Commissioner Of Income-Tax v. Prabhukunj Co-Operative Housing Society Ltd.

Akil Kureshi, J.:— In these references, common question of taxability of 1 the receipts by a co-operative housing society from a portion of sale consideration received by its member at the time of transfer of the plot has arisen. In I.T.R No. 33 of 1998, the question framed is as under:

“Whether, on the facts and in the circumstances of the case, the Tribunal is justified in confirming the order of the Commissioner of Income-tax (Appeals) deleting the addition of Rs. 3,25,387 made on account of the premium account received for transfer of plots?”

2. A group of income-tax applications came up for consideration before the Division Bench where the Revenue wanted such a question to be referred in different cases but in similar factual background. The Revenue was of the opinion that the amount received by a co-operative society from the portion of the sale consideration received by its member at the time of transfer of the plot constituted its income and was, therefore, taxable under the Income-tax Act. The assessees opposed the applications basing reliance on the Division Bench decision of the Gujarat High Court in the case of CIT v. Adarsh Co-operative Housing Society Ltd. reported in (1995) 213 ITR 677 (Guj). The Division Bench noted that the Bombay High Court in the case of CIT v. Presidency Co-operative Housing Society Ltd. reported in (1995) 216 ITR 321 (Bom) had taken a different view. The court unable to subscribe to the view taken in the case of Adarsh Co-operative Housing Society Ltd. (supra) directed the Tribunal to furnish statement of case in all the matters and further referred the question for the opinion of a larger Bench. For some reason, these proceedings remained dormant for a long time and ultimately the present larger Bench came to be constituted. Advocates appearing for the Revenue as well as the assessees made detailed submissions and relied on several authorities to which we would refer to at appropriate stages.

3. Since the material facts are almost identical, for the purpose of this judgment, we may refer to the facts as arising in I.T.R No. 33 of 1998. The assessee is a co-operative housing society and was registered on December 16, 1943. For the assessment year 1986-87, the assessee filed its return of income showing total income of Rs. 17,879. The assessee-society had given its plots on lease to its members for the purpose of constructing residential units. The bye-laws of the society provided that upon transfer of a plot of land allotted to a member to incoming member, the society would collect 50 per cent, of the excess received by such outgoing member. During the year under consideration, the society collected such premium of Rs. 1,25,387 upon transfer of four plots. The society claimed that the premium amount was not a revenue receipt. The Assessing Officer in his order dated March 30, 1989, however, held that the assessee was not a cooperative society but an association of persons engaged in the business and, accordingly, added the said sum of Rs. 1,25,387 as the income of the assessee.

4. The society preferred appeal before the Commissioner of Income-tax (Appeals) and argued that the society is governed by the provisions contained in the Gujarat Co-operative Societies Act. The bye-laws of the society stipulate that the amount so collected is to be utilised partly for promoting a development fund and partly for direct expenditure for the development of the area and providing civic amenities in the society. According to the society, therefore, as per the principle of mutuality, such amount was not taxable in the hands of the society. The Commissioner of Income-tax (Appeals), following the decision of the Income-tax Appellate Tribunal in the case of Adarsh Co-operative Housing Society Ltd. allowed the appeal.

5. The Revenue carried the matter in appeal before the Tribunal. The Tri-bunal noted that the decision of the Income-tax Appellate Tribunal in the case of Adarsh Co-operative Housing Society Ltd. was also confirmed by the Gujarat High Court in the case of Adarsh Co-operative Housing Society Ltd. (supra) and dismissed the Revenue's appeal.

6. On the basis of such facts, the learned counsel for the Revenue sub-mitted that when a co-operative society receives a portion of the sale consideration upon its member transferring the plot, such receipt would partake of the character of a revenue receipt and would, accordingly, be taxed in the hands of the society. It was submitted that the principle of mutuality in such a case would not apply. It was strongly urged that the decision of the Bombay High Court in the case of Presidency Co-operative Housing Society Ltd. (supra) laid down the correct law. The decision of the Supreme Court in the case of Bangalore Club v. CIT reported in (2013) 350 ITR 509 (SC) was heavily relied upon to contend that the principle of mutuality has its inherent limitations.

7. Our attention was drawn to certain provisions of the Gujarat Cooperative Societies Act, 1961 (“the said Act” for short). It was pointed out that section 65 of the said Act provides that no part of the funds or assets of a society other than the dividend equalisation fund, and the net profits thereof, shall be paid by way of rebate or dividend or otherwise distributed to its members. It was pointed out that section 66 of the said Act provides for appropriation of profits by the society. Section 67(1) provides that every society which derives a profit, shall maintain a reserve fund. Section 107 of the said Act provides for winding up of a society. Section 115 provides that any surplus assets of a society which has been wound up, shall not be divided amongst its members but shall be devoted to any object or objects provided in the bye-laws of the society, if they specify that such a surplus shall be utilised for the particular purpose. Where the society has no such bye-laws, the surplus shall vest in the Registrar who shall hold it in trust and shall transfer it to the reserve fund of a new society registered with a similar object and serving more or less an area which the society to which the surplus belonged was serving. The proviso to section 115 provides for the manner in which the Registrar shall distribute such surplus in case no such society exists or is registered within three years of the cancellation of the registration of the society whose surplus is vested in the Registrar.

8. On the basis of such statutory provisions, it was contended that the amount of premium collected over a period of time from its outgoing members would remain the fund of society in perpetuity and even upon winding up of the society, would not be distributed amongst the members. In addition to placing heavy reliance on the decision of the Bombay High Court in the case of Presidency Co-operative Housing Society Ltd. (supra) and of the Supreme Court in the case of Bangalore Club (supra), following further decisions were cited before us.

(1) The English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl. I.T, [1948] 16 ITR 270 (PC) where the Privy Council found that the activities of co-operative society closely conformed to the pattern of an ordinary profit-making concern and held that the profits earned by the society upon sale of tea from its estate to its members would invite tax.

(2) Cit, Bombay City v. Royal Western India Turf Club Ltd. , (1953) 24 ITR 551 (SC) where the assessee-company carried on the business of a race course. The company claimed that in computing its total income, various items of receipts such as season admission tickets from members, daily admission gate tickets from members, use of private boxes by members, etc., should be excluded. The Supreme Court held that there was no mutuality between the members inter se and that, therefore, the principle of mutuality was not applicable.

(3) Delhi Stock Exchange Association Ltd. v. CIT reported in (1961) 41 ITR 495 (SC), in which the assessee was a stock exchange. The income accrued was distributed amongst the shareholders. It was held that receipts by the stock exchange association towards admission fee on account of authorised assistants and members are taxable as income from business and the concept of mutuality would not apply.

(4) Mantola Co-operative Thrift and Credit Society Ltd. v. CIT reported in [2014] 50 taxmann.com 278 (Delhi) in which the assessee-co-operative society was engaged in providing credit facility to its members. The society deposited surplus funds in fixed deposits and earned interest thereon. The court held that such interest would be assessable as “income from other sources” and not eligible for deduction under section 80P(2)(a)(i) of the Act.

9. On the other hand, learned advocates for the assessees submitted that the decision of this court in case of Adarsh Co-operative Housing Society Ltd. (supra), needs no reconsideration. It was also been followed in the later decision in the case of CIT v. Manekbaug Co-operative Housing Society Ltd. reported in [2012] 22 taxmann.com 220 (Guj). It was further argued that in the decision of the Bombay High Court in the case of Presidency Co-operative Housing Society Ltd. (supra), the question of mutuality was not considered. It was argued that the judgment of the Supreme Court in the case of Bangalore Club (supra), was rendered in entirely different fact situation. The ratio laid down therein in no manner disturbs the ratio in the case of Adarsh Co-operative Housing Society Ltd. (supra). It was pointed out that a similar view has been taken by other High Courts as well. Reference to all these judgments will be made at a later stage.

10. It was further contended that the bye-laws of the society provided for collection of 50 per cent, of the excess from the sale consideration upon a member transferring the plot to another person. Such amount would be utilised for maintenance of the society and for providing other facilities and amenities to the members. Thus, in one form or the other, the members themselves were contributing to the common fund of the society which in turn was utilised for the benefit of the members of the society. Counsel, therefore, contended that the principle of mutuality was applicable. There cannot be income from a person from his own self.

11. Since the bye-laws of the societies were not part of the paper book, the learned counsel, Shri K.M Parikh, for the Revenue provided a set of bye-laws of one such society and submitted that these bye-laws being standard bye-laws as prescribed by the co-operative department, such bye-laws may be taken as standard for the purpose of all the assessee-societies.

12. As per the bye-laws, some of the main objects of the society are:

(1) development of plots for allotment to the members to enable them to construct their residential units on them.

(2) to provide necessary funds to its members for construction of such houses.

(3) to make necessary arrangements for health, Education and social activities of the members.

(4) properly maintaining the properties of the society.

• Chapter 2 pertains to funds of the society. Bye-law No. 4 permits the society to raise funds from various sources such as membership fee, shares, by raising loans, accepting deposits, from donations and from sale consideration of the lands.

• Chapter 10 pertains to distribution of profits. Various bye-laws contained therein envisage that out of the net profit, 25 per cent, would be kept in reserve fund. 9 per cent, dividend on the share value could be distributed to the members. After providing for these two items, 50 per cent, of the remaining net profit would be paid to the members in the proportion of the lease rent paid by them. 30 per cent, would be diverted to a fund for other activities which would be utilised for health, Education and social activities of the members as per the objects of the society. Bye-laws also envisage that upon transfer of a plot by its member, 50 per cent, of the premium, i.e, net profit of the outgoing member would be paid to the society.

13. On the basis of such bye-laws we need to judge whether, in the facts of the case, the principle of mutuality would apply.

14. The principle of mutuality has come up for consideration before various courts earlier. We may briefly refer to some leading decisions of the Supreme Court on the point. In the case of Royal Western India Turf Club Ltd. (supra), the Supreme Court referring to the decision in the case of New York Life Insurance Co. v. Styles (Surveyor of Taxes), [1889] 2 Tax Cas 460, observed as under (page 559):

“Styles' case (supra) has recently been examined and explained by the Judicial Committee in The English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl. I.T, (1948) 16 ITR 270 (PC). After referring to various passages from the speeches of the different Law Lords in Styles' case, Lord Normand, who delivered the judgment of the Board, summarised the grounds of the decision in Styles' case as follows:

‘From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.’”

• In the case of Commissioner Of Income Tax, Bihar v. Bankipur Club Ltd. reported in (1997) 226 ITR 97 (SC); [1998] 109 STC 427 (SC), the Supreme Court held that excess over expenditure received by a club from facilities extended to members as part of advantages attached to such membership, shall not be taxable on the principle of mutuality. It was observed as under (page 109):

“Now, we turn to the main question canvassed by the Revenue in the appeals coming under groups A to D, namely, whether the assessees—mutual clubs are entitled to exemption for the receipts or surplus arising from the sales of drinks refreshments, etc., or amounts received be way of rent for letting out the buildings or amounts received by way of admission fees periodical subscriptions and receipts of similar nature, from its members? In all these cases the appellate tribunal as also the High Court have found that the amount received by the clubs were for supply of drinks? refreshments or other goods as also the letting out of building for rent or the amounts received be way of admission fees, periodical subscription etc. from the members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs. It has also been found that different clubs realised various sums on the above counts only to afford to its members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally).

In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the clubs to its members, as stated herein above as part of the usual privileges, advantages and conveniences, attached to the members of the club, cannot be said to be ‘a trading activity’. The surplus—excess of receipts over the expenditure—as a result of mutual arrangement, cannot be said to be ‘income’ for the purpose of the Act.”

• In the case of Chelmsford Club v. Commissioner Of Income Tax, Delhi reported in (2000) 243 ITR 89 (SC) the facts were that the assessee-club provided recreational and refreshment facilities to its members and their guests. Facilities were not available to the non-members. The club was run on “no profit no loss” basis and the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. In that background, the Supreme Court applied the following triple test referred to in the case of The English and Scottish Joint Co-operative Wholesale Society Ltd. (supra) (page 97):

“(1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.”

It was held that applying such criteria to the facts of case on hand, the business of the assessee was governed by the doctrine of mutuality.

• In the case of Bangalore Club (supra), the Supreme Court observed that the concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered the income nor taxable. It was further observed that over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organisations.

15. With this background, if we revert to the case on hand, the undisputed facts are that all assessees are co-operative housing societies. They own lands for residential use. Such lands are developed by the society by providing common amenities such as internal roads, drainage, street lights if need be, common plot and club house. Individual plots are allotted to its members who enjoy occupational right but ownership of the land always remains with the society. On the plots of land so allotted, the member would be allowed to construct his residential unit. Upon transfer of the plot by a member, the society would collect 50 per cent, of the excess or popularly referred to as “premium”. The fund so collected would be appropriated in the common fund of the society to be utilised as per the bye-laws which envisage development of common facilities and expenditure for common amenities. A part of the surplus would be diverted to the reserve fund of the society. Surplus could also be utilised for waiver of the lease amount or for the health, Education and social activities of the members. It can thus be seen that there is total identity of contributors of the fund and recipients from the fund. The contribution comes from the outgoing member in the form of a portion of the premium and it is utilised for the common facilities and amenities for the members of the society. Different modes of application of the funds make it clear that the funds would be expended for common amenities or for general benefit of the members; or be distributed amongst the members in the form of dividend or lease rent waiver. It can thus be seen that it is impossible for the contributors to derive profit from contribution made by themselves to a fund since such fund could only be expended or returned to them. Creation of the society was primarily for the convenience of the members to create a housing society where individual members could construct their residential units and common facilities and amenities could be provided by the society. It was essential thus that a combined activity is carried on by a group of persons who would be the members in the co-operative society. All the tests referred to in the Privy Council decision in case of The English and Scottish Joint Co-operative Wholesale Society Ltd. (supra), stand fulfilled.

16. Reference to the provisions of the Gujarat Co-operative Societies Act would not change the position. Such provisions and in particular section 115 only provide the modality of diverting the funds of the society upon its winding up. We have already noted that the contributors from the members of the society are to be expended for their benefit or would be returned to them while the society is functioning. Merely because upon winding up of the society, the surplus fund would be utilised by the Registrar as provided under the Act and would not be returned to the members would not break down the relationship of mutuality since even in the eventuality of winding up, there is no scope of profiteering by the members.

17. Division Bench of this court in the case of Adarsh Co-operative Housing Society Ltd. (supra), under identical circumstances, held that principle of mutuality would apply. It was held as under (page 691):

“For arriving at any conclusion as to the question of ‘mutuality’ between the assessee and its members, the consistent tests applied since Styles' case, [1889] 2 TC 460 (HL) have already been summarised. What is really required is that all the participants must contribute to the fund as against merely being entitled to contribute. It is also not necessary that the participants in the surplus need be the same individuals who have contributed but they must bear the same character, namely, contributor member. A person who transfers his interest in the land acts while he is member. It is only in his character as member that he incurs liability to contribute to the society's fund to the extent provided in the bye-laws, subject to which only he was entitled to derive benefits. The contribution on the happening of the event is a must and is not mere entitlement to contribute at his discretion. Therefore, the argument that contribution is not by a member who could participate in the surplus is of no consequence and deserves to be rejected. It is to be noticed at pain of repetition that the identity of the individuals as contributors and participants is not essential but what is essential is the identity of character as contributors and participants. When a person transfers his interest in land, the transferor goes out after paying the contribution and the purchaser enters as member in his place to derive the benefit of expenses incurred by the society. It is to be appreciated in this connection that there is room for change of the name of the member not only at the time of transfer but also in the case of devolution after demise of the original member. What is to be reckoned is that the character of the contributor does not cease to exist in view of the nature of the enactment vis-a-vis the scheme of the Act and the principle of ‘mutuality’ as propounded in Styles' case, [1889] 2 TC 460 (HL), a leading English case, as discussed earlier. Though it is contended that there is no participation in surplus by the members because the surplus, remaining with the society in case of its cancellation does not return to contributors but is to be utilised for public purposes, the question which arises is: what is meant by ‘return’ of what has been contributed to a common fund? does it mean return of the corpus of the fund or does it include retention of control over the corpus to be used in consonance with the statute regulating the association, company or society, as the case may be? It is to be noticed that as per the findings of the Revenue authorities the amount which is contributed by the outgoing member is in turn utilised by the society for extending common amenities to the members. Thus, according to this finding, the surplus in any particular assessment year is utilised for extending amenities to members in succeeding years. That is to say, such surplus during the existence of the society returns to the members by way of deriving benefit from the amenities provided by the society to its members by expending the surplus. If the inquiry is limited to assessment year concerned, the test of return of the surplus to the contributors, viz., members is satisfied on the Revenue authorities' own finding which is not in dispute.”

18. In a later decision in case of Manekbaug Co-operative Housing Society (supra), the court accepted the same principle making the following observations observed that:

“13. As pointed out by a Division Bench of this court in the case of CIT v. Adarsh Co-operative Housing Society Ltd. reported in (1995) 213 ITR 677 (Guj), a co-operative society registered under the Bombay Co-operative Societies Act, 1925, should be treated as a amutual concern and by virtue of the income which it received from its members should held to be ‘not liable to be taxed’. It appears that the Supreme Court in the subsequent decision in the case of Chelmsord Club v. CIT reported in (2000) 243 ITR 89 (SC) has adopted the same principle. As pointed out in the above decision, under the Income-tax Act, 1961, what is taxed is, the ‘income, profits or gains’ earned or ‘arising’, ‘accruing’ to a ‘person’. According to the said decision, where a number of persons combine and 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 returned to those persons cannot be regarded in any sense as profit. The Supreme Court further pointed out that there must be complete identity between the contributors and the participators. If these requirements are fulfilled, the Supreme Court proceeded, it is immaterial what particular form the association takes. Trading between persons associating together in this way, according to the said decision, does not give rise to profits, which are chargeable to tax. Where the trade or activity is mutual, according to the Supreme Court, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities, which it offers, does not affect the mutuality of the enterprise. The law, according to the said decision, recognizes the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. The Supreme Court referred to section 2(24) of the Income-tax Act, 1961, which shows that the Act recognizes the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause (vii) of that section. The three conditions, the existence of which establishes the doctrine of mutuality are (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.

14. In the said case, the assessee, a members' club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on ‘no profit no loss’ basis and that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that was a mutual concern and so the annual letting value of the club house was not assessable. In such situation, the Supreme Court held that the assessee's business was governed by the doctrine of mutuality and it was admitted fact that the business of the assessee did not come within the scope of ‘business’ referred to in section 2(24)(vii) of the Act. It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, according to the Supreme Court, even the annual value of the club house, as contemplated in section 22 Of the Act would be outside the purview of the levy of income-tax.

15. By applying the aforesaid principles to the facts of the present case, we find that the Commissioner of Income-tax (Appeals) and the Tribunal below rightly applied the above principles so far as the addition of Rs. 2 lakhs as transfer fees are concerned as all the three conditions indicated above are satisfied.”

19. The Bombay High Court in the case of Mittal Court Premises Co-operative Society Ltd. v. ITO reported in (2010) 320 ITR 414 (Bom), on a similar question of taxability of the premium collected by the society upon transfer of plot, held as under (page 419):

“We have referred to the bye-laws of both, the Mittal Court Premises Co-operative Society Ltd. and Maker Chambers-III Premises Co-operative Society Ltd. The bye-laws are nothing but the contract between the society and the member. Under these bye-laws, it is the member who has to make the payment. Any inter-se arrangement between the incoming members and the transferee is irrelevant in so far as the society is concerned. There is an agreement by which the amount is paid by the transferee. In so far as society is concerned, even if receipt is issued in the name of transferee it is the nature of admission fee which could be appropriated, only on the transferee being admitted. Merely because the amount may be appropriated earlier, it will not loose the character of the amount being paid by a member. In these circumstances, the identity of the contributor and beneficiary being satisfied and considering the provisions of Maharashtra Co-operative Societies Act and Rules framed thereunder, surplus can be disposed off in favour of the members only or for the objects for which they may specify. As held by us in Income Tax Appeal No. 931 of 20041. the same reasoning will apply to the appellants/petitioners before us. In these circumstances, question (a) as framed has to be answered in the negative in favour of the assessee and against the Revenue.”

20. In the case of Commissioner Of Income-Tax v. Jai Hind Chs Ltd. reported in (2012) 349 ITR 541 (Bom) once again a Division Bench of the Bombay High Court held that the amount collected by the society under the head of transferable development rights from member who desired to develop his plot by using the extra FSI would be governed by the principle of mutuality. It was observed as under (page 543):

“The admitted facts would indicate that the TDR premium is liable to be paid by a member of the society who desires to utilise additional FSI in the form of transferable development rights. The principle of mutuality would clearly apply to a situation as to the present. In the context of the payment of non-occupancy charges by a member of a co-operative housing society to the society, a Division Bench of this court held in Mittal Court Premises Co-operative Society Ltd. v. ITO, [2009] 184 Taxman 292; (2010) 320 ITR 414 (Bom) that the principle of mutuality would apply. The Division Bench noted that the object of the society is to provide service, amenities and facilities to its members. Non-occupancy charges are payable by a member on account of the fact that the member is not in occupation of the premises. In our view, the same principle would apply to the present case. The TDR premium is a payment made by a member to the society of which he is a member, as a consideration for being permitted to make an additional utilisation of FSI on the plot allotted by the co-operative housing society. The society which looks after the infrastructure, requires the payment of the premium in order to defray the additional burden that may be cast as a result of the utilisation of the FSI. The point however, is that there is a complete mutuality between the co-oper-ative housing society and its members.”

21. From the above discussion, it could be seen that in various decisions, this court as well as the Bombay High Court consistently held that contribution made by the members to the general fund of the society in various forms would be governed by the principle of mutuality. Particularly, in the case of premium collected by the society from its outgoing member from out of a portion of his profit, the principle of mutuality would apply and the receipt would not be taxable as income of the society. The Supreme Court in case of Chelmsford Club (supra) further held that surplus of a club which provided recreational and refreshment facilities, etc., to its members and guests cannot be taxed on the principle of mutuality since such surplus would be used for maintenance and development of the club. Similar view was also taken by the Supreme Court in case of Bankipur Club Ltd. (supra).

22. In the referring order, the Division Bench had placed reliance on the judgment of the Bombay High Court in the case of Presidency Co-operative Housing Society Ltd. (supra). In the said case, the question of taxability of the premium on transfer of a plot did come up for consideration. In such background, it was observed as under (page 327 of 216 ITR):

“In the present case, the payment is certainly not in repayment of capital on account of parting with of any property of the Housing Society; nor is it repayment of capital in instalments. It cannot, therefore, fall in the category of a capital receipt. Looked at from a commercial point of view, the society receives a payment under its contract with the lessee every time the lease changes hands. It is a source of income for the society.

Looked at from a commercial point of view the reason why such a clause was inserted in the lease deed was to enable the society to earn an income. It was submitted before us that this clause was inserted merely as a deterrent to transfer. Looking to the nature of the clause, we do not see how the clause deters any transfer by a member. A member may be required to transfer his interest for various reasons. For example, if he is required to move out of Bombay, he may have to sell his interest in the property. All that the clause provides is that the society will receive half the profits when the member sells his interest. Therefore, it cannot be viewed as a deterrent to transfers. This payment is also not a payment for granting consent. The consent of the society is required because the society may want to ensure that an undesirable person does not become its member. Even in a situation where the society is likely to get money or transfer, the society may decline to give its consent for transfer if it considers the person to whom the member's interest is being transferred as undesirable. Therefore, in our view, the purpose for inserting the clause is to ensure an income to the society whenever there is a transfer of the member's interest in favour of a third party.”

23. However, in such decision the principle of mutuality was never pressed in service nor discussed by the court. The said decision, therefore, is not a authority on the question that we are trying to answer. Under the circumstances, we are of the opinion that ratio laid down by this court in case of Adarsh Co-operative Housing Society Ltd. (supra), and later on followed in case of Manekbaug Co-operative Housing Society Ltd. (supra), lays down correct principles in law.

24. Before closing, we may refer to the decisions cited by the Revenue.

(1) In the case of The English and Scottish Joint Co-operative Wholesale Society Ltd. (supra), the Privy Council was examining the facts where advances were made to the society for the purpose of enabling it to produce tea-on its own land. When the tea was produced, it was sold to the lenders, and the price was set off against the amount of the loan. In this background, it was held that there was a dual relationship between the appellant and its members and there was a mutual creditor-debtor relationship and there was also a buyer and seller relationship. There was nothing notional about either of these relationships and they were not mere conventional machinery to give efficacy to a relationship which was in substance that of principal and agent. It was in this background held that principle of mutuality would not apply.

(2) The case of Mantola Co-operative Thrift and Credit Society Ltd. (supra), before the Delhi High Court arose in vastly different background. In that case, the assessee was a co-operative society engaged in providing credit facilities to its members. The society would deposit surplus funds in fixed deposits and earn interest. It was in this background the Delhi High Court held that such income would not be eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act since it would be assessable as “Income from other sources”.

(3) In the case of Delhi Stock Exchange Association Ltd. (supra), the assessee was a stock exchange. It was a company formed to promote and regulate the business of exchange of stocks and shares, debentures, etc. Income accrued was distributed amongst the shareholders. It was observed that the body of trading members who paid the entrance fees and the shareholders among whom the profits were distributed were not identical. It was, therefore, observed that the element of mutuality was lacking.

(4) In the case Royal Western India Turf Club Ltd. (supra), the assessee was a company which carried on the business of running a race course and providing other facilities such as refreshments. The members of the company were provided with separate enclosure to watch the races for which an admission fee was charged. Non-members were not admitted in this enclosure. It was found that the assessee gave to non-members the same or similar amenities such as facility to watch the races and to bet on the horses in the races, use of the facilities for refreshments, etc. The daily ticket fee for admission into the members' enclosure was the same as that for admission into the first enclosure to which the public had access. The assessee claimed that in computing its total income, the receipts such as, season admission tickets from members, daily admission gate tickets from members, use of private boxes by members, etc., should be excluded. It was in this background held that there was no mutual dealing between the members inter se and the principles laid down in Styles' case would not apply.

(5) The decision in the case of Bangalore Club (supra) by the Supreme Court was also rendered in different facts. Bangalore club, the assessee, was an association of persons. It sought exemption from payment of income-tax on the interest earned on fixed deposits kept with certain banks which were corporate members of the assessee on the principle of mutuality. The assessee, however, paid tax on interest earned on fixed deposits kept with the non-member banks. It was in this background held that for application of the principle of mutuality, there has to be a complete identify between the class of participators and the class of contributors. The second feature highlighted was, actions of the participators and the contributors must be in furtherance of the mandate of the association. The third requirement of the principle of mutuality highlighted was that there must be no scope of profiteering by the contributors from a fund made by the members which could only be expended or returned to themselves. In the facts of the case, it was held that this condition of mutuality was not satisfied. It was observed as under (page 524 of 350 ITR):

“The facts at hand also fail to satisfy the third condition of the mutuality principle, i.e, the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. This principle requires that the funds must be returned to the contributors as well as expended solely on the contributors. True, that in the present case, the funds do return to the club. However, before that, they are expended on non-members i.e the clients of the bank. Banks generate revenue by paying a lower rate of interest to club-assessee, that makes deposits with them, and then loan out the deposited amounts at a higher rate of interest to third parties. This loaning out of funds of the club by banks to outsiders for commercial reasons, in our opinion, snaps the link of mutuality and thus, breaches the third condition.” It can thus be seen that the Revenue's reliance on this decision is wholly misconceived. As noted, it was a case where the association of persons deposited its funds with the banks, some of whom were members of the association and rest who were not the members. On the interest earned from such fixed deposits, the assessee claimed exemption from tax on the fixed deposits from the member banks. It was in this background the Supreme Court found that the third principle, that the contributor should not derive profit from the contributions made, was not satisfied. Though the fund was eventually returned to the club, nevertheless, before that they were expended on the non-members, i.e, clients of the bank and in turn the bank made profit in the process. It was purely a commercial transaction.

25. In fact, all the three tests of mutuality laid down since the decision of the Privy Council in the case of The English and Scottish Joint Co-operative Wholesale Society Ltd. (supra), which were reiterated, highlighted and refined in the decision in the case of Bangalore Club (supra), stands satisfied in our case.

26. In the result, the question is answered in the affirmative, i.e, against the Revenue and in favour of the assessee. All the references are disposed of accordingly.