Monday, 14 April 2014

Taxability of Housing Societies


Taxability of Housing Societies
In general the perception is that income of Co–operative Societies is not chargeable to tax and therefore many societies do not bother to take PAN No. & file Income Tax returns. This is a wrong perception since though certain types of income of CHS are exempt there are other incomes which are chargeable to Tax.
         We now examine on a case by case basis the income which is normally earned by a Co – Operative Society’s:

a)   Contribution from Members :
This are the most commonly credited accounts in profit &loss account of    any CHS . They are credited under different heads namely Maintenance charges Municipal Taxes, Electricity Charges, Lift Maintenances Charges, Water Charges etc.
 It may be emphasized that the society merely acts as an agent which collects this charges on behalf of members & spends the same to meet the various joint expenses of the society. Any surplus generated due to these types of income is not chargeable to tax as it is exempt based on the ‘concept of Mutuality’. The basic principle of Mutuality is a mutual association arises when persons forming a group; associate together for a common object and contribute money for achieving that object and divide the surplus amongst them in the character. The cardinal requirement in case of mutual association is that “All the contributors to the common fund must be entitled to participate in the surplus & all the participators to the surplus must be contributors to the common trade. In other words there should be complete identity between the contributors and the participators.
b) Interest Charged on member Outstanding  :
Interest charged by society on outstanding dues of members again forms a part of contribution from members. Moreover it qualifies the test of mutuality since the contributors & participators are the same persons. Thus this is also exempt on concept of Mutuality.
c) Interest Income Earned on Investments 
Interest income earned can be further classified into interest earned from investments made in Co-operative Banks & interest from other Investments. Interest earned from any investment made in Co-operative Banks qualifies for deduction @ 100% under section 80P(d). However other interest income on investments is fully taxable.
d) Dividend  : 
Dividend income received from Indian Companies is fully exempt u/s 10 (34). Dividend received from Co-operative Banks qualifies for exemption under 80P(d) is therefore 100% deductible.
 e) Rental Income from Advertisement Hoardings   :
This is fully taxable under the head Business Income / Income from other sources. However expenses which can be directly attributable to earning of this income can be claimed against this income on a proportionate basis.
f) Rental from Mobile / Cable Towers etc  :
Rental from mobile & Cable Towers is taxable under the head Income from House Property; considering the same it is eligible for standard deduction u/s 24 (a) @ 30 % of the rent. Also if society has borrowed capital to construct said building in which the tower has been erected than a proportionate deduction can be claimed for interest paid on borrowed capital.
g) Rentals from use of open Spaces / Terrace   :
If the Rentals are received for use of open ground or terrace the point be noted is whatever it is received from Members or Non-members. If it is received from Members than it can be argued that it is not taxable on the grounds of “Mutuality”. If it is received from Non-members or outsiders it shall be fully taxable under the head Income from House Property & will qualify for deductions as mentioned earlier.
h) Non –Occupancy Charges   :
Though non – occupancy charges are being collected from members in their periodic Bills the income tax departments view point has been that this amount is received from a members who has not been staying in the premises of the society. Therefore though he is a contributor he is not enjoying the amenities of the society is thus not a participator. Considering the same the mutuality concept is not satisfied & therefore this income is chargeable to tax.
            
However this view point is debatable and can always be argued in society’s favour as in some of the courts case’s the ruling given is that “While comparing the contributors and participators in concept mutuality they should be compared as a class an not isolated or individual contributors”.
i) Parking Charges   : Again in this case the point to be seen is whether the collections are from members or Non – members. In case of collections from members they are covered by concept of Mutuality. However in case of Societies having shopping complexes parking charges collected from outsiders would be taxable.
         
We have covered most of the incomes likely to be earned by Co-operative Housing Society. However we have not touched upon Transfer fees as it is requires to be discussed at length & will be covered in a separate article. Moreover it may be hereby specified that all CHS earning business income qualify for a general deduction under section 80 P(2)(c) of Rs. 50000/-.This deduction can be claimed against business income and not against interest or any other income.
Also we may hereby emphasize that since most of the income’s of societies can fall in tax net it is compulsory to file Income tax return. Also if society is not having taxable income due to deduction available u/s 80 P(d) (i.e interest from Co-operative Banks being exempt) it is imperative on the part of the society to prove the same and this can be done only if Income Tax return is filed. Thus it may me said in conclusion that it is compulsory on the part of CHS to filing Income Tax returns regularly.
         Further the societies are taxed as per the following slab: _
Income upto   Rs 10000                                     10 %
Income upto   Rs 20000                                     20 %
Above 20000/-                                                  30 %
The income tax as arrived above has to be increased by 3 % of tax payable towards Education Cess and Higher education Cess.

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