Commissioner Of Income Tax, Delhi ... vs M/S Talangang Coop. Group Housing ...
2010 Latest Caselaw 2995 Del

*              THE HIGH COURT OF DELHI AT NEW DELHI

%                                                Date of decision: 1st July, 2010

+                           ITA No.744/2010

       Commissioner of Income Tax, Delhi - VII         ..... Appellant
                  Through:     Ms.Sonia Mathur, Advocate

                                   versus

       M/s Talangang Coop. Group Housing
       Society Ltd.                                            ..... Respondent

Through: None

CORAM:

HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN

1. Whether reporters of the local papers be allowed to see the judgment?

2. To be referred to the Reporter or not?

3. Whether the judgment should be reported in the Digest?

DIPAK MISRA, CJ

This is an appeal under Section 260A of the Income Tax Act, 1961 (for

brevity „the Act‟) assailing the order dated 15th May, 2009 in ITA

No.779/Del/2006 passed by the Income Tax Appellate Tribunal, New Delhi (for

short „the tribunal‟) whereby the tribunal allowed the appeal preferred by the

assessee in part.

2. The factual matrix as is discernible is that the assessee filed the return of

income for assessment year 2001-2002 on 7th February, 2003 declaring a loss of

Rs.5,48,075/-. The case was selected for scrutiny and accordingly notices were

issued under Sections 143(2) and 142(1). The assessee, a cooperative society,

produced the books of accounts, the bank passbooks, the bills and vouchers and

such other documents as required by the assessing officer. The assessing officer

on the basis of a report submitted by the DDIT Unit-I, Delhi and the information

gathered by the auditors of the assessee society proceeded to finalise the

assessment.

3. Before the assessing officer the assessee claimed exemption on the

principles of mutuality. The assessing officer referred to the principles laid down

in CIT v. Royal Western India Turf Club (1953) 24 ITR 551 (SC), Chelmsford

Club v. CIT (2000) 243 ITR 89, Haryana State Co-operative Labour and

Construction Federation Ltd. v. CIT (2001) 252 ITR 265 (P&H) and culled out

the principle that a cooperative group society is not exempt from filing its return

nor from income derived from other than constructional activities. After culling

out the principle, the assessing officer referred to the letter dated 19th September,

2001 filed by the Administrator appointed by the Government of Delhi, scanned

the objects of the society and opined that the primary activity of the assessee

society is to collect money from members for construction of flats/houses and

subsequently allot the same to them. It further observed the money can be

collected under various heads and the money collected on all heads cannot be

exempted except constructional activities. In this backdrop, she expressed the

view that the equalization charges from new members, maintenance fund and

entry fee from power of attorney holders, interest on delayed payments and

interest from banks on FDRs were taxable. Quite apart from the above, the

assessing officer took note of the fact that the assessee had sold six shops during

the assessment year 2000-2001 and certain amount had been spent on construction

of the shops. The assessing officer held that this did tantamount to commercial

activity which is not objects of the society. Thus, it is held by the assessing officer

that the difference between the sale price and the construction price is to be treated

as income as short term capital gains of the assessee for the assessment year 2001-

2002. The amount spent on purchase of dustbins for the garden maintenance was

treated as capital nature and assessed as the same. As far as the receipt of interest

is concerned, the assessing officer came to hold that for the relevant assessment

year the assessee had shown interest receivable from the members and not being

incorporated in account and as the assessee was following the mercantile system,

it was treated as income. Being of this view, the assessing officer added

Rs.27,13,797/- towards income and deducted Rs.50,000/- under Section 80P. In

addition to the same, interest under Section 234 B was charged and a proceeding

under Section 271(1)(c) for imposition of penalty was initiated.

4. Being grieved and dissatisfied, the assessee preferred an appeal before

CIT(A) and contended that the conclusion arrived at by the assessing officer was

totally unjustified, violative of principles of natural justice and against the concept

of mutuality as is understood in law. It was also contended that the order passed

by the assessing officer was perverse inasmuch as she has not appreciated the facts

in proper perspective. The appellate authority held that no exemption from

taxation of the income of the society was available as there was no obligation on

the part of the society to return the funds to the contributors; that the society had

constructed the shops as a business venture and had admitted to derive profit out

of the venture; that the society instead of maintaining the entire premises

belonging to the society for the common benefit of its members had indulged in

accepting new members on power of attorney basis and as a consideration for the

same had collected equalization charges and maintenance fund as entry fee in the

name of external development charges and hence, the concept of equalization was

not to be applicable. The assessee put forth the claim that the shops had been

constructed by the society for the benefits of its members / residents within the

complex of the society to meet the daily needs of the members of the society. No

sanction letter from the Municipal Corporation of Delhi was furnished to validate

such construction of shops within the complex of the society and there was a profit

motive for which considerations had been duly received and, therefore, with the

transfer of capital assets within the meaning of Section 2(47)(v) of the Act, short

term capital gain was consequent within the meaning of Section 45 of the Act and,

therefore, the addition by the assessing officer cannot be faulted; that the purchase

of the dustbins and the purchase of benches having been identified as capital

expenses by the auditors the finding of the assessing officer treating the said

expenses as capital in nature cannot be faulted; that the amount receivable from

the members having been quantified by the auditors as interest receivable from the

members which had not been accounted for by the assessee and the maintenance

of accounts was under mercantile system, the same should have been provided in

the accounts for the year under consideration and thus the addition was justified;

and that the charge of interest under Section 234 B being consequential, no

interference was called for. Being of this view, the appellate authority dismissed

the appeal.

5. Aggrieved by the aforesaid order of the appellate authority, the assessee

approached the tribunal in second appeal. The tribunal noted the submission of

the assessee and that of the revenue and placing reliance on Shree Parleshwar Co-

op. Housing Society Ltd. v. ITO, Ward 21(2)(4), (Mum) [2006) 8 SOT 668

(Mumbai) came to hold that once it is accepted that principle of mutuality is

applicable inasmuch as the object of the society as enumerated under clause 8 goes

a long way to show that the assessee society could do all such things which are

incidental or conducive to attain or any or all of the other objects and the clauses

of the bye laws pertaining to development and construction of residential houses /

flats for the members to provide common amenities and facilities as may be found

practicable by the Delhi Development Authority and Municipal Corporation of

Delhi and such other authorities and, therefore, the doctrine of equalization gets

attracted; the maintenance fund and entry fee from the power of attorney holders

are in direct relation with the members of the society and the funds are also

collected from the members of the society and the shops having been constructed

within the premises of the society having been approved by the concerned

government authority it could be irresistibly concluded that the shops were

constructed to cater to the needs of the members of the society only and no outside

customer is allowed in the complex of the society and there has been necessary

sanction for construction of such buildings, therefore, principles of mutuality

would also get attracted to the same; that as regards the issue of interest the

principles of mutuality would also apply as it is receivable from the members of

the society. As regards the capitalization of cost of purchase of the dustbins and

benches, the assessing officer was directed to grant depreciation on the capitalized

amount as it is a capital expenditure. After so holding, the tribunal directed to

delete the additions made out on account of equalization charges, maintenance

funds as entry fee from the power of attorney holders, the interest receivable from

the members of the society as also the income determined on account of the shops

allotted and eventually allowed the appeal in part.

6. Ms. Sonia Mathur, learned counsel for the revenue submitted that the

tribunal has grossly erred in applying the principle of mutuality though factual

matrix did not so deserve. It is contended by her that the tribunal totally failed to

appreciate that interest income derived by the assessee cooperative society from

the deposits made by it out of the contributions made by the members of the

society could not come within the ambit and sweep of the principle of mutuality.

It is her further submission that the tribunal has read the bye laws of the society in

the larger expanse though it should have been read strictly that the principle of

mutuality would only apply to the cost incurred for development in the matter

relating to construction. It is proponed by Ms. Mathur that the society could not

have constructed shops without proper sanction and that apart, this being a

business activity, the doctrine of mutuality could not have been taken aid of by the

society.

7. To appreciate the submissions raised by learned counsel for the revenue, we

have carefully perused the order passed by the forums below. In this connection,

we may refer with profit to the decision in Director of Income Tax (Exemptions)

v. All India Oriental Bank of Commerce Welfare Society, (2003) 184 CTR

(Delhi) 274, wherein a Division Bench of this Court posed the question whether

the judgment rendered by the apex Court in Chelmsford Club v. Commissioner of

Income Tax, (2000) 243 ITR 89 would apply where the income earned on

deposits made out of members and non-members contributions, donation and

subscriptions are seggregable or not and dealing with the said question, answered

the issue as follows:

"3. The issue with regard to the concept and principle of mutuality has been elaborately examined by the apex Court in Chelmsford Club v. CIT (2000) 243 ITR 89. Their lordships have held that where a number of persons combine together 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 generated cannot in any sense be regarded as profits chargeable to tax. It has been observed that what is required to be seen is

whether there is a complete identity between the contributors and participators. Once the identity of the contributor to the fund of the recipients of the funds; the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words as an instrument obtained to their mandate; and the impossibility that the contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves is established, the doctrine of mutuality is established."

8. In the case at hand, the tribunal has appreciated that a member who was

registered earlier and the member who gets registered later on cannot stand on the

same footing. The earlier member had paid less amount as compared to a member

who joined subsequently but the same does not really affect the nature of the

society or the transactions with such members and the principle of mutuality is

still attracted. The character of the society, needless to say, cannot be said to have

changed. As regards the activities of the society, the tribunal has held that the bye

laws clearly and categorically stipulate that the assessee-society is entitled to do all

such things which are incidental or conducive to attain any or all of the other

objects. The clauses in the bye laws clearly exposit that it is for the development

and construction of residential houses, flats for the members to provide the

members necessary common amenities and facilities as may be found practicable

by the DDA and the Municipal Corporation of Delhi and such other authorities

and, therefore, the society, to cater to the needs of the members, have constructed

the shops and no outside consumers are allowed to the complex of the society.

The shops were built after obtaining proper certificate from the concerned

engineer. In this factual matrix, the tribunal has held that the principle of

mutuality would apply to the above income.

9. As regards the interest derived from the deposits made by the society out of

the contributions made by the members of the society, the tribunal placing reliance

on the decision in All India Oriental Bank of Commerce Welfare Society (supra)

has expressed the view that once the identity of the contributor to the fund of

recipients is accepted, the principle of mutuality would get attracted. It is also

noticeable that there is nothing on record to show that the amount collected from

the respondent has been diverted for any other purpose.

10. In view of the aforesaid analysis, we concur with the conclusion of the

tribunal and accordingly the appeal stands dismissed in limine.

CHIEF JUSTICE

MANMOHAN, J.

JULY 01, 2010 nm/pk