same. The ground taken before the CIT(A) was apropos the addition of Rs. 25,000 as income from transfer fees. It was made clear before the CIT(A) that this receipt of Rs. 25,000 was not by way of transfer fees but, in reality receipt of premium on transfer of occupancy rights over the flat. The transfer fee was collected under Clause 7(g) of the bye-laws of the assessee's society. There was no disallowance on account of transfer fee. However, by mistake the premium on transfer fee was treated as transfer fee. We have examined the records. We find that the addition was on account of premium on transfer. We, therefore, proceed to decide this issue in respect of premium on transfer.
3. Shri V.H. Patil, learned counsel for the assessee, appeared before us. It was submitted that the assessee received an amount of Rs. 25,000 towards the premium on transfer on the sale of flat in the society. It was alleged that this receipt is not exigible to tax on the ground of mutuality. The assessee received this amount on 23rd May, 1996, from the outgoing member, Shri Pushkar G. Ramwala and the incoming member, Smt. Neelam A Sanghvi. Both the incoming and outgoing members contributed Rs. 12,500 each. NOC was issued by the society in accordance with the resolution passed by the managing committee on 22nd May, 1996. The transfer charges were received by the society on 23rd May, 1996.
4. Shri Patil invited our attention on Clause 40(d)(vii) of the bye-laws of the assessee's co-operative housing society (hereinafter called the 'bye-laws'). With reference to this clause, it was submitted that the premium on transfer of flat is fixed by the Government. The maximum amount cannot exceed Rs. 25,000. Assessee-society did not charge anything extra on this account. The amount received as premium was within the permissible limits.
5. Shri Patil submitted that society is a voluntary association. He explained what the term voluntary connotes. In the context of society it was stated that no one can be compelled to join the society, no one can be compelled to continue, having joined once. The members are free to take the advantage of the services of the society to the extent considered necessary by them.
6. Shri Patil submitted that co-operative society is organised to enable the members to improve their economic conditions by helping them in their respective pursuits and not to earn profits. However, a co-operative society is not restrained from earning profit. Profit is the natural result of better management which must always be encouraged. What is to be avoided is not the profit, but profit motive.
In the present case profit motive cannot be attributed to the assessee as the assessee is a co-operative housing society. To explain the concept and purpose of co-operative movement reliance was placed oil the decision of Hon'ble Madhya Pradesh High Court rendered in the case of Collective Farming Society Ltd. and Ors. v. State of Madhya Pradesh and Ors. AIR 1974 MP 59 (FB).
7. Our attention was invited on the prescription of Section 4 of the Maharashtra Cooperative Societies Act, 1960 (hereinafter called MCS Act). It was stated that the registration was granted to the society consequent upon the compliance of all the conditions.
8. Shri Patil submitted, that the co-operative society may be described as a union of persons, established according to co-operative principles, the object of which is to improve the financial conditions of its. members by joint performance of economic acts or improve the conditions under which they carry on their profession either by means of self-help or mutual-help or Government support provided that all the profits made by the organizations are joint. The housing societies are also part of the same co-operative movement. The object of the co-operative housing society is to provide to its members open plots for housing or dwelling houses or flats and also to provide the members common amenities and services. Shri Patil read the decision of the apex Court rendered in the case of R.H. Shah v. H.J. Joshi AIR 1975 SC 1470.
The relevant portion is reproduced here as under: "Multi-storeyed ownership flats on co-operative basis in cities and big towns have come to stay because of dire necessity and are in the process of rapid expansion for manifold reasons. Some of these are, every growing needs of an urban community necessitating its accommodation in proximity to cities and towns, lack of availability is land in urban areas, rise in price of building material, restrictions under various rent legislations, disincentives generated by tax laws and other laws for embarking upon housing construction on individual basis, security of possession depending upon fulfilment of the conditions of, membership of a society which are none to irksome." 9. Taking us through the decision of the jurisdictional High Court rendered in the case of CIT v. Presidency Co-operative Housing Society Ltd. (1995) 216 ITR 321 (Bom), Shri Patil submitted that this, decision is not applicable, as in this case the Hon'ble High Court did not decide the issue taking into consideration the principles of mutuality.
10. Shri Patil vehemently contended that the principle of mutuality would be applicable, if the transactions including trading transactions are with the members' with a view to provide certain facilities, or to collect funds for achieving the objects of the society. However, if the business or trading is carried on with profit motive with members and non-members alike, the principle of mutuality will not apply. It was further stated that the contributors and the participants belong to the same class and they contribute and participate as members belonging to that class. It is not sine qua non that all members should contribute and participate in surplus or get back what they had contributed.
11. It was stressed that participation must not be by way of return of the contribution. It may be in any other form, of getting common benefit or facility or taking such contributions to the reserve fund to be used for achieving the objects of the society. All the contributions of the assessee-society, including by way of transfer fees or premium, were with the object of collecting funds for achieving the objects of the society, viz., to maintain and manage the properties of the society. There was absolutely no profit motive. The contributions were received from the members. As such, the principle of mutuality is fully applicable in the present case, 12. Shri Patil discussed the basic principles of mutual benefit association. It was stated that no person can make a profit out of himself. Reference was made to the decision rendered in the case of Styles v. New York Life Insurance Company 2 Tax Cases 460. The relevant portion reads as under : "When a number of individuals agree to contribute funds for a common purpose, such as the payment towards amenities, 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, the contributions returned to them cannot be regarded as profits liable to tax." 13. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund.
In other words, there must be complete identity between the contributors and participators. If this requirement is satisfied the particular from which the association takes is immaterial. This principle was laid down in the case of Municipal Insurance Ltd. v.Hills 16 Tax Cases 430, 448.
14. Shri Patil argued that the contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. According to Shri Patil what is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve for development and for providing better amenities to the members. To buttress this provision, reliance was placed on various precedents, which are discussed hereinafter.
15. In the case of CIT v. Merchant Navy Club (1974) 96 ITR 261 (AP), the assessee was a club. It provided amenities to its members on payment of cost plus some extra amount. The extra amount so realised was utilised by the club for the maintenance and improvement of the club. Amenities were provided to both paying and non-paying members but only on payment and not to outsiders. Hon'ble High Court has held that the assessee was not a trade association but a social club inasmuch as all the members, whether they paid any subscription or not, paid for the amenities they enjoyed, and that there was a complete identity between the contributors to the common fund and the participators in the surplus. The following passage from the book on Law of Income-tax, Surtax and Profits-tax by Wheatcroft was quoted at p. 267 : "It has also been established that the same principle applies although the contributors incorporate themselves into a separate entity to carry out the mutual scheme and the surplus contributions are put to reserve and not immediately returned. For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate, it does not matter that the class may be diminished by persons going out of the scheme or increased by others coming in." 16. In the case of Surat District Cotton Dealers' Association v. CIT (1959) 35 ITR 121 (Bom) it was held that in order to establish the mutuality there must be identity between the persons contributing to the fund of the association and the persons entitled to the fund.
However, it is not necessary for the purpose of this identity that there must be an actual contribution by all the members of the association. It is sufficient if all the members have a right to make a contribution.
17. In the case of CTT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 (SC), the apex Court has held that the essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied.
18. In the case of CIT v. Bankipur Club Ltd. (1997) 226 ITR 97 (SC), it was held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.
19. Shri Patil submitted that in view of the decision of the jurisdictional High Court rendered in the case of Surat District Cotton Dealers' Association v. CIT (supra) and of the apex Court in the case of CIT v. Bankipur Club Ltd. (supra); the decision rendered in the case of Wankaner Jain Social Welfare Society v. CIT (2003) 260 ITR 241 (Mad) is not a good law. In this case the Hon'ble Madras High Court has held that complete identity between contributors and participators in fund is mandatory. Right to contribute is not enough.
20. Shri Patil invited our attention on the British Tax Encyclopedia (1) 1962 edition edited by G.S.A. Wheatcroft at pp. 1200 and 1201, dealing with "Mutual trading operations" the law is stated thus : "In several early cases there were dicta to the effect that a man could not make a profit by trading with himself, this developed into the proposition that when persons contribute to a common fund in pursuance of a scheme for their mutual benefit, having no dealings or relations with any outside body, they cannot be said to have made a profit when they find they have overcharged themselves and that some portion of their contributions may be safely refunded. It has also been established that the same principle applies although the contributors incorporate themselves into a separate entity to carry out the mutual scheme and the surplus contributions are put to reserve and not immediately returned. For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate, it does not matter that the class may be diminished by persons going out of the scheme or increased by other coming in...." 21. Shri Patil heavily relied on the decision of the Hon'ble Calcutta High Court rendered in the case of CIT v. Apsara Co-operative Housing Society Ltd. (1993) 204 ITR 662 (Cal). In this case the issue was in regard to the taxability of transfer fee realised by the society for transfer of flats. It was noted that the persons have to first become members of the society before they can be entitled to get flats transferred in their names or become liable to pay transfer fees. Court found that the transfer fee so realised is for the benefit of the members of the society. As such, it was held to be a mutual concern and the transfer-fee was not liable to tax.
22. It was submitted that the issue involved in the present appeal stands squarely covered by the decision of the Hon'ble Gujarat High Court rendered in the case of CIT v. Adarsh Co-operative Housing Society Ltd. (1995) 213 ITR 677 (Guj). In this case the Hon'ble Gujarat High Court has held that where the assessee is found to be a mutual concern, the income which it receives from its members is not liable to tax, This is founded on the principle that no one can make a profit by transacting with oneself. The primary condition of mutuality between the assessee and its members is that the assessee which collects money from its members, must apply the same for their benefit not as shareholders having an interest in its profits but as persons themselves who have put up the fund by contributing to it. There must be a thread of agency for acting for the contributors for achieving the objectives. The identity of individuals as contributors and participants is not essential but what is essential is the identity of character of contributors and participants.
23. Reference was also made to the decision of the jurisdictional High Court rendered in the case of CIT v. Bombay Oilseeds and Oil Exchange Ltd. (1993) 202 ITR 198 (Bom). The Hon'ble High Court has held that there should be complete identity between the contributors to and participators in the fund. In this case the Tribunal found that such identity did exist. On this factual finding, the Hon'ble High Court has held that the receipt of mutual concern was not exigible to tax.
24. Shri Patil took us through various bye-laws of the society in order to demonstrate that the assessee was a mutual concern and there was no profit motive. He relied on various other precedents to buttress this point.
25. The Revenue was represented by Shri Girish Dave, CIT Departmental Representative, and Shri Ajit Korde, senior Departmental Representative. At the outset it was submitted that the issue involved in the present appeal is covered by the decision of the jurisdictional High Court rendered in the case of CIT v. Presidency Co-operative Housing Society Ltd. (supra). It was stated that the principle of mutuality was not argued before the Hon'ble High Court is not a material alliunde to which it can be said that the issue apropos the taxability of co-operative society is still res integra. Shri Korde placed his reliance on the decision of the Tribunal rendered in the case of Hatkesh Co-operative Housing Society Ltd. v. ITO (1997) 60 ITD 662 (Mumbai). In this case the Tribunal has held that the identity of the recipient with the contributor is a condition precedent to enable the benefit of mutuality. In that case the contributor was the transferor. The Tribunal noted that it was possible on the part of the society to put interdict on the transfer de hors such contribution. The payment of transfer money was a condition precedent for executing the transfer. As a result of transfer the society permitted a new person into the society in place of the old. The society put a clog over the ownership right. Right apropos the disposition was encumbered, membership of the society for owning the flat was sine qua non.
Therefore, what the society charged was not a voluntary contribution.
It was a cost for effecting the change. This was a continuous process.
On this factual backdrop it was held that the identity between the contributors and the participators did not exist. As such, the principle of mutuality cannot be applied.
26. Our attention was invited on Circular No. CHS-2001/M. No. 188/14-C, dt. 9th Aug., 2001, issued by the Co-operative & Textile Department, Government of Maharashtra, Mantralaya, Mumbai 400 032. By this circular, the earlier Circular dt. 27th Nov., 1989, was cancelled. It is stipulated in the circular that while transferring the flat/tenement of the member of the co-operative housing society and also transferring his/her shares and rights in the share capital/property of the society to another person, rate of premium to be charged should be fixed in the general body meeting. However, the rate of premium decided by the general body meeting of the society, in any circumstances should not be more than Rs. 25,000 in respect of Municipal Corporation and authority area. It was stated that this step was taken by the Government to arrest the profit earning qua the co-operative housing society.
27. The learned Departmental Representative relied on the decision of the Andhra Pradesh High Court rendered in the case of CIT v. West Godavari District Rice Millers Association (1984) 150 ITR 394 (AP). In this case it was held that a mutual association is an AOP who agrees to contribute funds for some common purpose mutually benefit and receive back the surplus left out in the same capacity in which they have made the contributions. Therefore, the capacity as contributors and participants remains the same. The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves. It is enough if they have a right of disposal over the surplus.
28. It was stated that in the present case the contributors and the participators are not the same. As such, the principle of mutuality cannot be applied.
29. It was stated that the payment made by the member was not a voluntary payment. Reference was made to the decision of the Tribunal rendered in the case of ITO v. Sea Face Park Co-operative Housing Society Ltd. (ITA Nos. 5314, 5315 & 5316/Bom/l984, dt. 16th Oct., 1997). In this case the Tribunal noted that if that person does not pay the fees, the flat will not be transferred and his sale falls through.
Therefore, it cannot be said that there is any element of voluntary contribution in this matter.
30. The learned Departmental Representative invited our attention on the decision of the Tribunal-rendered in the case of Oval Shiv Shanti Bhuvan Cooperative Housing Society Ltd. v. ITO (2001) 73 TTJ (Mumbai) 254 : (2001) 78 ITD 403 (Mumbai). In this case the Tribunal followed the decision rendered in the case of Hatkesh Co-operative Housing Society Ltd. v. ITO (supra). It was held that it is not every payment from a member to the association of which he is a member which would per se be governed by the principle of mutuality. For this proposition, the Tribunal relied on the decision of the apex Court rendered in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. (supra). The contribution was held not to be voluntary but under compulsion as decided in the case of Hatkesh Co-operative Housing Society Ltd. v. ITO (supra).
31. Reliance was further placed on the decision of the Tribunal rendered in the case of Regent Chambers Premises Co-operative Society Ltd. v. ITO (2002) 76 TTJ (Mumbai) 531 : (2002) 82 ITD 13 (Mumbai). We find that in this case the principle laid down in the case of Oval Shiv-Shanti Bhuvan Co-operative Housing Society Ltd. v. ITO (supra) was followed. In this case the Tribunal noted that the contributors to the common fund of the society were not entitled to participate in the surplus because all such contributors made these payments only when their flats/offices were transferred.
Therefore, the question of contributors to the common fund must be entitled to participate in the surplus did not arise. The issue was decided in favour of the Department.
32. Shri Korde further invited our attention on the decision of the Special Bench of the Tribunal rendered in the case of Jai Hind Co-operative Housing Society Ltd. v. ITO (1983) 3 ITD 625 (Bom)(SB). In this case the Tribunal held as under : "So what we have to see in the present case is whether the payment made to the assessee, pursuant to the lease agreements, by its members on sale of their plots to others could be regarded as having an origin in what might be called the real source of income. On the facts found in the present case, we have no hesitation in coming to the conclusion that the payments are referable to the real source of income. The payments in this case were not voluntary or ex gratia payments and did not depend on the whims and caprices of the members and the assessee could legally enforce its right to get 50 per cent of the premium from its members on transfer of their plots, It is, therefore, not necessary that the assessee should have carried on any activity which constituted business in order to bring to tax amounts." 33. Our attention was further invited on the decision of the Hon'ble Madras High Court rendered in the case of CIT v. Madras Race Club (1976) 105 ITR 433 (Mad). In this case, while considering the principle of mutuality, for exemption of subscription collected from the members, the Court held that it is sine qua non to bear in mind two concepts.
The first concept is that the principle of mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a dozen persons gather together and agree to purchase certain commodities in bulk and distribute them among themselves in accordance with their individual requirements, they may collect a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselves, a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent saving and not income. The IT Act seeks to tax income and not savings. If this principle is borne in mind, then it would be easier to understand the decisions rendered on this point.
34. What comes out from the perusal of the aforesaid judgment, the learned Departmental Representative contended is that to invoke the principle of mutuality, the society should not anticipate the profits.
If the profits are anticipated and charged in a calculated manner, in that eventuality, principle of mutuality will fail. Referring to the facts of the present case, it was contended that the premium was charged with a motive to earn profit. As such, the principle of mutuality cannot be extended to the facts of the present case.
35. Referring to the decision of the jurisdiction High Court rendered in the case of CIT v. Presidency Co-operative Housing Society Ltd. (supra) at p. 329, it was submitted that it was held by the Hon'ble High Court that the receipt of the amount by the society can never be considered as akin to a windfall because the receipt of the amount by the society was under the terms of the contract which was entered into by the society with its members. Therefore, whenever there was any excess receipt by a member on transfer of his interest, the society was entitled to half of this excess. It is true that there was no regularity about the receipt of such an amount. But this by itself is not sufficient to take away from the receipt the character of income.
Even a payment which may be received occasionally can be income. For example, a professional may receive fees only occasionally as and when he gets work. It nevertheless is his income. There is no certainty about the receipt of this amount. Whenever, such amount is received by a member, the society is bound to get half of the portion.
36. Shri Korde submitted that it is necessary to see that in what capacity the member is making the payment. Dealing with the identity of class of members, it was stated that the character of the member who is making the payment should be the same.
37. Shri Korde, further submitted that the contribution to the common objective has to be made by all. Reference was made to the decision of the apex Court rendered in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. (supra). The apex Court held as under: "It seems to us that the test applied by the High Court is not sound. It is not consistent with the true decision in Styles' case (1889) 2 Tax Cases 460, as understood by this Court and in other subsequent cases. It will be noticed that Lord Macmillan clearly said that all participators must be contributors to the common fund and not that all participators must be entitled to contribute. The essence of mutuality lies in the return of what one has contributed to a common fund." 38. Shri Korde submitted that the taxability of an amount would depend on the nature and character of the receipt at the initial stage. If the amount initially received partakes the character of a trading receipt the amount would necessarily be taxable as such, if however, the amounts are initially not taxable if cannot be taxed despite the magnitude of the accumulation and despite its appropriation by the assessee to his own credit subsequently, The name which the parties may give to the transaction which is the source of the receipt and the characterisation of the receipt by them are of little significance, and the true nature and character of the transactions have to be ascertained from the covenants of the contract in the light of the surrounding circumstances.
39. Our attention was invited on the decision of the Hon'ble Calcutta High Court rendered in the case of CIT v. Darjeeling Club Ltd. (1985) 153 ITR 676 (Cal). The Hon'ble High Court has observed as under: "The fact that there are some temporary members and some honorary members is quite immaterial. The class of members may diminish or may increase. Some members may retire, some members may die but the class of the members who contribute to the fund remain as a class the same. This aspect of the matter was emphasised by Lord Upjohn in the case of Faulconbridge (H.M. Inspector of Taxes) v. National Employers Mutual General Insurance Association Ltd. (1952) 33 Tax Cases 103, at p. 125.
Finally, viewed in the light of the other cases, I think it is clear that when Lord Macmillan speaks of the cardinal requirement being, complete identity between the contributors and the participators, he is not referring to individual identity but to identity as a class, so that at any given moment of time, the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgment, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in their place in the future." It was stated by Shri Korde that the members may come, they may go, but they take the position of the member at a particular point of time. The case of a housing society cannot be equated with a club.
40. Adverting our attention to the transfer from and the receipt issued by the society with reference to the resolution passed, it stated that first approval of transfer payment follows that payment is made after the member has gone out. The transferor assigned all rights to the transferee in essence. The transferor cannot be construed to be a member. There was no identity between the contributor and the participator as the payment is made not as a member but as a transferor subsequent upon the surrender of his rights. In essence it cannot be said to be a voluntary payment. It is a conditional payment. It does not satisfy the test of mutuality. The procedure of transfer was explained with reference to Clause 24 of the bye-laws.
41. To supplement the arguments of Shri Korde, Shri Dave, CIT Departmental Representative, argued the case. At the outset Shri Dave submitted that there is absolutely no legal bar for a co-operative society to earn profit. What is all required is that the object of the co-operative society should not be profiteering the co-operative societies can earn reasonable amount of profit, which is assessable to tax. For this proposition, Shri Dave relied on the decisions of the apex Court rendered in the case of Baburao Shantaram More v. Bombay Housing Board and Anr. AIR 1954 SC 153 and in the case of S.M. Mahendm & Co. v. State of Tamil Nadu AIR 1985 SC 270.
42. Shri Dave took us through the model bye-laws. Our attention was invited on Clauses 148 and 149 regarding the appropriation of profits.
43. Commenting on the applicability of the ratios laid down in the case of CIT v. Apsara Co-operative Housing Society Ltd. (supra) and CIT v.Adarsh Cooperative Housing Society Ltd. (supra). It was submitted that they cannot be said to be precedents for the present case. In these cases it was held that in co-operative societies there is no element of profit.
44. The jurisdictional High Court in the case of CIT v. Presidency Co-operative Housing Society Ltd. (supra) has held that looked at from a commercial point of view the clause for charge of premium was inserted in. order to enable the society to earn an income. As such, the jurisdictional High Court found the presence of element of profit in the co-operative housing society.
45. It was submitted that in the case of Adarsh Co-operative Housing Society Ltd. (supra) Hon'ble Gujarat High Court was concerned with the Gujarat Cooperative Societies Act. It is different from MCS Act. Our attention was invited on Section 110 of the MCS Act. This deals with the disposal of surplus assets. It does not prohibit division of surplus assets. The Gujarat Co-operative Societies Act prohibits such division of surplus. This was stated to be a testing feature Shri Dave explained the text and context of the decisions. It was explained that these two decisions were delivered in a different context. Hence, these cannot be used for deciding the present issue.
46. In explaining the principle of mutuality, Shri Dave discussed the concept of inter se transaction and class of member as a whole. It was submitted that complete identity of the contributor and the participator is sine qua non to attract the principle of mutuality. He discussed the concept of common identity.
47. Shri Dave read out the various provisions of Maharashtra Ownership Flats Act, 1963 (hereinafter called MOFA) and MCS Act, to inculcate that premium was not paid out of the volition or free will. It was not a voluntary payment. It was a compulsory exaction. De hors such payment, transfer was not possible.
48. It was stated that creation of a co-operative society is a condition precedent for sale of flats. As soon as promoter, sells out 10 flats, it is mandatory on his part to form a co-operative society.
Remaining flats he can keep for himself. The obligation to form a co-operative society is mandatory in terms of Section 10 of the MOFA.Ownership of flats vests in co-operative society and not with flat owner. Further, it was argued that for the sake of mutuality it is essential that the member should join the society voluntarily. It was submitted that Sections 4 and 10 of MOFA makes it obligatory for a person to join the co-operative society in case he is willing to purchase a flat in multi-storeyed building. There is statutory compulsion to join the society. Our attention was invited on the model bye-laws. Various clauses were referred to in order to explain that the membership in housing society is a necessary requirement for acquiring the flat.
49. Shri Dave submitted that as per Section 2(19) of the MCS Act members could be of four types; Viz., member, associate member, nominal member and sympathizer member. In the present case, as per Clause 16 of bye-laws, there are three classes of members, viz., members, associate members and nominal members. A member holds a flat as owner. An associate member holds a flat jointly with the member. A nominal member is one to whom the flat is sublet. Shri Dave submitted that all the members cannot participate in the activities of the society. All the contributors are not the participators. As such, the test of mutuality fails.
50. Further, with reference to Section 110 of the MCS Act, it was submitted that the surplus when liquidated, the participators are not the same. Non-occupancy charges are levied on the members by the society. The nominal member has to pay certain charges for occupancy. A stranger could be a nominal member. The society is not a college of members but is a collage of members, having distinct and separate rights conferred upon them. There is a clear-cut distinction between the members who reside and who do not reside but participate in the contribution.
51. It was submitted that the nominal member cannot be evicted once he occupied the flat as a tenant He is a protected tenant under the Bombay Rent Act, 1947. The members do not remain as a class as because there are distinct categories of members, one occupying the flat and the other not occupying and letting or providing to the nominal member.
52. Shri Dave submitted that subsequent upon the demise of a member, the dispute between the associate member and legal heirs cannot be decided by the society. So, there are classes within classes.
53. Shri Dave stated that the dominant idea for forming the co-operative housing society is to be ascertained Law interdicts profiteering in co-operative society. In co-operative housing societies there is no restriction as to the earning of profit. As such the co-operative housing societies are not precluded from adopting commercial angle while fixing the amount of premium. The purpose is to benefit the society and to enrich its funds. The motive of profit is, therefore, engrained.
54. Shri Dave referred to the decision of the apex Court rendered in the case of HMT House Building Co-operative Society v. M.Venkataswamappa AIR 1995 SC 2253. It was submitted that abrasions in the co-operative movements were taken care of by the highest Court of the land. In this case allegations were made against the society regarding collection of huge amounts from different applicants for site who were not even members of the society.
55. Shri Dave discussed various modes by which the society can raise funds. Voluntary donation is one of such modes. It is pertinent to note that as per 2001 Model Bye Laws, voluntary donations cannot be charged from transferor or transferee. The society can earn profit while effecting the transfer. It cannot earn profit when a member resigns, when a member is expelled, and from nominee and legal heir. Subsequent upon the resignation of the member, the title of the flat will vest with the society. Various clauses of the bye-laws were referred to.
Clause 33 deals with acquisition of shares by the society. Clause 68 deals with payment of value of shares, Clause 57 deals with acquisition of shares by the expelled member. In respect of nominee and expelled member, the procedure is same. The highest offer is accepted. This was stated to prove that there existed a profit motive and there are situations where the society earns profit.
56. Shri Dave discussed the procedure for transfer of flat. Various clauses of the bye-laws were read out to explain the procedure. Shri Dave stated that ownership cannot remain in vacuum. The flat was owned by someone at a particular point of time. It cannot be said that when transfer was in the offing the ownership vested in the transferee. Two persons simultaneously cannot hold same share. As such the principle of mutuality cannot be invoked. He also made distinction between legal possession and possession by consent. He discussed the right of equitable owner. Our attention was invited on the various steps and procedural formalities which are necessary for effecting the transfer.
It was contended that it hits the basic root of mutuality. Therefore, it is to be taxed.
57. Shri Dave invited our attention on the receipts issued by the assessee-society. Both the receipts are dt. 23rd May, 1996. It was stated that the assessee received the amount on 20th May, 1996. So long the transfer is not effected, the possession is not given. The property remains with the transferor. The transferee does not become the member of the society. Therefore, the payment received from the transferee is not the payment from the member. The principle of mutuality cannot be extended and the amount received by the society towards the premium on transfer is exigible to tax.
58. Shri Korde elaborated this aspect. It was submitted that mutuality exists among members only. The transferee cannot be considered to be the member soon after the payment, as such, the principle of mutuality fails. Besides, payment by the transferee is not authorised by the bye-laws. Only transferor is required to make the payment. Mere application for admission to membership together with payment of necessary fees does not invest a person with the position of a member.
This is so because while admitting an application to membership, the managing committee has to consider not merely compliance of technicalities but also the position, status, desirability of a person to be a member, etc. It is only after the committee is satisfied on these points that it has to admit one to membership. As per Section 26 of the MCS Act, 1960, no rights of membership to be exercised till due payments are made. It was submitted that a person cannot become a member, unless the application for membership is granted by the managing committee of the society. Mere payment of fees of membership to the secretary or even entering the applicant's name in the register of members does not make him a member. Rule 19 of the Maharashtra Co-operative Societies Rules, 1961, requires various conditions to be complied with for admission for membership. It was submitted that the transferee cannot be construed to be a member. As such the transfer premium received from the transferee is exigible to tax. The principles of mutuality cannot be invoked in the facts and circumstances of the case, as the basic requirements of mutuality are missing.
59. We have heard the rival submissions in the light of material placed before us and precedents relied upon. The short question, which arises for our consideration in this appeal is whether the income received by the assessee, which is a co-operative housing society, by way of premium on transfer of flat is exigible to tax or is exempt on the principle of mutuality 60. The principle of co-operation is enunciated in our scripture, In Kathopanisad it is said : Let him protect us. May he bless us with bliss of knowledge. Let us exert together. May what we study, be well studied. May we not quarrel with each other. Om Peace! Peace!! Peace!!!.
61. In the last Sukta 191 of Mandala 10 of Rigved the following three verses are significant : lekuks ea=% lfefr lekuh lekua eu% lg fpes"kke~ lekua eU=kfHka e=s; o% lekusu oks gfo"kk tqgksfe lekuh o vkr% lekUr kfu o% Oh, Men, you be of one thought, talk the same philosophy, be of the same mind and just as the Gods with common intelligence eat the same oblations, so you with common intelligence share the wealth together.
Oh, Men, you should utter the same mantras, you should come together in cooperation, your minds should be one and you should perform your duty together with one thought.
Oh, Men, our prayers should be one, our hearts should unite; we should have one mind and only one thought and we should organize ourselves together." So the basic principle of co-operation in all types of activity is sought in these verses.
62. This gives us an idea of the team spirit. It is inculcated in the scripture that no progress is possible without the co-operation. The tenets of cooperation in all types of activity are embodied in the Vedas. Co-operation in the sense of working together for a common result is perhaps as old as human civilization. When primitive men hunted and their womenfolk prepared the food there was elementary co-operation. In this sense Dr. Johnson wrote of the larger and infinitely more varied economic order of his time that : "the business of life is carried on by general co-operation". We have recognised the virtues of co-operation in our fables and stores. The blind man, the story goes, could not go on in his journey, from the village to another, because he could not see; the lame man could not similarly proceed, because his legs were unequal to the task but the blind man with the lame man, perched on his shoulder, could easily accomplish the distance; the legs of the one co-operating with the eyes of the other.
But that at best is unconscious co-operation; even in its general sense the word usually is reserved for a designed common effort.
63. In the guilds among the freemen of the English villages of the 15th century, as in the mujins or mutual aid societies of Japan, and the fruitieres of Switzerland, it was different. In these countries as elsewhere such bodies were voluntary and they arose amongst groups of people roughly on an equality. England can be said to be the motherland of the co-operative activity. The first society or organisation based on co-operative principles came into existence in England in or about the middle of the 19th century. This society was known as Rochdale Pioneers. It was formed by a group of weavers. Rochdale Pioneers became the founders of co-operative movement. The next pioneers were Germans where the co-operative movement spread on a large scale and in course of time the movement spread almost throughout the world.64. The very basis of co-operative movement which owes its impetus to Rochdale Pioneers of England is constituted by the following principles : 65. These principles have been recognised by a Full Bench of the Hon'ble Madhya Pradesh High Court in the case of Collective Farming Society Ltd. and Ors. v. State of Madhya Pradesh and Ors. (supra).
Hon'ble Bombay High Court also recognised the aforesaid principles in the case of St. Anthony's Cooperative Society Ltd. v. Secretary, Co-operation & Textile Department (2000) 4 Mh LJ 642.
66. What objective and scope of co-operative legislation should be, have been succinctly described by Mr. Watkin in his preface to International Handbook of Co-operative Legislation : "True co-operation draws its inspiration from realms where the state's writ does not run.
Co-operative movements are not created by legislation. Nevertheless, without an appropriate legislative framework a cooperative movement in the form of a growing economic organism is not possible or even conceivable. The right of individuals to associate in cooperative societies and the right of the societies to unite in federations must be recognised. ..........The legal harness must allow for the free play of fundamental co-operative principles and the normal development of co-operative organisations according to the needs of their members and their own laws of growth." 67. Section 4 of the MCS Act provides for registration of co-operative societies in the State of Maharashtra. The section is worded as under : "4. Societies which may be registered : A society, which has as its objects the promotion of the economic interest or general welfare of its members or of the public, in accordance with co-operative principles or a society established with the object of facilitating the operations of any such society, may be registered under this Act : Provided that, no society shall be registered if it is likely to be economically unsound, or the registration of which may have an adverse effect on development of the co-operative movement, or the registration of which may be contrary to the policy directives which the State Government may, from time to time, issue." 68. Now the objections of the Revenue to the treatment of the assessee as a mutual concern, as put forth before us on its behalf, were basically three-fold, viz, the assessee-society is not a voluntary association, there is profit motive in receiving the amount of premium, and principle of mutuality cannot be extended in the facts and circumstances of the present case, 69. Adverting to the voluntary aspect, we find that the word "voluntary" connotes resulting from free choice. Unconstrained by interference, unimpelled by another's influence. A society could only be registered if it is in accordance with the co-operative principles, and is a voluntary association. That aspect is engrained in the requirement for getting the registration done. Once the registration is granted, it can be presumed that the registrar of co-operative societies in Mumbai found this to be a voluntary association, Co-operative movement is peoples voluntary movement. It is to be utilised for the normal needs of the people. In the arena of housing it is a blessing to the society. In order to arrest the evil of capitalism some norms are fixed to promote the movement in a healthy way. Section 10 of the MOFA makes it mandatory for the promoter to form a society as soon as minimum number of persons required to from a co-operative housing society have taken place.
70. Members join the society out of their free choice. There is no compulsion to join the society. There is no compulsion to continue having joined once. The members are free to take advantage of the services of the society to the extent considered necessary by them.
They do all that out of their own volition. MOFA is enacted to buttress the cause of co-operative movement and not to defeat it. As such, it cannot be said the member who purchases a flat in a co-operative housing society does so out of compulsion. As such, we are not inclined to accept the argument of Shri Dave that the act of joining the society is not voluntary.
71. Coming now to the profit aspect, to understand this concept it is necessary to see the object of the co-operative movement. Elimination of the middleman and protection against exploitation was the fundamental object of co-operative movement. It was felt that the consumer had to pay more because of the army of middlemen. The producer receives very little for his trouble and skill. The lion share goes to the middleman. With its belief in the doctrine of the protection of the weak with its firm desire for distributive justice, co-operation naturally hates exploitation by one group of another. The co-operative movement proposes to bring about by the consumers or the producers themselves performing the necessary services. The motive is service to the member, safeguard of the member against exploitation. Ex consequenti, if some profit results, it is distributed amongst the members,Baburao Shantaram More v. Bombay Housing Board and Anr. (supra), Hon'ble apex Court has held that co-operative housing societies may earn profits which may be distributed amongst their members. In the case of S.M. Mahendru & Co. v. State of Tamil Nadu and Anr. (supra) Hon'ble Supreme Court has held that the object of promoting the economic interests of the members has to be achieved by following co-operative principles where the profit motive will be restricted to a reasonable level unlike other commercial bodies where sky is the limit so far as their desire to earn profits is concerned.
73. Co-operation evokes loyalty, fellowship and a corporate feeling.
Cooperation, therefore, appeals to self-interest as well as to social instinct, It is because of the spirit of service in co-operation that it helps not merely the economic, but also the social well-being of the community that betakes to cooperation. Philanthropy is, no doubt, one of the noblest instincts of humanity, but philanthropy waits till suffering arises and then steps in to relieve it. But true benevolence arising from a sense of social service will avoid the evil day and use preventive measures, such measures, being intended not merely to hop, but to help people to help themselves. As such, there is no room for profit motive. However, if there is some profit in the deal, it goes for the benefit of the members only. The protect the co-operative movement, the apex Court declared in the aforesaid decisions that the co-operative societies may earn profits. Earning of profit is different from profiteering. Just because the profit is earned, it cannot be said that the motive was there to earn profit. It could just be a natural consequence in the direction of achieving the goal of co-operative movement.
74. Clause 3(xii) of the bye-laws defines premium on transfer of shares to mean and include the amount payable to the society by the member, transferring his shares and interest in the capital/property of the society, in addition to the transfer fee as provided under Clause 40(d)(vi) of the bye-laws.
(d) If the committee is satisfied that the member is prima facie eligible to transfer his shares and interest in the capital/property of the society, the committee shall direct the secretary of the society to inform the member within 3 days of the decision of the committee to make the compliance as under: (vii) To pay the amount of premium at a rate to be fixed by the general body meeting, not exceeding 2.5 per cent of the difference between the book value of the flat and the price realized by the transferor on transfer of the flat, or Rs. 25,000 whichever is less.
No additional amount by way of donation etc. will be taken unless it is paid voluntarily by the member.
Note : The condition at sr. No. (vii) above shall not apply to transfers of shares and interest of the transferor in the capital/property of the society to the member of his family or to his nominee or his heir/legal representative." 76. It transpires from the perusal of the aforesaid rule that the maximum amount of premium cannot exceed Rs. 25,000. It is as per the norms set out by the Government. The society can raise fund only for achieving the objects of the society and not for any other purpose. So long the society is charging the amount of premium within the, framework of law, no profit motive can be attributed to the society.
However, if it is found that the society charged more than what is prescribed under the law, in that eventuality, of course stern action should be taken against the society.
77. In the case of Presidency Co-operative Housing Society Ltd (supra), Hon'ble Bombay High Court has held that the receipt of the amount by the society can never be considered as akin to a windfall because the receipt of the amount by the society was under the terms of the contract which was entered into by the society with its members. It is pertinent to note that this issue was not decided in the context of mutuality. In the present case the assessee claimed exemption on the ground of mutuality.
78. In the case of Adarsh Co-operative Housing Society Ltd (supra), it was held that the income of a mutual concern is not exigible to tax.
The co-operative housing society was found to be a mutual concern. The income was exempted on the principle that no one can make a profit by transacting with oneself. In this case the Revenue authorities found that the amounts contributed by the outgoing members were utilised by the society for extending common amenities to the members. The corpus fund of the assessee was not divisible. The Hon'ble High Court has held that, the right of members to deal with the surplus was not destroyed but only restricted to the extent that instead of dividing the corpus pro rata, it has confined to utilization of the surplus for the objectives as per their own decision. This did not detract from the concept of return of surplus to members which they had "contributed. On this factual backdrop the assessee was treated as a mutual concern. As such, its income was not liable to tax. Similar view was taken in the case of Apsara Co-operative Housing Society Ltd. (supra). The element of mutuality was found in respect of the transfer fee. As such, it was held that the receipt was not subject to tax. We have noted the difference in the provision of MCS Act and Gujarat CS Act in this regard.
79. The fact that under certain circumstances society is empowered to sell the flat to the highest bidder is not a material alliunde to which it can be said that there exists a profit motive. Actually society acts only in the interest of the member. Entire sale proceeds go to the member or his heirs as per the prescription of bye-law 68(v) of the society, The society has no control over the transfer. It has no control over the price to be charged. It enters into the picture only when the committee is intimated about the proposal, Then it steps in and asks for premium, as provided for in the bye-laws.
80. It is true that the rate of premium is decided by the general body, but in no case it can exceed the prescribed limits. Income is more general term than profits or gains, the words 'income' is not limited by the words "profits and gains". A receipt may be taxable as income although it may contain no element of profit or gain. In order to bring the premium within the net of tax there should exist a pervading profit motive. In the present case the premium was taxed under the head "Other source". It was not taxed as "Profits and gains of business". As such it is difficult to say that the assessee had profit motive in accepting the premium from the member on the transfer of flat.
81. No one can make a profit out of himself. In short this is the principle of mutuality. The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. There must be complete identity between the contributors and the participators. If all the participators to the common fund are also contributors and their identity is established, then the test of mutuality is satisfied. The contributors to the common fund and the participators in the surplus must be an identical body.
82. Where a number of persons combined together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. These must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which is offers does not affect the mutuality of the enterprise. Members' clubs are an example of a mutual undertaking; but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting.
83. In the case of Styles (supra), Lord Macmillan clearly said that all participators must be contributors to the common fund and not that all participators must be entitled to contribute. The essence of mutuality lies in the return of what one has contributed to a common fund. The property belongs to the members. It is a fallacy, Take the example of a club. If a member orders a dinner and consumes it, whether it can be said that it amounted to a sale This is not a sale. The fundamental thing is that the whole property is vested in the members.
84. We find that the transfer form was given on 4th May, 1996. The premium was paid on 23rd May, 1996. The transfer was effected subsequent upon the payment of premium only. As on the date of the payment of premium, the transferor was the owner. De hors payment of premium, it was not possible to get the flat transferred in the name of transferee. As such, we hold that when the premium was paid the transferor was the owner of the flat. He continued his membership till the execution of the transfer.
85. Co-operative housing societies in our country are playing a very special and prominent role in catering to the housing needs of our people. If the society is a voluntary association, created for mutual help without profit motive, no tax is being charged on the income of such society. This profile of taxation at times tempts the human ingenuity to defile the law. Consequently the spirit of mutuality is abused with impurity. To hoodwink the law premium is worded under different names, viz., donation, welfare fund, common amenities fund, etc. etc, Such contributions are compulsive to effect the transfer.
Society can put interdict on the transfer de hors such contribution. As such, there is quid pro quo in accepting such contributions. Such charges are neither legal nor voluntary. Profit is the prime object for making such charges to effect the transfer. This amounts to malpractice. Such unlawful or illegal means should not be encouraged.
86. Bacon said, "laws are like cobwebs; where the small files are caught, and the great breakthrough". To maintain the majesty of law, it is imperative that innocent should not suffer and recalcitrant should not go scot-free. If a cooperative housing society indulged in malpractices and adopted unlawful or illegal means to achieve the objective, it should face the consequences. But if there is no evidence apropos any malpractice, it won't be fair to view the society with suspicion. If the premium is charged within the limits prescribed under law, no profit motive can be attributed to the society. It is just, to ensure an income to the society which is to be utilised for the common good. However, if the excess amount is charged--be it donation or payment under any other nomenclature--profit motive will pervade and mutuality will cease to exist. Ex consequenti, the profit will be exigible to tax.
87. The identity of the recipient with the contributor is a condition precedent to enable the benefit of mutuality. In the present case we find that both the parties to the transaction are the contributors towards the premium. As per law, it is the obligation of the transferor to pay the premium. We find that with the common consent, the transferor and the transferee divided equally the premium and paid it to the society. The society issued separate receipts to the transferor and transferee. At the time of making payment the transferee was not the member of the society. As such, the amount paid by the transferee is not covered by the principle of mutuality. The transferor made the payment in the capacity of a member. The cardinal requirement for mutuality is that a contributor to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. For this doctrine to apply, it is sine qua non that there should be complete identity between the contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate. It does not matter that the class may be diminished by persons going out of this scheme, or increased by others coming in. We find that the transferor satisfied the test of mutuality. When the premium was paid, he was the member of the society. He received the consideration for alienating his right in favour of the transferee. Legally speaking the transferee stepped into the shoes of the transferor and became eligible for all the benefits which were heretobefore available to the transferor. But at the time of effecting the transfer, the transferee was not the member. As such, the amount received from the transferee will not satisfy the test of mutuality. Resultantly the amount received from the transferor is not exigible to tax, whereas the amount received from the transferee is exigible to tax. We decide the issue accordingly.
88. All the issues were not referred for the consideration of the Special Bench. Therefore, the remaining issues will be decided by the Division Bench. We direct the Registry to place this appeal before the Division Bench for deciding the remaining issues.