Is the transfer fee your society collects taxable? Supreme Court on mutuality in ITO v. Venkatesh Premises, decoded

Your society has collected transfer charges and non-occupancy charges for years and spent the money on repairs and common amenities. Now an income-tax notice arrives, treating those receipts as business income. The Supreme Court dealt with exactly this question in 2018, and its answer favours societies, but only within limits your committee must understand before relying on it.

The case in brief

Income Tax Officer, Mumbai v. Venkatesh Premises Cooperative Society Ltd. was decided by the Supreme Court on 12 March 2018 in Civil Appeal No. 2706 of 2018, (2018) 15 SCC 37. The bench was Rohinton Fali Nariman J. and Navin Sinha J.; the judgment was written by Sinha J.

The common question was whether certain receipts of co-operative societies from their members, namely non-occupancy charges, transfer charges, common amenity fund charges and certain other charges, are exempt from income tax under the doctrine of mutuality. The Revenue argued that such receipts are business income with an element of commerciality.

The Assessing Officer had taxed non-occupancy charges beyond 10% of the service charges permitted under the notification dated 9.8.2001, and the CIT(A) agreed. The ITAT held that the notification applies only to co-operative housing societies and not to a premises society, and also held the transfer fee paid by the transferee taxable because he was not yet a member when he paid. The Bombay High Court set aside the transferee finding but upheld taxability of receipts beyond the notification.

What the court decided

The Court restated the doctrine: a person cannot make a profit from himself, so an amount received from oneself is not income. The essence lies in the identity between the contributors to the common fund and those entitled to its surplus, and a surplus in that fund is not income but only an increase in the common fund meant to meet sudden eventualities.

Applying this, the Court held that transfer charges, non-occupancy charges and common amenity fund contributions in these cases were levied on resolutions of the society, in consonance with its bye-laws, and were indisputably used for maintenance, repairs, infrastructure and common amenities. On that footing they were not business income. On the transferee, it said:

> “Transfer charges are payable by the outgoing member. If for convenience, part of it is paid by the transferee, it would not partake the nature of profit or commerciality as the amount is appropriated only after the transferee is inducted as a member. In the event of non-admission, the amount is returned.” (para 19)

On the notification, it agreed with the High Court that the notification of 9.8.2001 applies only to co-operative housing societies and not to a premises society of non-residential premises (para 24). All Revenue appeals were dismissed and the society's appeal was allowed.

Why it matters for your society

The tax answer turned on where the money comes from and where it goes. Charges taken from members, fixed by the society's own resolutions under its bye-laws, and spent only on the members' common benefit stay within the mutuality principle.

What your committee should do

1. 1Minute the resolutions. Have the General Body or committee resolution fixing each charge recorded in the minutes, consistent with the bye-laws. The Court noted that the charges were levied on resolutions and in consonance with bye-laws.
2. 2Keep premium within bye-law 38(e)(ix). The premium is at the rate fixed by the General Body Meeting but within the limits of the circular of the Department of Co-operation, Government of Maharashtra, and the bye-law says no additional donation or contribution under any other pretext is to be recovered from transferor or transferee.
3. 3Treat non-occupancy charges as the bye-laws do. They are among the charges a society may collect under bye-law 65(xi) and 67(x).
4. 4Show the money going into repairs and amenities. Keep a separate ledger or head for these receipts.
5. 5Keep the refund-on-non-admission practice. If a transferee pays part of the charge and is not admitted, return it, and record that you did.
6. 6Hand the working to the auditor. Give the resolutions, ledgers and vouchers to your auditor and tax advisor before the return is filed, not after a notice.

Limits of this ruling

The premises-society point comes first. The Court held only that the notification of 9.8.2001, issued under Section 79-A of the Maharashtra Co-operative Societies Act, 1960, applies to co-operative housing societies and not to a premises society of non-residential premises (para 24). It also said the New India Co-operative Housing Society case concerned a different cause of action, and that it was not the Revenue's case that the receipts were not used for the contributors' common benefit (para 22). It did not hold, in general terms, that charging above a Government-fixed limit is tax-free. Your society is a housing society and the notification does apply to you, so this case is no licence to charge above the limit. Recovering more than your bye-laws allow remains a separate exposure under co-operative law, even if mutuality answers the tax question.

The rest is equally narrow:

• •The transferee holding depends on the charge being payable by the outgoing member, the transferee paying part of it for convenience, the amount being appropriated only after induction, and refund on non-admission. It does not mean that anything taken from an incoming buyer is exempt.
• •The Court did not decide what follows if funds are shown to be used for something other than the members' common benefit; its reasoning rests on that not being in dispute.
• •It did not address receipts from genuine outsiders or non-members, did not discuss Articles 43B or 243ZI, and made no finding on the validity of the notification.

The case was decided in March 2018. Check the current position with your advocate and auditor. This article is general information, not advice on your society's return; consult your own auditor or tax advisor.