1. Understanding Co-operative Housing Societies
A co-operative housing society (hereinafter referred to as ‘Society’) includes all types of societies, whether residential, commercial, or industrial. These societies are formed to collectively manage the affairs of a community, typically focusing on maintaining common amenities, property management, and ensuring shared responsibilities among members.
The functioning of these societies hinges on
contributions from members towards common expenses, ensuring the upkeep of
shared spaces and services. One key mode of collecting such contributions is
through the transfer fee.
2. Transfer Fee: A Mechanism for Common
Contributions
A transfer fee is a specific form of
contribution collected by a Society when a member transfers their flat, office,
or unit to another person. It represents an event-triggered contribution from
the member and is aimed at maintaining and improving common services for the
overall welfare of the society.
Unlike regular maintenance charges, which are
periodic, the transfer fee is linked to specific instances—namely, the sale or
transfer of ownership by a member. It is therefore an essential mechanism for
collecting contributions to fund the common expenses of the Society.
3. Transfer Fee as a Mutual Contribution
By its very nature, the transfer fee is not
a revenue-generating transaction but a form of contribution from members.
This fee is utilized for the common benefit of all members and
contributes towards the broader objectives of the Society, such as maintenance,
repairs, and improvements of common areas and services. It helps sustain the
collective infrastructure of the Society, ensuring its smooth functioning for all
its members.
The transfer fee reflects the collective ownership
and shared responsibility inherent in co-operative societies. Since it
directly supports the common good, the fee does not result in a profit or
income for the Society, but instead, strengthens the mutual welfare framework
that co-operatives are built upon.
4. The Principle of Mutuality in Income
Tax Law
The principle of mutuality is a core concept in
income tax law, particularly concerning entities like clubs, societies, and
associations. This principle asserts that when a group of people come together
to form a mutual association, where contributors and beneficiaries are the same,
no taxable income is generated because one cannot make a profit by dealing with
oneself.
This principle applies to co-operative societies,
where members contribute to a common pool for mutual benefit. The fundamental
argument is that transactions between members of the Society are not considered
income-generating for tax purposes since they are part of the same entity.
5. Supreme Court Ruling in ITO vs.
Venkatesh Premises Co-operative Society Ltd.
The Supreme Court of India, in the case of ITO
vs. Venkatesh Premises Co-operative Society Ltd. [2018] 402 ITR 670 (SC),
decisively settled the application of the principle of mutuality to transfer
fees in co-operative societies. The Court affirmed that:
"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."
This ruling reinforced the idea that amounts
received by a Society from its members—whether through transfer fees or
other contributions—cannot be considered income since the Society and its
members are not separate entities for this purpose.
6. Application of the Principle of
Mutuality to Transfer Fees
In light of the Supreme Court's ruling and the
established principle of mutuality, it can be conclusively stated that the transfer
fee received by a co-operative housing society from a member is not
liable to tax under the Income Tax Act.
The transfer fee is simply a mutual contribution, used
for the common benefit of all members, without resulting in any profit or
income for the Society. Hence, the principle of mutuality fully governs
the taxation treatment of transfer fees, ensuring that such amounts remain
outside the purview of income tax.
Conclusion
The principle of mutuality plays a pivotal role
in determining the taxability of contributions received by co-operative
societies. Transfer fees, being a mutual contribution from members, do not
amount to taxable income. The Supreme Court's ruling in the Venkatesh
Premises case has provided legal clarity, confirming that transfer fees
collected by societies from their members are not subject to tax under
the Income Tax Act, as they are inherently non-income transactions.
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