What are the highlights of the latest Supreme Court judgment on the concept of mutuality of co-operative societies
In the case of Venkatesh Premises Co-operative Society, the Supreme Court (SC) provided a big relief to co-operative societies by dismissing the claim of the income tax (IT) authorities to levy tax on various receipts such as non-occupancy charges, transfer charges, common amenity fund charges and certain other charges on the grounds of principle of mutuality. The fact that the receipts are in excess of the limits prescribed by the state government does not mean that the societies have rendered services for profit and are subject to tax.
The apex court observed that the doctrine of mutuality is based on common law principles that a person cannot profit from self. Therefore, the amount received from self cannot be considered as income and, accordingly, taxed.
Section 2(24(vii) of the IT Act, 1961, defines taxable income in a specific condition. It states that the business income of co-operative societies is taxable under Section 2(24)(vii) of the IT Act and stands excluded from the principles of mutuality.
The essence of the principle of mutuality is in the commonality of contributors and participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus and the participators in the surplus are contributors to common fund.
Participants do not have property right to common fund nor can they sell their share of common fund. Cessation of membership results in loss of right to participation in common fund without receiving financial benefit.
Any amount left over as surplus at the end of the financial year after meeting maintenance and other common charges constitutes surplus fund of the society to be used for the common benefit of members and to meet heavy repairs and other contingencies. It does not attain the character of profit or commerciality so as to attract tax.
Non-occupancy charges and transfer fees are considered non-taxable under the principles of doctrine of mutuality. Non-occupancy charges are payable by a member who does not occupy the premises but lets it out to a third person. The charges are again utilized for the common benefit of members.
Once a person is admitted as member, the members form a class. The identity of the individual member is irrelevant. Thus, the principle of mutuality is automatically attracted. The receipt essentially is from a member. Part of it may have been paid by the transferee is irrelevant as, ultimately, the amount is utilized for the mutual benefit of the members including the fresh member.
Premium receipts by a housing society to allow a member to construct using extra floor space (FSI) index is also not taxable on principles of mutuality as the receipts are utilized by the society for maintenance and infrastructure including to defray the extra burden on account of the additional FSI constructed.
Fresh construction by a society to utilize the extra FSI available, with grant of occupancy rights only to member who may have had to pay more as membership fees than an existing member, too, does not detract from the principle of mutuality as the contribution is ultimately used for the maintenance, repairs and facilities to members in the society including the additional construction. There cannot be bifurcation between the receipts and costs as non-mutual to deny exemption to the extent paid by the new members to qualify.