Adarsh Sahkari Grih Nirman Swablami Samiti Limited, Jamshepur V. DCIT, Jamshepur

ITA 129/RAN/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 85458 (ITAT-RANCHI)
• Duration Of Justice: 4 year(s) 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2014
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2003-2004
• Appeal Filed On: 30-06-2010
• Court: TRIBUNAL
• Department Lawyers: DEEPAK ROSHAN SR S C LD
• Assessee Lawyers: D V PATHY LD
• Keywords: Source of fund
• Section: 143(3)

Judgement Text

INCOME TAX APPELLATE TRIBUNAL, CIRCUIT BENCH, RANCHI BEFORE HON'BLE SHRI H.L. KARWA, PRESIDENT , AND HON'BLE SHRI B.R. BASKARAN, ACCOUNTANT M EMBER ITA NO S . 129,136,137 & 138 /RAN/201 0 A.Y S. 200 3 - 04, 02 - 03, 04 - 05 07 - 08 M/S ADARSH S AHAKARI GRIH NIRMAN VS. DCIT, CIRCLE - JSR SWABLAMB I SAMITY LTD PAN: A AAAA4454D ( APPELLANT ) ( RESPONDENT ) FOR THE APPELLANT : S/ SH RI D.V.PATHY, ADVOCATE, LD.AR FOR THE RESPONDENT : SHRI DEEPAK ROSHAN, SR.S.C /LD.DR DATE OF HEARING : 24 - 11 - 2014 DATE OF PRONOUNCEMENT: 05 - 12 - 201 4 ORDE R SHRI B.R. BASKARAN, ACCOUNTANT MEMBER : ALL THE FOUR APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE SEPARATE ORDER S PASSED BY LD. CIT(A) , JAMSE HE D PUR AND THEY RELATE TO THE ASSESSMENT YEAR S 20 02 - 03, 2003 - 04, 2004 - 05 AND 20 07 - 08 . SINCE IDENTIC AL ISSUES ARE INVOLVED IN ALL THE APPEALS, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSE OF BY THIS COMMON ORDER , FOR THE SAKE OF CONVENIENCE. 2 THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2003 - 04 HAS BEEN PASSED U/S. 143(3) R.W.S 263 OF THE ACT. THE ASSE SSMENT ORDERS FOR ASSESSMENT YEARS 2002 - 03 AND 2004 - 05 HAVE BEEN U/S. 143(3) R.W.S 147 OF THE ACT. THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 2007 - 08 HA S BEEN PASSED U/S. 143(3) OF THE ACT. 3 . AT THE TIME OF HEARING, LD. COUNSEL F OR THE ASSESSEE DID N OT PRESS ALL THE GROUNDS RELATING TO VALIDITY OF INITIATION OF RE - ASSESSMENT PROCEEDINGS U/S. 147 2 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR OF THE ACT URGED IN AY 2002 - 03 AND 2004 - 05 . IN FACT, THE LD. COUNSEL FOR THE ASSESSEE RESTRICTED HIS ARGUMENT S WITH REGARD TO THE FOLLOWING ISSUES ONLY : - A. ASSESSMENT OF TRANSFER FEE RECEIVED BY THE ASSESSEE B. ASSESSMENT OF INTEREST ON CREDIT FACILITIES GIVEN TO THE MEMBERS OF THE ASSESSEE SOCIETY C. CONFIRMATION OF ADDITION RELATING TO PROFIT ON SALE OF ASSETS ACCORDINGLY, ALL OTHER GRO UN DS ARE DISMISSED AS NOT PRESSED AND WE PROCEED TO ADJUDICATE THE ABOVE SAID ISSUES ONLY. 4 . THE FACTS RELATING TO THE ISSUES CITED ABOVE ARE STATED IN BRIEF. THE ASSESSEE IS A CO - OPERATIVE SOCIETY REGISTERED UNDER THE PROVISIONS OF JHARKHAND SWABLAMBI SAHAKARI SAMITY ADHINIYAM, 1996. IT IS ENGAGED IN THE ACTIVITY OF CONSTRUCTING HOUSES AND GIVEN THE SAME ON LONG - TERM LEASE TO ITS MEMBERS. ACCORDING TO THE LD.AR , THE HOUSES ARE GIVEN TO ITS MEMBERS ON 99 YEARS LEASE. THE ASSESSEE SOCIETY ALSO PROVID ED CREDIT FACILITIES TO ITS MEMBERS BY CHARGING INTEREST THEREON . THE ASSESSEE HAS BEEN RECEIVING TRANSFER FEE WHENEVER THE HOUSES BUILT BY IT ARE TRANSFERRED BY A MEMBER TO ANOTHER MEMBER . THE ABOVE SAID TRANSFER FEE WAS COLLECTED FROM THE MEMBERS, WHO PURCHASE THE FLAT/HOUSE . 5 . IN THE RETURN OF INCOME FILED , THE ASSESSEE CLAIMED THAT THE TRANSFER FEE I S EXEMPT UNDER THE P RINCIPLES OF MUTUALITY AND IN THIS REGARD, THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING CASE LAWS/DECISIONS: - A. CIT VS. APSARA CO - OP HOUSING SOCIETY 204 ITR 662(CAL) B. CIT VS. BANKIPUR CLUB 198 ITR 261(PAT) C. CIT VS. BANKIPUR CLUB 226 ITR 97(SC) SIMILARLY, THE ASSESSEE CLAIMED THAT THE INTEREST RECEIVED BY I T ON THE CREDIT FACILITIES PROVIDED TO ITS MEMBERS IS EXEMPT U/S.80P(2)(A) (I) OF THE ACT. THE ASSESSEE DID NOT DECLARE ANY INCOME FROM OUT OF ITS CONSTRUCTION ACTIVITIES ON THE REASONING THAT THE HOUSES CONSTRUCTED BY IT SHOWN AS ITS OWN ASSETS IN THE 3 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR ASSET SIDE OF THE BALANCE SHEET AND T HE AMO UNT COLLECTED FROM THE MEMBERS FOR ALLOTMENT OF HOUSES WERE SHOWN AS LIABILITIES IN THE LIABILITY SIDE OF BALANCE SHEET. APPARENTLY, THE VIEW OF THE ASSESSEE APPEARS TO BE THAT IT CONTINUE TO BE THE OWNER OF THE HOUSES CONSTRUCTED BY IT, DESPITE THE FACT OF GIVING THEM ON LEASE FOR 99 YEARS. 6 . THE ASSESSING OFFICER HELD THAT THE ABOVE SAID CASE LAWS RELIED UPON BY THE ASSESSEE ARE DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS PREVAILING IN THE CASE OF THE ASSESSEE. HE FURTHER OBSERVED THAT THE ASSESS EE HAS RECEIVED THE TRANSFER FEES FROM ITS MEMBERS ON JOINING THE SOCIETY , MEANING THEREBY , THE TRANSFER FEE IS FORMING PART OF SALE CONSIDERATION OF THE FLATS/HOUSES . ACCORDINGLY, HE HELD THAT THE TRANSFER FEE CANNOT BE SAID TO BE EXEMPT TO TAX. 7 . W ITH REGARD TO THE INTEREST INCOME OF THE ASSESSEE, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS NOT GIVEN ANY LOAN TO ITS MEMBERS FOR CONSTRUCTION OF FLATS , INSTEAD THE LOAN WAS GIVEN TO ITS MEMBERS DEPENDING UPON T HEIR INDIVIDUAL REQUIREMENTS . THE AS SESSING OFFICER FURTHER OBSERVED THAT THE PROVISIONS OF SECTION 80P(2)(A)(I) SHALL NOT APPLY TO THE ASSESSEE , SIN C E THE PRIMARY OBJECTIVE OF THE ASSESSEE IS NOT PROVIDING ANY LOAN OR OTHER CREDIT FACILITIES TO ITS MEMBERS. ACCORDINGLY, HE HELD THAT THE IN TEREST INCOME RECEIVED BY THE ASSESSEE IS TAXABLE UNDER THE ACT . THE ASSESSING OFFICER ALSO NOTICED THAT T HE ASSESSEE HAS RECEIVED THE ENTIRE AMOUNT OF SALE CONSIDERATION ON ALLOTMENT AND HANDING OVER THE POSSESSION OF THE FLATS CONSTRUCTED BY IT. HENCE , THE ASSESSING OFFICER TREATED THE BUILDING CONSTRUCTION ACTIVITY OF THE ASSESSEE IS IN FACT A COMMERCIAL ACTIVITY . SINCE THE ASSESSEE DID NOT DECLARE ANY INCOME FROM THE SAID ACTIVITY, THE ASSESSING OFFICER ESTIMATED THE PROFIT AT 5% OF THE GROSS RECEIP TS IN THE ASSESSMENT YEAR 2003 - 04 AND AT 5.5% OF THE GROSS RECEIPTS IN OTHER THREE ASSESSMENT YEARS UNDER CONSIDERATION. 4 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR 8 . THE ASSESSEE CHALLENGED THE ABOVE SAID ADDITIONS BY FILING APPEALS BEFORE THE LD.CIT(A) , BUT COULD NOT SUCCEED. HENCE, THE ASSESS EE HAS FILED THESE APPEALS BEFORE US. 9 . THE LD. COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS CARRYING ALL TYPES OF ACTIVITIES WITH THE MEMBERS ONLY . HE FURTHER SUBMITTED THAT THE ASSESSEE IS CONSTRUCTING THE RESIDENTIAL FLATS /HOUS ES AND THE SAME ARE HANDED ON LONG TERM LEASE TO ITS MEMBERS . THE AMOUNT RECEIVED FROM THE MEMBERS HAVE BEEN SHOWN AS LIABILITY IN THE L IABILITY SIDE OF THE BALANCE SHEET . SIMILARLY, THE CONSTRUCTION COST OF THE FLATS /HOUSES ARE DECLARED AS ASSESSEE S OWN ASSETS IN THE ASSET SIDE OF B ALANCE SHEET. ACCORDINGLY, HE SUBMITT ED THAT THE ASSESSEE HAS NOT SOLD ANY OF FLATS CONSTRUCTED BY IT , AS PRESUMED BY THE TAX AUTHORITIES . ACCORDINGLY HE CONTENDED THAT THE TAX AUTHORITIES ARE NOT JUSTIFIED IN CONSTRUING THAT THE ASSESSEE HAS CARRIED ON A COMMERCIAL ACTIVITY OF CONSTRUCTION AND SALE OF HOUSES/FLATS AND THEREBY ESTIMATING THE PROFIT FROM CONSTRUCTION ACTIVITIES . 10 . THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE HAS RECEIVED THE TRA NSFER FEES FROM ITS MEMBERS AND THE SAME IS EXEMPT UNDER THE PRINCIPLES OF MUTUALITY . IN THIS R E GARD, HE PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SIND CO - OPERATIVE HOUSING SOCIETY VS. ITO (2009) 317 I TR 47 (BOM) . WITH REGARD TO THE INTEREST RECEIVED ON CREDIT FACILITIES GIVEN TO ITS MEMBERS OF THE ASSESSEE SOCIETY , THE LD.AR FOR THE ASSESSEE CONTENDED THAT THE SAME IS ALSO NOT TAXABLE UNDER THE PRINCIPLES OF MUTUALITY . THUS WE NOTICE THAT THE ASSESS EE HAS CHANGED ITS STAND WITH REGARD TO THE INTEREST INCOME, I.E., BEFORE THE AO, IT WAS CLAIMED THAT THE INTEREST INCOME IS EXEMPT U/S 80P(2)(A)(I) OF THE ACT AND NOW IT IS CONTENDED THAT THE SAME IS ALSO EXEMPT UNDER THE PRINCIPLES OF MUTUALITY. 5 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR 1 1 . ON THE CONTRARY, THE LD.DR SUBMITTED THAT THE DECISION RENDERED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SIND CO - OPERATIVE HOUSING SOCIETY(SUPRA) IS NOT APPLICABLE TO THE FACTS PREVAILING IN THE INSTANT CASE. IN THE ABOVE SAID CASE THE HON'BLE BOMBAY HIGH COURT HAS GIVEN A CLEAR FINDING THAT THE ASSESSEE THEREIN DID NOT CARRY ON ANY COMMERCIAL ACTIVITY . IN FACT, THE HON BLE BOMBAY HIGH COURT HAS OBSERV ED, IN PARAGRAPH 3 OF TH E ORDER, THAT THERE IS NO DISPU TE THAT IN NONE OF THE ACTIVITIES CARRIED ON BY THE SOCIETY, IS THERE ANY COMMERCIALITY OR TAINT OF COMMERCIALITY. 12. THE LD D.R FURTHER SUBMITTED THAT THE ACTIVITIES CARRIED ON BY THE ASSESSEE SOCIETY ARE PURE LY COMMERCIAL IN NATURE, I.E., THE ACTIVITY OF CONSTRUCTION OF HOUSES/FLATS AND G IVING THE SAME ON LONG TERM LEASE OF 99 YEARS VIRTUALLY MEANS THAT THE ASSESSEE HAS BEEN INVOLVED IN THE COMMERCIAL ACTIVITY OF CONSTRUCTI N G THE HOUSES AND SELLING THEM. THE LD D.R SUBMITTED THAT THE LEASE PERIOD OF 99 YEARS IS PRETTY LONG TIME AND SUCH TIME PERIOD ARE TREATED AS SALES ONLY UNDER THE COMMON LAW . ACCORDINGLY, THE LD D.R SUBMITTED THAT THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE ASSESSMENT OF PROFIT ESTIMATED BY THE AO FROM CONSTRUCTION ACTIVITIES. THE LD D.R FURTHER SUBMITTED THAT THE TRANSFER FEE HAS BEEN RECEIVED BY THE ASSESSEE IN THE COURSE OF CARRYING ON THE COMMERCIAL ACTIVITY ONLY AND HENCE THE SAME IS ALSO TAXABLE. SIMILARLY, THE ASSESSEE HAS BEEN LENDING MONEY TO ITS MEMBERS AND CHARGING INTEREST THEREON AND THE SAID ACTIVITY ALSO FALLS IN THE CATEGORY OF COMMERCIAL ACTIVITIES . ACCORDINGLY, HE SUBMITTED THAT THE PRINCIPLES OF MUTUALITY WILL NOT APPLY TO T HE ASSESSEE HEREIN , ONCE THE COMMERCIALITY OR TAINT OF COMMERCIALITY ENTERS INTO THE ACTIVITIES OF THE SOCIETY, EVEN IF THE SAID ACTIVITIES ARE RESTRICTED WITH THE MEMBERS ALONE . HE FURTHER SUBMITTED THAT , UNDER THE CO - OPERATIVE SOCIEITIES ACT, THE CO - OPERATIVE SOCIETIES ARE AUTHORIZED TO TRANSACT ITS B USINESS ACTIVITIES ONLY WITH ITS MEMBERS. THEY CANNOT TRANSACT BUSINESS ACTIVITIES WITH OUTSIDERS. ACCORDINGLY HE REITERATED THAT T HE INCOME OF THE CO - OPERATIVE SOCIETIES WILL NOT BE TAXABLE UNDER THE PRINCIPLES OF MUTUALITY, SO LONG AS THE ACTIVITIES DO NOT INVOLVE COMMERCIALITY OR TAINT OF COMMERCIALITY. ONCE THE ACTIVITIE S OF THE CO - OPERATIVE SOCIETIES 6 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR ACQUIRE THE CHARACTER OF COMMERCIALITY OR TAINT OF COMMERCIALITY , INCOME ARISING FROM SUCH ACTIVITIES ARE LIABLE TO BE TAXED UNDER THE ACT, HOWEVER, SUBJECT TO THE DEDUCTION GIVEN U/S 80P OF THE ACT. HE FURTHER SUBMITTED TH AT THE PROVISIONS OF SEC. 80P OF THE INCOME - TAX ACT CLEARLY INDICATE THAT THE CO - OPERATIVE SOCIETIES ARE TAXABLE UNDER THE PROVISIONS OF ACT , EVEN THOUGH THEY TRANSACT THEIR COMMERCIAL ACTIVITIES WITH THE MEMBERS ONLY. ACCORDINGLY, HE SUBMITTED THAT PRINC IPLES OF MUTUALITY CANNOT BE EXTENDED TO THE ASSESSEE, SINCE COMMERCIALITY IS INVOLVED IN THE ACTIVITIES CARRIED ON BY THE ASSESSEE. THE LD D.R FURTHER SUBMITTED THAT THE ACCOUNTING TREATMENT GIVEN IN THE BOOKS CANNOT DECIDE ABOUT THE NATURE OF TRANSACTIO NS. 13 . IN THE REJOINDER, THE LD A.R SUBMITTED THAT THE ASSESSEE SOCIETY HAS GOT MORE NUMBER OF MEMBERS THAN THE HOUSES OWNED BY IT. REFERRING TO THE CERTIFICATE DATED 7.5.2013 ISSUED BY THE CHIEF EXECUTIVE OF THE ASSESSEE SOCIETY, THE LD A.R SUBMIT TED THAT THE ASSESSEE SOCIETY HAS GOT 2984 MEMBERS AS ON THAT DATE AND ONLY 1435 MEMBERS HAVE BEEN ALLOTTED DWELLING UNITS CONSTRUCTED BY THE ASSESSEE SOCIETY. HE FURTHER SUBMITTED THAT THE TRANSFER OF DWELLING UNITS ARE CARRIED BETWEEN THE MEMBERS ONLY A ND FURTHER MAJORITY OF THE TRANSFEROR MEMBERS ARE CONTI NUING AS MEMBERS OF THE SOCIETY, EVEN AFTER CEASING TO HOLD THE HOUSES. HE FURTHER SUBMITTED THAT THE MANNER OF DISTRIBUTION OF ASSETS IN THE EVENT OF DISSOLUTION OF A SOCIETY DETERMINES ABOUT THE APP LICABILITY OF PRINCIPLES OF MUTUALITY. HE SUBMITTED THAT THE ASSESSEE SOCIETY HAS AMENDED ITS BYE LAWS TO PROVIDE FOR DISTRIBUTION OF THE ASSETS AMONGST ITS MEMBERS AND HENCE THE PRINCIPLES OF MUTUALITY WOULD CLEARLY APPLY TO IT. THE LD COUNSEL ALSO PL ACED RELIANCE ON THE FOLLOWING CASE LAWS IN SUPPORT OF HIS CONTENTIONS: - (A) SIND CO - OPERATIVE HOUSING SOCIETY (2009)(317 ITR 47)(BOM) (B) ACIT VS.YUVRAJ GRIH NIRMAN SWALAMBI SAHAKARI (ITA NOS. 87,88 & 89/RAN/2008 DATED 8 - 7 - 2009 OF ITAT, RANCHI) (C) CIT VS. MADRAS AUTORICKSHAW DRIVERS CO - OPERATIVE SOCIETY LTD. (143 ITR 981)(MAD). 7 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR 14 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THOUGH THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80P(2)(A)(I) OF THE ACT BEFORE TAX AUTHORITIES IN RESPECT OF I NCOME EARNED ON THE CREDIT FACILITIES PROVIDED TO ITS MEMBERS, YET, AT THE TIME OF HEARING, THE LD A.R MAINLY REITERATED THAT THE PRINCIPLES OF MUTUALITY SHALL APPLY TO BOTH KIND OF RECEIPTS, VIZ., TRANSFER FEES AND ALSO INTEREST INCOME EARNED ON THE CREDI T FACILITIES GIVEN TO ITS MEMBERS. WITH REGARD TO THE PROFIT ESTIMATED ON THE CONSTRUCTION ACTIVITIES, THE LD A.R MAINLY CONTENDED THAT THERE WAS NO SALE OF HOUSES AND HENCE THE QUESTION OF ESTIMATION OF PROFIT DOES NOT ARISE. 15 . IT IS A WELL SETTLE D PROPOSITION THAT THE PRINCIPLES OF MUTUALITY SHALL APPLY ONLY , IF THE ACTIVITIES CARRIED ON BY A SOCIETY/CLUB DO NOT HAVE COMMERCIALITY OR TAINT OF COMMERCIALITY. IN THIS REGARD, WE MAY GAINFULLY REFER TO SOME OF THE OBSERVATIONS MADE IN THE DECISION RENDERED BY HON BLE BOMBAY HIGH COURT IN THE CASE OF SING CO - OPERATIVE HOUSING SOCIETY. IN THE ABOVE SAID CASE, THE HON BLE BOMBAY HIGH COURT WAS CONSIDERING THE QUESTION ABOUT TAXABILITY OF TRANSFER FEE RECEIVED BY THE ASSESSEE THEREIN FROM TRANSFEREE MEMBERS. AT PARAGRAPH 3, THE HON BLE HIGH COURT OBSERVED AS UNDER: - AT THE HEARING OF THIS APPEAL, ON BEHALF OF THE APPELLANTS, THEIR LEARNED COUNSEL CONTENDS THAT ON THE FACTS THERE IS NO DISPUTE THAT IN NONE OF THE ACTIVITIES CARRIED ON BY THE SOCIETY, IS THERE ANY COMMERCIALITY OR TAINT OF COMMERCIALITY. IN FACT, THE SYSTEM PREVAILING IN THE STATE OF MAHARASHTRA IS THAT THE CO - OP ERATIVE SOCITIES ARE USUA LLY FORMED AFTER THE COMPLETION OF SALE OF ALL FLATS. THE BUYERS OF THE FLATS WOULD BECOME THE M EMBERS OF THE SOCIEITY AND THE OBJECTIVE OF THE SOCIETY IS TO CARRY ON THE ACTIVITIES RELATING TO THE MAINTENANCE AND PEACEFUL ENJOYMENT OF THE FLATS BY THE RESIDENTS . IT IS PERTINENT TO NOTE THAT THE SUCH TYPE OF CO - OPERATIVE SOCITIES FORM IN MAHARASHTRA WILL NOT CARRY ON ANY TYPE OF COMMERCIAL ACTIVITIES AND THEY ARE NOT ALSO FORM WITH COMMERCIAL OBJECTIVE S . HENCE, THE FACTS PREVAILING IN THE ASSESSEE S CASE BEING DIFFERENT, 8 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR WE ARE OF THE VIEW THAT THE ASSESSEE CANNOT TAKE SUPPORT OF THE SAID DECISION R ENDERED BY HON BLE BOMBAY HIGH COURT. 16 . F OLLOWING SUBMISSIONS MADE BY THE REVENUE BEFORE HON BLE BOMBAY HIGH COURT WOUYLD ALSO BE RELEVANT TO UNDERSTAND THE CONCEPT OF PRINCIPLES OF MUTUALITY : - ..THE PAYMENT IS A CONDITIONAL PAYMENT AND DOES N OT SATISFY THE TEST OF MUTUALITY. THE PREMIUM IS CHARGED BY THE SOCIETY TO EARN PROFITS. THERE IS ABSOLUTELY NO BAR ON CO - OPERATIVE SOCIETIES TO EARN PROFIT. WHAT IS REQUIRED UNDER THE ACT IS THAT THE OBJECTS OF THE CO - OPERATIVE SOCIETY SHOULD NOT BE TO MAKE PROFIT. CO - OPERATIVE SOCIETIES CAN EARN REASONABLE AMOUNT OF PROFIT WHICH SHOULD BE ASSESSABLE TO TAX ..SHRI P.S. SAHADEVAN HAS SUBMITTED THAT THE PRINCIPLE OF MUTUALITY HAS NOT BEEN DEFINED IN THE INCOME TAX ACT. THERE IS SEPARATE PROVISION FOR D EDUCTION IN THE CASE OF TRADE, PROFESSION OR SIMILAR ASSOCIATION UNDER SECTION 44AA OF THE ACT. CO - OPERATIVE SOCIETIES ARE NOT INCLUDED IN THIS SECTION THOUGH THE AFORESAID ASSOCIATIONS ARE LOOKING AFTER THE MUTUAL INTEREST OF THE MEMBERS THEREOF. SECTIO N 80P OF THE INCOME TAX ACT WOULD INDICATE THAT THE SOCIETIES ARE TAXABLE 17 . THE HON BLE BOMB AY HIGH COURT ALSO REFERRED TO THE DECISION OF HON BLE SUPREME COURT RENDERED IN THE CASE OF CIT VS. ROYAL WESTERN INDIA TURF CLUB LTD (1953)(24 ITR 551) (SC) AND HAS OBSERVED AS UNDER (PARA 20) : - IN CIT VS. ROYAL WESTERN INDIA TURF CLUB LTD (1953)(24 ITR 551)(SC) THE ASSESSEE WAS A COMPANY CARRYING ON THE BUSINESS OF HORSE RACING. IN THIS CONTEXT, THE COURT OBSERVED THAT THE PRINCIPLE OF MUTUALITY WOULD NOT APPLY TO AN INCORPORATED COMPANY WHICH CARRIES ON BUSINESS OF HORSE RACING AND REALISES MONEY BOTH FROM MEMBERS AND FROM NON - MEMBERS FOR THE SAME CONSIDERATION, NAMELY, BY GIVING OF THE SAME OR SIMILAR FACILITIES TO ALL LIKE IN COURSE OF ONE AND THE S AME BUSINESS CARRIED ON BY IT. THE COMPANY THERE WAS SEEKING TO CONTEND THAT CERTAIN RECEIPTS RECEIVED BY IT SHOULD BE EXCLUDED ON THE PRINCIPLE OF MUTUALITY. RIGHT UP TO THE HIGH COURT THERE ITEMS OF WERE HELD TO ATTRACT THE DOCTRINE. THE ONLY ITEM HEL D TO BE EXIGIBLE TO TAX WAS INCOME FROM ENTRIES AND FORFEITS RECEIVED FROM THE MEMBERS WHOSE HORSES DID NOT RURN IN THE RACES DURING THE SEASON. IN RESPECT OF THESE ITEMS, THE HIGH COURT HELD THAT IT WAS NOT TAXABLE EITHER UNDER SECTION 10(1) OR 10(6) OF THE 1922 ACT AND THE FOURTH ITEM, WHICH WAS INCOME FROM ENTRIES AND FORFEITS WAS TAXABLE UNDER BOTH THE SUB - SECTIONS. IN THE APPEAL FILED BEFORE THE SUPREME COURT, THE COURT HELD THAT THERE WAS NO MUTUAL DEALING AND ALL THE ITEMS OF RECEIPTS FROM MEMBERS WERE RECEIVED BY THE 9 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR ASSESSEE FROM BUSINESS WITH ITS MEMBERS WITHIN THE MEANING OF SECTION 10(7) AND, THEREFORE, ASSESSABLE TO TAX. THE COURT THERE OBSERVED AS UNDER (PAGE 560): - HERE THERE IS NO MUTUAL DEALING BETWEEN THE MEMBERS INTER SE IN THE NATUR E OF MUTUAL INSURANCE, NO CONTRIBUTION TO A COMMON FUND PUT UP FOR PAYMENT OF LIABILITIES UNDERTAKEN BY EACH CONTRIBUTOR TO THE OTHER CONTRIBUTORS AND NO REFUND OF SURPLUS TO THE CONTRIBUTORS. THERE BEING NO MUTUAL DEALING THE QUESTION AS TO THE COMPLETE IDENTITY OF THE CONTRIBUTORS AND THE PARTICIPATORS NEED NOT BE RAISED OR CONSIDERED. SUFFICE IT TO SAY THAT IN THE ABSENCE, AS THERE IS IN THE PRESENT CASE, OF ANY DEALING BETWEEN THE MEMBERS INTER SE IN THE NATURE OF MUTUAL INSURANCE, THE PRINCIPLES LAID DOWN IN STYLES CASE (1889) 2 TC 460 AND THE CASES THAT FOLLOWED IT CAN HAVE NO APPLICATION HERE. THE COURT FURTHER OBSERVED THAT THE DEALINGS DISCLOSES SAME PROFIT EARNING MOTIVES AND IS TAINTED WITH COMMERCIALITY. 18 . FOLLOWING OBSERVATIONS MADE BY HON BLE BOMBAY HIGH COURT FURTHER CLARIFIES THE PRINCIPLES OF MUTUALITY: - ..(PARA 28) THE COURT ON THE FINDINGS THEREIN, HELD THAT THE RECEIPTS FOR THE VARIOUS FACILITIES EXTENDED BY THE CLUBS TO THEIR MEMBERS, AS PART OF THE USUAL PRIVILEGES, ADV ANTAGES AND CONVENIENCES, ATTACHED TO THE MEMBERSHIP OF THE CLUB, CANNOT BE SAID TO BE A TRADING ACTIVITY . THE SURPLUS EXCESS OF THE RECEIPTS OVER THE EXPENDITURE AS A RESULT OF MUTUAL ARRANGEMENT CANNOT BE SAID TO BE INCOME FOR THE PURPOSES OF THE AC T. IN CIT VS. WILLINGDON SPORTS CLUB (2008) 302 ITR 279(BOM), THIS COURT OBSERVED AS UNDER (PAGE 284) ONCE A FINDING IS RECORDED THAT THERE IS NO COMMERCIALITY AND WHAT IS BEING OFFERED ARE USUAL PRIVILEGES, ADVANTAGES AND CONVENIENCES THAT WOULD ATTRACT THE PRINCIPLE OF MUTUALITY. IT MAY BE NOTED THAT BOTH IN THE BANKIPUR S CASE (1997) 226 ITR 97 AND WILLINGDON S CASE (2008) 302 ITR 279 CASE, THE SUPREME COURT AND THIS COURT WAS CONCERNED AMONGST OTHERS WITH THE ADMISSION FEES/ENTRANCE FEES PAID BY THE INCOMING MEMBERS. BUT THIS FACT WAS NOT CONSIDERED RELEVANT SO AS TO AFFECT THE PRINCIPLE OF MUTUALITY. IN WILLINGDON, THIS COURT RELIED ON THE QUOTED PASSAGE IN THE CASE OF JUDICIAL COMMITTEE OF THE PRIVY COUNCIL IN FLETCHER V. INCOME TAX COMMISSIONER (1971) 3 ALL ER 1185 AT PAGE 1189 AS UNDER: 10 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR IS THE ACTIVITY, ON THE ONE HAND, A TRADE, OR AN ADVENTURE IN THE NATURE OF TRADE, PRODUCING A PROFIT, OR IS IT, ON THE OTHER, A MUTUAL ARRANGEMENT WHICH, AT MOST GIVE RISE TO A SURPLUS ? . IF THE OBJECT OF THE ASSESSEE COMPANY CLAIMING TO BE A MUTUAL CONCERN OR CLUB IS TO CARRY ON A PARTICULAR BUSINESS AND MONEY IS REALISED BOTH FROM THE MEMBERS AND FROM NON - MEMBERS, FOR THE SAME CONSIDERATION, BY GIVING THE SAME OR SIMILAR FACILITIES TO ALL ALIKE IN RE SPECT OF THE ONE AND THE SAME BUSINESS CARRIED ON BY IT, THE DEALINGS AS A WHOLE DISCLOSES THE SAME PROFIT EARNING MOTIVE AND ARE ALIKE TAINTED WITH COMMERCIALITY. ON THE OTHER HAND, IF IT IS MERELY A MUTUAL ARRANGEMENT WHETHER THE FEES OR SUBSCRIPTIONS A RE COLLECTED FOR EXTENDING FACILITIES TO MEMBERS LIKE USUAL PRIVILEGES, ADVANTAGES AND CONVENIENCES EVEN IF SOME SUPRLUS IS GENERATED, THEN THAT SURPLUS CANNOT BE REGARDED AS PROFIT AS LONG AS THE CONTRIBUTORS AND PARTICIPANTS AS A CLASS ARE THE SAME AND T HEY HAVE A SAY OVER THE DISTRIBUTION OF SURPLUS. (PARA 40) IT WAS NEXT CONTENDED THAT THERE IS NO LEGAL BAR FOR THE ASSESSEE TO EARN PROFITS. THERE CAN BE NO DISPUTE ON THAT PROPOSITION BUT THE PROFIT MUST COME FROM A COMMERCIAL ACTIVITY IN THE NATUR E OF TRADE, BUSINESS OR THE LIKE IN WHICH EVENT THE ASSESSE THEN WILL HAVE TO PAY TAX ON SUCH PROFITS. CHARGING OF TRANSFER FEES AS PER BYE - LAWS HAS NO ELEMENT OF TRADING OR COMMERCIALITY. THERE, THEREFORE, BEING NO TAINT OF COMMERCIALITY, THE QUESTION O F EARNING PROFITS WOULD NOT ARISE WHEN THE HOUSING SOCIETY FROM THE FUNDS RECEIVED APPLIES THE MONEYS RECEIVED TOWARDS MAINTENANCE OF THE SOCIETY AND PROVIDING THE MEMBERS WITH USUAL PRIVILEGES, ADVANTAGES AND CONVENIENCES. 19 . IN PARAGRAPH 40, EXTRA CTED ABOVE, THE BOMBAY HIGH COURT HAS BROUGHT OUT THE OBJECTS OF THE ASSESSEE SIND CO - OPERATIVE HOUSING SOCIETY . ITS OBJECT WERE MAINTENANCE OF THE SOCIETY AND PROVIDING THE MEMBERS WITH USUAL PRIVILEGES, ADVANTAGES AND CONVENIENCES. THE HIGH COURT FUR THER OBSERVED THAT THE CHARGING OF TRANSFER FEE HAS NO ELEMENT OF TRADING OR COMMERCIALITY AND FURTHER THE SAID FUNDS WERE USED TOWARDS MAINTENANCE AND PROVIDING THE PRIVILEGES. UNDER THESE SET OF FACTS, THE HON BLE BOMBAY HIGH COURT HELD THAT THE TRANSFE R FEES RECEIVED BY THE ASSESSEE THEREIN IS NOT TAXABLE. 11 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR 20 . IN PARAGRAPH 44, THE HON BLE BOMBAY HIGH COURT HAS SUMMARIZED THE TESTS TO BE CONSIDERED FOR APPLYING THE PRINCIPLE OF MUTUALITY AS UNDER: - (1) IS THERE ANY COMMERCIALITY INVOLVED. THIS HAS TO BE FOUND FROM THE BYE - LAWS OF THE CO - OPERATIVE HOUSING SOCIETY. IN THE CASE OF THE CO - OPERATIVE HOUSING SOCIETY, ADMITTEDLY, THERE IS NO COMMERCIALITY INVOLVED. ONCE THERE IS NO COMMERCIALITY INVOLVED THE FIRST TEST OF PROFITABILITY DOES NOT EXIST . (2) FROM THE MONEYS RECEIVED ARE THE SERVICES OFFERED IN THE NATURE OF PROFIT SHARING OR PRIVILEGES, ADVANTAGES AND CONVENIENCES. (3) ARE THE PARTICIPANTS AND CONTRIBUTORS IDENTIFIABLE AND BELONG TO THE SAME CLASS IN THE CASE OF CO - OPERATIVE HOUSING SOCIETY. (4) DO THE MEMBERS HAVE THE RIGHT TO SHARE IN THE SURPLUS AND DO THEY HAVE A RIGHT TO DEAL WITH ITS SURPLUSES. THE VARIOUS TESTS SUMMARIZED BY HON BLE BOMBAY HIGH COURT NEED TO BE APPLIED WHENEVER AN ASSESSEE CLAIMS THAT THE PRINCIPLES OF MUT UALITY SHOULD APPLY TO IT. IN OUR VIEW, A N ASSESSEE SHOULD PASS IN ALL THE FOUR TESTS CUMULATIVELY. ACCORDINGLY, IF AN ASSESSEE FAILS IN ANY OF THE FOUR TESTS, THEN IT CANNOT CLAIM THAT THE PRINCIPLES OF MUTUALITY SHOULD BE APPLIED TO IT. 21 . THUS, IT SEEN THAT THE PRINCIPLE OF MUTUALITY CANNOT BE APPLIED WITH AUTOMATICALLY TO CO - OPERATIVE SOCIETIES SOLELY ON THE REASONING THAT IT CARRIES ON ITS ACTIVITIES WITH ITS MEMBERS. THIS POSITION IS MADE VERY MUCH CLEAR IN THE ACT IF ONE REFERS TO THE PROVI SIONS OF SEC. 80P OF THE ACT. THE SAID SECTION IS TITLED AS DEDUCTION IN RESPECT OF INCOME OF CO - OPERATIVE SOCIETIES , MEANING THEREBY, THE INCOME OF THE CO - OPERATIVE SOCIETIES IS OTHERWISE TAXABLE, HOWEVER, SUBJECT TO THE DEDUCTION GIVEN U/S 80P OF THE ACT. UNDER THE INCOME TAX, THERE IS CLEAR DIVISION OF INCOME WHICH IS EXEMPT AND INCOME IN RESPECT OF WHICH DEDUCTION IS PROVIDED IN CHAPTER VI. THE DEDUCTIONS GIVEN IN CHAPTER VI ARE INCENTIVE PROVISIONS INSERTED IN THE ACT IN ORDER TO ACHIEVE CERTAIN S OCIAL OBJECTIVES OF THE GOVERNMENT. 12 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR 22 . NOW WE SHALL EXAMINE THE FACTS PREVAILING IN THE INSTANT CASE. A PERUSAL OF THE BALANCE SHEET FURNISHED BY THE ASSESSEE WOULD SHOW THAT THE ASSESSEE HAS DISCLOSED THE AMOUNT RECEIVED FROM ITS MEMBERS TOWARDS T HE COST OF DWELLING UNITS AS A LIABILITY UNDER THE HEAD SELF FINANCING SCHEME . THE COST OF CONSTRUCTION OF DWELLING UNITS IS SHOWN AS ITS OWN ASSET UNDER THE HEADING OTHER ASSETS AND RECOVERIES . BY PLACING RELIANCE ON THIS ACCOUNTING TREATMENT, THE L D COUNSEL STRONGLY CONTENDED THAT THERE IS NO SALE OF DWELLING UNITS AND HENCE THE TAX AUTHORITIES ARE NOT JUSTIFIED IN ASSESSING THE PROFIT FROM CONSTRUCTION ACTIVITIES. HOWEVER, WE AGREE WITH THE CONTENTION OF THE LD D.R THAT THE ACCOUNTING TREATMENT GI VEN IN THE BOOKS OF ACCOUNT ARE NOT RELEVANT TO DECIDE ABOUT THE TAXABILITY OF A PARTICULAR ITEM OF INCOME/EXPENDITURE. THE PRINCIPLES IN THIS REGARD IS WELL SETTLED. 23 . THE ASSESSEE HAS FURNISHED A COPY OF LEASE DEED ENTERED BETWEEN THE ASSESSEE AND ITS MEMBERS. THE PR E AMBLE OF THE SAME READS AS UNDER: - WHEREAS THE SOCIETY HAS BEEN FORMED WITH AMONGST OTHERS THE OBJECT OF ACQUIRING LANDS/HOUSES, COMMERCIAL UNIT, FLAT ETC. AT JAMSHEDPUR AND OTHER PLACES IN THE STATE OF JHARKHAND BY PURCHASE OR OTHERWISE FOR THE PURPOSE OF PROVIDING RESIDENTIAL ACCOMMODATION, FLATS ETC TO ITS ELIGIBLE MEMBERS BY LEASING OUT THE SAME OR PORTION OF THE SAME AS RESIDENTIAL HOUSES ON PORTION THEREOF AT ITS OWN COST AND EXPENSES AND LEASING OUT THE SAME TO THE LESSEE WHO ARE ITS CONSTITUENT MEMBERS AND RECOVERING THE COST OF CONSTRUCTION, EXPENSES INCURRED FROM THE RESPECTIVE LESSEE IN INSTALMENTS/LUMP SUM/ONE TIME PAYMENT OR PAYMENT AS PER CONSTRUCTION PROGRAMME. THIS PREAMBLE CLEARLY BRINGS OUT THE INTENTION OR OBJ ECTIVE OF THE ASSESSEE SOCIETY. FURTHER THERE IS ALSO CONFUSION ABOUT THE OBJECTIVES ALSO. IN THE FIRST PART, IT IS SAID THAT THE HOUSES ETC SHALL BE ACQUIRED AT ITS OWN COST AND THEN THE SAME SHALL BE LEASED OUT TO THE ELIGIBLE MEMBERS. HOWEVER, IN THE SECOND PART, IT IS STATED THAT THE COST OF CONSTRUCTION AND OTHER EXPENSES SHALL BE RECOVERED FROM THE RESPECTIVE LESSEE. IN FACT, WE NOTICE THAT THE ASSESSEE HAS CARRIED OUT THE ACTIVITIES MENTIONED IN THE SECOND PART ONLY, I.E., IT HAS RECEIVED 13 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR THE COS T OF CONSTRUCTION FROM THE MEMBER ALLOTTEES AND THEN CONSTRUCTED THE FLATS/HOUSES. IN THIS LEASE DEED, IT IS MENTIONED THAT THE HOUSES/FLATS ETC. ARE GIVEN ON LONG TERM LEASE FOR 99 YEARS. THUS THE ASSESSEE, ON THE ONE PART, CLAIMS TO BE THE OWNER OF THE HOUSES/FLATS ETC AND ACCORDINGLY PREPARED THE LEASE DEED FOR LEASING OUT THEM FOR 99 YEARS LEASE. HOWEVER, ON THE OTHER PART, IT HAS DETERMINED THE COST OF HOUSES/FLATS AND HAS RECOVERED THE SAME FROM THE SO CALLED LESSEES. GIVING THE FLATS/HOUSES ON A LONG TERM LEASE OF 99 YEARS SHOULD BE CONSIDERED AS SALE OF DWELLING UNITS ONLY. 24 . THE FOLLOWING CLAUSE STATED IN THE LEASE DEED FURTHER BRINGS OUT THE INTENTION OF THE ASSESSEE SOCIETY CLEARLY : - IN CASE OF MEMBERS FOR WHOM THE LOAN HAS BEEN RAISED BY THE SOCIETY FROM A FINANCING INSTITUTION FOR THE PROJECT OF THE SOCIETY. 5. THAT THE MEMBER AGREES AND UNDERTAKE TO COMPLY WITH THE REQUIREMENTS OF THE FINANCING INSTITUTION WITH REGARD TO HIS ELIGIBILITY FOR THE LOAN. THE MEMBER AGREES TO SUBMIT IN SUPPORT OF ELIGIBILITY FOR LOAN, A LOAN APPLICATION, INCOME CERTIFICATE, EMPLOYER S CERTIFICATE, AFFIDAVIT IN SUPPORT OF HIS/HER BEING ELIGIBLE TO BE A MEMBER OF A CO - OPERATIVE GROUP HOUSING SOCIETY HIS ELIGIBILITY FOR HOLDING THE LAND UNDER THE PROVIS IONS OF URBAN LAND (CEILING & REGULATION) ACT, 1976 ETC. BESIDES THIS MEMBER AGREES TO UNDERTAKE TO PAY TO THE SOCIETY, THE AMOUNT WHICH HE/SHE CAN CONTRIBUTE TOWARDS THE PROJECT OF THE SOCIETY AND ALSO AGREES TO PAY ANY OVER RUNS DUE TO THE RISE IN THE COST OF THE PROJECT, IF ANY, FROM TIME TO TIME. THE MEMBER AGREES AND UNDERTAKES TO PAY THE MONTHLY ECONOMIC RENT WHICH WOULD BE DETERMINED FROM TIME TO TIME BY THE BOARD OF DIRECTOR/CHIEF EXECUTIVE OF THE SOCIETY WHICH WOULD COVER REPAYMENT OR QUARTERLY EQUATED INSTALMENT (INSTALMENT OR PRINCIPAL AND INTEREST), INSURANCE PREMIUM FOR GROUP INSURANCE AND THE PROPERTY OF THE SOCIETY MORTGAGED TO THE FINANCING INSTITUTION, AS BEING PAYABLE BY WAY OF INSTALMENT FOR REPAYMENT OF THE BALANCE OF LOAN INCLUDING IN TEREST OR OTHERWISE ON SUCH DATES FROM TIME TO TIME. THE MEMBER ALSO AGREES TO PAY SERVICES AND MAINTENANCE CHARGES FIXED BY THE SOCIETY FROM TIME TO TIME. A CAREFUL READING OF THIS CLAUSE SHOWS THAT ( A ) THE HOUSE/FLAT SHALL BE ALLOTTED TO ONLY THOSE MEM BERS WHO CAN CONTRIBUTE TOWARDS THE COST OF HOUSE/FLAT. 14 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR ( B ) IF THE MEMBER DOES NOT HAVE HIS OWN FUNDS, THE SOCIETY SHALL HELP IN GETTING LOANS FROM BANKS/FINANCIAL INSTITUTION, HOWEVER, SUB JECT TO THE FULFILLMENT OF THE TERMS AND CONDITIONS PRESCRIBED BY THE BANK/FINANCIAL INSTITUTION WITH REGARD TO THE ELIGIBILITY. ( C ) THE COST OVER RUNS DUE TO RISE IN THE COST OF PROJECT, IF ANY, SHALL BE BORNE BY THE MEMBERS, WHO HAVE AGREED TO TAKE HOUSE ON LONG TERM LEASE (PURCHASE). ( D ) THE BOARD OF DIRECTORS/CHIEF EXECUTIVE SHALL DETERMINE THE ECONOMIC RENT AND THE SAME WOULD COVER REPAYMENT OF QUARTERLY EQUATED INSTALMENT (INSTALMENT OF PRINCIPAL AND INTEREST) AND OTHER EXPENSES. ( E ) THE MEMBER SHALL ALSO PAY THE SERVICE AND MAINTENANCE CHARGES FIXED BY THE SOCIETY FROM TIME TO TIME. THIS CLAUSE CLEARLY BRINGS OUT THE FACT THAT THE ASSESSEE SOCIETY IS CONSTRUCTING THE HOUSES/FLATS AND ALLOTTING THE SAME ON OUTRIGHT SALE BASIS OR UNDER INSTALMENT SCHEME TO THE MEMBERS. THE INSTALMENTS FIXED WOULD COVER BOTH PRINCIPAL AND INTER EST, MEANING THEREBY, THE ASSESSEE IS ACTUALLY SELLING THE HOUSE S TO THE MEMBERS AND THE SALE CONSIDERATION IS RECOVERED IN INSTALMENTS ALONG WITH INTEREST. 24. IT IS IN THE COMMON KNOWLEDGE OF EVERYONE THAT THE BANKS/FINANCIAL INSTITUTIONS SHALL GI VE LOAN FOR PURCHASE/CONSTRUCTION OF THE HOUSES/FLATS, ONLY IF THE SAID ASSET IS OWNED BY THE BORROWER . FURTHER THE BANK/FINANCIAL INSTITUTION SHALL TAKE THE VERY SAME HOUSE/FLAT AS SECURITY AGAINST THE LOAN DISBURSED. IF THE CONTENTION O F THE ASSESSEE T HAT IT OWN S ALL THE DWELLING UNIT S IS ACCEPTED FOR A MOMENT, THEN THE QUESTION THAT ARISES IS WHETHER THE ASSESSEE WOULD ALLOW THE BANK/FINANCIAL INSTITUTION TO TAKE ITS ASSETS AS SECURITY IN RESPECT OF LOAN OBTAINED BY SOME OTHER POSSESSION. WHETHER THE ASSESSEE WOULD ALLOW THE BANK TO TAKE POSSESSION OF THE DWELLING UNIT AND SELL THE SAME , IF THE BORROWER FAILS TO REPAY THE LOAN TAKEN BY HIM . WE CAN LOOK AT THIS CLAIM FROM ONE MORE ANGLE ALSO. WHETHER A COMMON MAN WOULD BORROW LOAN AND ALSO UNDERTAKE 15 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR T HE RESPONSIBILITY TO REPAY IT, IN RESPECT OF A HOUSE/FLAT TAKEN ONLY ON LEASE AND NOT BELONGING TO HIM ? THE VERY FACT THAT A PERSON AGREES TO TAKE THE HOUSE/FLAT ON LONG TERM LEASE OF 99 YEARS, EITHER BY PAYING OWN FUNDS OR AVAILING LO ANS, WOULD ONLY SHOW THAT HE IS TAKING POSSESSION OF THE SAME, WITH THE BELIEF THAT HE IS ACTU A LLY PURCHASING THE HOUSE/FLAT. 25. WHEN IT WAS SPECIFICALLY ASKED AS TO WHETHER THE MEMBERS COULD SELL THE HOUSE/FLAT AND RETAIN THE GAIN ARISING ON SUCH SALE, THE LD A.R SU BMITTED THAT THE BUYERS HAVE ACTUALLY ACQUIRED AN INTEREST OR RESIDENCE RIGHT IN THE HOUSE/FLAT AND UP ON SALE OF HOUSE/FLAT, THEY ARE ACTUALLY TRANSFERRING THE SAID INTEREST/RIGHT. WITH REGARD TO GAIN ARISING ON TRANSFER OF HOUSE/FLAT, THE LD A.R SUBMITTE D THAT THE TRANSFEROR OF THE RIGHT WOULD PAY THE CAPITAL GAINS TAX. IN OUR VIEW, THE CONTENTIONS OF THE ASSESSEE APPEAR TO BE ATTRACTIVE, BUT IT DEFIES COMMON SENSE. WE HAVE ALREADY NOTICED THAT THE ACT OF GIVING THE HOUSE/FLAT ON LONG TERM LEASE FOR 99 YEARS IS CONSIDERED AS TRANSFER UNDER COMMON LAW. FURTHER, WE HAVE NOTICED THAT THE ASSESSEE IS RECOVERING FULL COST OF HOUSE/FLAT FROM THE PROSPECTIVE BUYERS , WHICH IS NOT THE NORMAL FEATURE FOUND IN LEASE TRANSACTIONS. NO LESSEE SHALL PAY THE FULL C OST OF THE ASSESSEE AND STILL REMAIN AS LESSEE ONLY AND NOT AS OWNER OF THE ASSET. ACCORDINGLY, WE ARE NOT INCLINED TO ACCEPT THE CONTEN TIONS OF THE LD A.R THAT THE ASSESSEE IS ACTUALLY THE OWNER OF THE HOUSES/FLATS AND THEY ARE GIVEN ON LONG TERM LEASE O F 99 YEARS. IN OUR VIEW, THE ACTIVITIES OF THE ASSESSEE CAN ONLY BE CONSIDERED AS CONSTRUCTION/PURCHASE OF HOUSES/FLATS AND SELLING THEM TO ITS MEMBERS. ADMITTEDLY THE SAID ACTIVITIES ARE COMMERCIAL IN NATURE OR TAINTED WITH COMMERCIALITY. 26. WE SH ALL NOW REFER TO THE DECISION OF HON BLE SUPREME COURT RENDERED IN THE CASE OF CIT VS. KUMBAKONAM MUTUAL BENEFIT FUND LTD (1964)(53 ITR 241). FOLLOWING OBSERVATIONS MADE BY THE HON BLE APEX COURT ARE RELEVANT: - 8. MOST OF THE CASES, BOTH ENGLISH AND INDI AN, BEARING ON THE POINT UNDER DISCUSSION, WERE REVIEWED BY THIS COURT IN CIT VS. ROYAL WESTERN INDIAN TURF 16 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR CLUB LTD. (1954) SCR 289 : (1953) 24 ITR 551 (SC) AND THIS RELIEVES US OF THE TASK OF REVIEWING ALL OF THEM AGAIN. WE WILL, HOWEVER, SHORTLY DEAL WI TH THOSE IN WHICH COMPANIES LIMITED BY SHARES WERE CONCERNED FOR THEY STAND ON A SLIGHTLY DIFFERENT FOOTING FROM COMPANIES LIMITED BY GUARANTEE. ALTHOUGH THE FACT IN THE ROYAL WESTERN INDIA TURF CLUB CASE (SUPRA) WERE DIFFERENT, THIS COURT LAID DOWN THE FO LLOWING : 'THE PRINCIPLE THAT NO ONE CAN MAKE A PROFIT OUT OF HIMSELF IS TRUE ENOUGH BUT MAY IN ITS APPLICATION EASILY LEAD TO CONFUSION. THERE IS NOTHING PER SE TO PREVENT A COMPANY FROM MAKING A PROFIT OUT OF ITS OWN MEMBERS. THUS A RAILWAY COMPANY WHICH EARNS PROFITS BY CARRYING PASSENGERS MAY ALSO MAKE A PROFIT BY CARRYING ITS SHAREHOLDERS OR A TRADING COMPANY; MAY MAKE A PROFIT OUT OF ITS TRADING WITH ITS MEMBER BESIDES THE PROFIT IT MAKES FROM THE GENERAL PUBLIC WHICH DEALS WITH IT BUT THAT PROFIT BEL ONGS TO THE MEMBERS AS SHAREHOLDERS AND DOES NOT COME BACK TO THEM AS PERSONS WHO HAD CONTRIBUTED THEM. WHERE A COMPANY COLLECTS MONEY FROM ITS MEMBERS AND APPLIES IT FOR THEIR BENEFIT NOT AS SHAREHOLDERS BUT AS PERSONS WHO PUT UP THE FUND THE COMPANY MAKE S NO PROFIT. IN SUCH CASES WHERE THERE IS IDENTITY IN THE CHARACTER OF THOSE WHO CONTRIBUTE AND OF THOSE WHO PARTICIPATE IN THE SURPLUS, THE FACT OF INCORPORATION MAY BE IMMATERIAL AND THE INCORPORATED COMPANY MAY WELL BE REGARDED AS A MERE INSTRUMENT, A C ONVENIENT AGENT FOR CARRYING OUT WHAT THE MEMBERS MIGHT MORE LABORIOUSLY DO FOR THEMSELVES. BUT IT CANNOT BE SAID THAT INCORPORATION WHICH BRINGS INTO BEING A LEGAL ENTITY SEPARATE FROM ITS CONSTITUENT MEMBERS IS TO BE DISREGARDED ALWAYS AND THAT THE LEGAL ENTITY CAN NEVER MAKE A PROFIT OUT OF ITS OWN MEMBERS.' IN DIBRUGARH DISTRICT CLUB LTD. VS. CIT (1927) 2 ITC521, WHICH WAS NOTICED BY THIS COURT, THE CALCUTTA HIGH COURT, DISTINGUISHING STYLES' CASE (SUPRA) HELD THAT THE FACT OF INCORPORATION COULD NOT BE NEGLECTED ON THE FACTS OF THE CASE. IN THAT CLUB, OUT OF THE MEMBERS OF CLUB ONLY 69 WERE SHAREHOLDERS AND 220 WERE NON - SHAREHOLDERS, WHILE 74 OUT OF 445 OF THE SHARES WERE HELD BY NON - MEMBERS OF THE CLUB, AND THE PROFITS OF THE CLUB WERE BEING DISTRIBUTE D EVERY YEAR AS DIVIDEND TO SHAREHOLDERS. ROWLATT, J., IN OUR OPINION, CORRECTLY POINTS OUT THAT IF PROFITS ARE DISTRIBUTED TO SHAREHOLDERS AS SHAREHOLDERS, THE PRINCIPLE OF MUTUALITY IS NOT SATISFIED. IN THOMAS VS. RICHARD EVAN & CO. (SUPRA), AT PAGE 822, HE OBSERVED THUS : ' BUT A COMPANY CAN MAKE A PROFIT OUT OF ITS MEMBERS AS CUSTOMERS, ALTHOUGH ITS RANGE OF CUSTOMERS IS LIMITED TO ITS SHAREHOLDERS . IF A RAILWAY COMPANY MAKES A PROFIT BY CARRYING ITS SHAREHOLDERS, OR IF A TRADING COMPANY, BY TRADING WITH THE SHAREHOLDERS EVEN IF IT IS LIMITED TO TRADING WITH THEM MAKES A PROFIT, THAT PROFIT BELONGS TO THE SHAREHOLDERS, IN A SENSE, BUT IT BELONGS TO 17 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR THEM QUA SHAREHOLDERS. IT DOES NOT COME BACK TO THEM AS PURCHASERS OR CUSTOMERS. IT COMES BACK TO THEM AS SH AREHOLDERS UPON THEIR SHARES. WHERE ALL THAT A COMPANY DOES IS TO COLLECT MONEY FROM A CERTAIN NUMBER OF PEOPLE IT DOES NOT MATTER WHETHER THEY ARE CALLED MEMBERS OF THE COMPANY, OR PARTICIPATING POLICYHOLDERS AND APPLY IT FOR THE BENEFIT OF THOSE SAME PEO PLE, NOT AS SHAREHOLDERS IN THE COMPANY, BUT AS THE PEOPLE WHO SUBSCRIBED IT, THEN AS I UNDERSTAND THE NEW YORK CASE (1889) 2 TAX CASES 469, THERE IS NO PROFIT. IF THE PEOPLE WERE TO DO THE THING FOR THEMSELVES, THERE WOULD BE NO PROFITS, AND THE FACT THAT THEY INCORPORATE A LEGAL ENTITY TO DO IT FOR THEM MAKES NO DIFFERENCE, THERE IS STILL NO PROFIT. THIS IS NOT BECAUSE THE ENTITY OF THE COMPANY IS TO BE DISREGARDED, IT IS BECAUSE THERE IS NO PROFIT, THE MONEY BEING SIMPLY COLLECTED FROM THOSE PEOPLE AND H ANDED BACK TO THEM, NOT IN THE CHARACTER OF SHAREHOLDERS, BUT IN THE CHARACTER OF THOSE WHO HAVE PAID IT. THAT, AS I UNDERSTAND IT, IS THE EFFECT OF THE DECISION IN THE NEW YORK CASE (SUPRA) . 27. THE ACTIVITIES CARRIED ON BY THE ASSESSEE IN THE CASE OF KUMBAKONAK MUTUAL BENEFIT FUND LTD WE RE DESCRIBED AS UNDER BY HON BLE SUPREME COURT: - THE RESPONDENT, THE KUMBAKONAM MUTUAL BENEFIT FUND LTD., HEREINAFTER REFERRED TO AS THE ASSESSEE, IS A COMPANY INCORPORATED UNDER THE INDIAN COMPANIES ACT, 1882, LIMIT ED BY SHARES. SINCE 1938, THE NOMINAL CAPITAL OF THE ASSESSEE IS RS. 33,00,000 DIVIDED INTO SHARES OF RE. 1 EACH. IT CARRIES ON BANKING BUSINESS RESTRICTED TO ITS SHAREHOLDERS, I.E., THE SHAREHOLDERS ARE ENTITLED TO PARTICIPATE IN THE VARIOUS RECURRING DEP OSIT SCHEMES OF THE ASSESSEE OR TO OBTAIN LOANS ON SECURITY. THE STATEMENT OF THE CASE DESCRIBES THE WORKING OF THE ASSESSEE THUS : 'RECURRING DEPOSITS ARE OBTAINED FROM MEMBERS FOR FIXED AMOUNTS TO BE CONTRIBUTED MONTHLY BY THEM FOR A FIXED NUMBER OF MONT HS AS STIPULATED AT THE END OF WHICH A FIXED AMOUNT IS RETURNED TO THEM ACCORDING TO PUBLISHED TABLES. THE AMOUNT SO RETURNED WILL COVER THE COMPOUND INTEREST OF THE PERIOD. THESE RECURRING DEPOSITS CONSTITUTE THE MAIN SOURCE OF FUNDS OF THE ASSESSEE FOR A DVANCING LOANS. SUCH LOANS ARE RESTRICTED ONLY TO MEMBERS WHO HAVE, HOWEVER, TO OFFER SUBSTANTIAL SECURITY THEREFOR, BY WAY OF EITHER THE PAID UP VALUE OF THEIR RECURRING DEPOSITS, IF ANY, OR IMMOVABLE PROPERTIES WITHIN THE TANJORE DISTRICT. OUT OF THE INT EREST REALISED BY THE ASSESSEE ON THE LOANS WHICH CONSTITUTE ITS MAIN INCOME, INTEREST ON THE RECURRING DEPOSITS AFORESAID ARE PAID AS ALSO ALL THE OTHER OUTGOINGS AND EXPENSES OF MANAGEMENT AND THE BALANCE IS DIVIDED AMONG THE MEMBERS PRO 18 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR RATA ACCORDING T O THEIR SHAREHOLDINGS AFTER MAKING PROVISION FOR RESERVES, ETC., AS REQUIRED BY THE MEMORANDUM OR ARTICLES AFORESAID. THE SHAREHOLDERS WHO ARE THUS ENTITLED TO PARTICIPATE IN THE PROFITS NEED NOT HAVE EITHER TAKEN LOANS OR HAVE MADE RECURRING DEPOSITS.' TH E HON BLE SUPREME COURT, AFTER CONSIDERING DIFFERENT CASE LAWS FINALLY HELD AS UNDER 11. IT SEEMS TO US THAT IT IS DIFFICULT T O HOLD THAT STYLES' CASE (1889)(2 TAX CASES 460) APPLIES TO THE FACTS OF THE CASE. A SHAREHOLDER IN THE ASSESSEE - COMPANY IS ENTIT LED TO PARTICIPATE IN THE PROFITS WITHOUT CONTRIBUTING TO THE FUNDS OF THE COMPANY BY TAKING LOANS. HE IS ENTITLED TO RECEIVE HIS DIVIDEND AS LONG AS HE HOLDS A SHARE. HE HAS NOT TO FULFIL ANY OTHER CONDITION. HIS POSITION IS IN NOWAY DIFFERENT FROM A SHAR EHOLDER IN A BANKING COMPANY, LIMITED BY SHARES. INDEED, THE POSITION OF THE ASSESSEE IS NO DIFFERENT FROM AN ORDINARY BANK EXCEPT THAT IT LENDS MONEY TO AND RECEIVES DEPOSITS FROM ITS SHAREHOLDERS. THIS DOES NOT BY ITSELF MAKE ITS INCOME ANY THE LESS INCO ME FROM BUSINESS WITHIN S. 10 OF THE INDIAN IT ACT. 28. WE HAVE NOTICED THAT, IN THE CASE OF THOMAS VS. RICHARD EVAN & CO. (SUPRA ) IT WAS HELD THAT IF A MUTUAL ASSOCIATION MAKES PROFIT OUT OF TRADING ACTIVITY CARRIED WITH ITS MEMBERS, THE PROFIT EARNED THEREFROM BELONGS TO THE MEMBERS AS SHARE HOLDERS AND NOT AS MEMBERS . IN THAT KIND OF SITUATION, THE ACTIVITY OF THE MUTUAL ASSOCIATION IS TAINTED WITH COMMERCIALITY. AS ALREADY POINTED OUT BY US, THE COMMERCIAL ACTIVITIES AND THE ACTIVITIES TAINTED WITH COMMERCIALITY ARE EXCLUDED FROM THE CONCEPT OF PRINCIPLES OF MUTUALITY . THIS PROPOSITION IS EXPLAINED BY HON BLE SUPREME COURT IN THE CASE OF BANGALORE COUB VS. CIT (2013)(350 ITR 509) AS UNDER 22. IN COMMISSIONER OF INCOME TAX, MADRAS VS. KUMBAKON AM MUTUAL BENEFIT FUND LTD. AIR 1965 SC 96, THIS COURT DIFFERENTIATED THE FACTS OF THE CASE BEFORE IT FROM THOSE OF STYLES CASE (SUPRA) AND DENIED THE EXEMPTION OF MUTUALITY BECAUSE OF THE TAINT OF COMMERCIALITY. IT WAS OBSERVED THUS: 'IT SEEMS TO US THAT IT IS DIFFICULT TO HOLD THAT STYLE S CASE APPLIES TO THE FACTS OF THE CASE. A SHAREHOLDER IN THE ASSESSEE COMPANY IS ENTITLED TO PARTICIPATE IN THE PROFITS WITHOUT CONTRIBUTING TO THE FUNDS OF THE COMPANY BY TAKING LOANS. HE IS ENTITLED TO RECEIVE HIS DIVI DEND AS LONG AS HE HOLDS A SHARE. HE HAS NOT TO FULFIL ANY OTHER CONDITION. HIS POSITION IS IN NO WAY DIFFERENT FROM A SHAREHOLDER IN A BANKING COMPANY, LIMITED BY SHARES. INDEED, THE POSITION OF THE ASSESSEE IS NO DIFFERENT FROM AN ORDINARY BANK EXCEPT TH AT IT LENDS MONEY TO AND 19 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR RECEIVES DEPOSITS FROM ITS SHAREHOLDERS. THIS DOES NOT BY ITSELF MAKE ITS INCOME ANY THE LESS INCOME FROM BUSINESS WITHIN S. 10 OF THE INDIAN INCOME TAX ACT.' 29. THE DOCT R INE OF MUTUALITY WAS AGAIN EXPL A INED BY HON BLE SUPREM E COURT IN THE CASE OF BANGALORE CLUB AS UNDER: - 7. BEFORE WE EVALUATE THE RIVAL STANDS, IT WOULD BE NECESSARY TO APPRECIATE THE GENERAL UNDERSTANDING OF DOCTRINE OF MUTUALITY. THE PRINCIPLE RELATES TO THE NOTION THAT A PERSON CANNOT MAKE A PROFIT FROM HI MSELF. AN AMOUNT RECEIVED FROM ONESELF IS NOT REGARDED AS INCOME AND IS THEREFORE NOT SUBJECT TO TAX; ONLY THE INCOME WHICH COMES WITHIN THE DEFINITION OF SECTION 2(24) OF THE ACT IS SUBJECT TO TAX (INCOME FROM BUSINESS INVOLVING THE DOCTRINE OF MUTUALITY IS DENIED EXEMPTION ONLY IN SPECIAL CASES COVERED UNDER CLAUSE (VII) OF SECTION 2 (24) OF THE ACT). 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 A MOUNT 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 INCOME NOR TAXABLE. OVER TIME, GROUPS WHICH HAVE BEEN CONSIDERED TO HAVE MUTUAL INCOME HAVE INCLUDED CORPORATE BODI ES, CLUBS, FRIENDLY SOCIETIES, CREDIT UNIONS, AUTOMOBILE ASSOCIATIONS, INSURANCE COMPANIES AND FINANCE ORGANIZATIONS. MUTUALITY IS NOT A FORM OF ORGANIZATION, EVEN IF THE PARTICIPANTS ARE OFTEN CALLED MEMBERS. ANY ORGANIZATION CAN HAVE MUTUAL ACTIVITIES. A COMMON FEATURE OF MUTUAL ORGANIZATIONS IN GENERAL AND OF LICENSED CLUBS IN PARTICULAR, IS THAT PARTICIPANTS USUALLY DO NOT HAVE PROPERTY RIGHTS TO THEIR SHARE IN THE COMMON FUND, NOR CAN THEY SELL THEIR SHARE. AND WHEN THEY CEASE TO BE MEMBERS, THEY LOSE THEIR RIGHT TO PARTICIPATE WITHOUT RECEIVING A FINANCIAL BENEFIT FROM THE SURRENDER OF THEIR MEMBERSHIP. A FURTHER FEATURE OF LICENSED CLUBS IS THAT THERE ARE BOTH MEMBERSHIP FEES AND, WHERE PRICES CHARGED FOR CLUB SERVICES ARE GREATER THAN THEIR COST, ADD ITIONAL CONTRIBUTIONS. IT IS THESE KINDS OF PRICES AND/OR ADDITIONAL CONTRIBUTIONS WHICH CONSTITUTE MUTUAL INCOME. 8 . THE DOCTRINE OF MUTUALITY FINDS ITS ORIGIN IN COMMON LAW. ONE OF THE EARLIEST MODERN JUDICIAL STATEMENTS OF THE MUTUALITY PRINCIPLE IS BY LORD WATSON IN THE HOUSE OF LORDS, IN 1889, IN STYLES (SURVEYOR OF TAXES) VS. NEW YORK LIFE INSURANCE CO. (1889) 2 TC 460 (HEREINAFTER REFERRED TO AS THE 'STYLES CASE'). THE APPELLANT IN THAT CASE WAS AN INCORPORATED COMPANY. THE COMPANY ISSUED LIFE POLICI ES OF TWO KINDS, NAMELY, PARTICIPATING AND NON - PARTICIPATING. THE MEMBERS OF THE MUTUAL LIFE INSURANCE COMPANY WERE CONFINED TO THE HOLDERS OF THE PARTICIPATING POLICIES, AND EACH YEAR, THE SURPLUS OF RECEIPTS OVER EXPENSES AND ESTIMATED LIABILITIES WAS DI VIDED AMONG THEM, EITHER IN THE FORM OF A REDUCTION OF FUTURE PREMIUMS OR OF A REVERSIONARY ADDITION TO THE POLICIES. THERE WERE NO SHARES OR SHAREHOLDERS IN THE ORDINARY SENSE OF THE TERM BUT EACH AND EVERY HOLDER OF A PARTICIPATING 20 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR POLICY BECAME IPSO FAC TO A MEMBER OF THE COMPANY AND AS SUCH BECAME ENTITLED TO A SHARE IN THE ASSETS AND LIABLE FOR A SHARE IN THE LOSSES. THE COMPANY CONDUCTED A CALCULATION OF THE PROBABLE DEATH RATE AMONGST THE MEMBERS AND THE PROBABLE EXPENSES AND LIABILITIES; CALLS IN THE SHAPE OF PREMIUMS WERE MADE ON THE MEMBERS ACCORDINGLY. AN ACCOUNT USED TO BE TAKEN ANNUALLY AND THE GREATER PART OF THE SURPLUS OF SUCH PREMIUMS, OVER THE EXPENDITURE REFERABLE TO SUCH POLICIES, WAS RETURNED TO THE MEMBERS I.E. (HOLDERS OF PARTICIPATING POLICIES) AND THE BALANCE WAS CARRIED FORWARD AS A FUND IN HAND TO THE CREDIT OF THE GENERAL BODY OF MEMBERS. THE QUESTION WAS WHETHER THE SURPLUS RETURNED TO THE MEMBERS WAS LIABLE TO BE ASSESSED TO INCOME TAX AS PROFITS OR GAINS. THE MAJORITY OF THE LAW LORDS ANSWERED THE QUESTION IN THE NEGATIVE. IT MAY BE NOTICED THAT IN THAT CASE THE MEMBERS HAD ASSOCIATED THEMSELVES TOGETHER FOR THE PURPOSE OF INSURING EACH OTHER'S LIFE ON THE PRINCIPLE OF MUTUAL ASSURANCE, THAT IS TO SAY, THEY CONTRIBUTED ANNUALLY TO A COMMON FUND OUT OF WHICH PAYMENTS WERE TO BE MADE, IN THE EVENT OF DEATH, TO THE REPRESENTATIVES OF THE DECEASED MEMBERS. THOSE PERSONS WERE ALONE THE OWNERS OF THE COMMON FUND AND THEY ALONE WERE ENTITLED TO PARTICIPATE IN THE SURPLUS. THIS SURPLUS WAS OBTAINED PARTLY FROM THE PROFITS ARISING FROM NON - PARTICIPATING POLICIES AND OTHER BUSINESS. IT WAS HELD THAT THAT PORTION OF THE SURPLUS WHICH AROSE FROM THE EXCESS CONTRIBUTIONS OF THE HOLDERS OF PARTICIPATING POLICIES WAS NOT AN ASSESSABLE PROFIT. IT W AS THEREFORE, HELD TO BE A CASE OF MUTUAL ASSURANCE. THE INDIVIDUALS INSURED AND THOSE ASSOCIATED FOR THE PURPOSE OF RECEIVING THEIR DIVIDENDS AND MEETING OTHER STIPULATED REQUISITES UNDER THE POLICIES WERE IDENTICAL. IT WAS HELD THAT THAT IDENTITY WAS NOT DESTROYED BY THE INCORPORATION OF THE COMPANY. LORD WATSON EVEN WENT TO THE EXTENT OF SAYING THAT THE COMPANY IN THAT CASE DID NOT CARRY ON ANY BUSINESS AT ALL, WHICH PERHAPS WAS STATING THE POSITION A LITTLE TOO WIDELY AS POINTED OUT BY VISCOUNT CAVE IN A LATER CASE; BUT, BE THAT AS IT MAY, ALL THE NOBLE LORDS, WHO FORMED THE MAJORITY, WERE OF THE VIEW THAT WHAT THE MEMBERS RECEIVED WERE NOT PROFITS BUT THEIR RESPECTIVE SHARES OF THE EXCESS AMOUNT CONTRIBUTED BY THEMSELVES. THEY HELD THUS: '... WHEN A NUM BER OF INDIVIDUALS AGREE TO CONTRIBUTE FUNDS FOR A COMMON PURPOSE ... AND STIPULATE THAT THEIR CONTRIBUTIONS, SO FAR AS NOT REQUIRED FOR THAT PURPOSE, SHALL BE REPAID TO THEM. I CANNOT CONCEIVE WHY THEY SHOULD BE REGARDED AS TRADERS, OR WHY CONTRIBUTIONS R ETURNED TO THEM SHOULD BE REGARDED AS PROFITS.' 30. IN THE INSTANT CASE, FIRST OF ALL, THE ASSESSEE SOCIETY IS NOT PROVIDING ANY FACILITY OR PRIVILEGE, WHICH IS NORMALLY DONE BY THE MUTUAL ASSOCIATION. INSTEAD, IT IS CONSTRUCTING THE HOUSES/FLATS AND S ELLING THEM TO ITS MEMBERS, WHICH IS NOTHING BUT A COMMERCIAL ACTIVITY. IN MUTUAL ASSOCIATION, THE MEMBERS WOULD BE 21 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR CONTRIBUTING TO COMMON FUND AND EACH MEMBER SHALL BE CONSIDERED AS PARTICIPATOR OF THE BENEFITS. HOWEVER, IN THE INSTANT CASE, T HE CONTRI BUTION MADE BY THE PURCHASERS OF THE HOUSE/FLAT CANNOT BE CONSIDERED AS CONTRIBUTION TO THE COMMON FUND OF THE ASSESSEE SOCIETY AND THE SAID MEMBERS EXERCISE RIGHT OVER THE PROPERTY TO THE EXCLUSION OF ALL OTHER MEMBERS . THIS FEATURE IS NOT ASSOCIATED WIT H THE DOCTRINE OF MUTUALITY. THE LD A.R FAIRLY ADMITTED THAT THE MEMBERS WHO HAVE ACQUIRED FLAT/HOUSE ARE ENTITLED TO TRANSFER THE SAME AND POCKET THE GAIN ARISING THERE FROM, WHICH IS NOT A FEATURE OF MUTUAL ASSOCIATION. IN FACT, NO MEMBER OF MUTUAL ASS OCIATION SHALL HAVE RIGHT INDEPENDENT RIGHT TO SELL ANY OF THE ASSETS OF THE MUTUAL ASSOCIATION OR EVEN THEIR SHARES. HOWEVER, IN THE INSTANT CASE, THE ADMITTED POSITION IS THAT THE MEMBERS ARE ENTITLED TO TRANSFER THE HOUSE ALLOTTED TO THEM TO OTHER PER SONS, THE ONLY CONDITION BEING THAT THE PROSPECTIVE BUYER SHOULD ALSO BECOME MEMBER OF THE ASSESSEE SOCIETY. HENCE THE ACTIVITY OF CONSTRUCTION/PURCHASE OF HOUSES/FLATS AND THEIR SALE CAN ONLY BE CONSIDERED AS COMMERCIAL ACTIVITY. HENCE THE SAME IS OUTS IDE THE SCOPE OF DOCTRINE OF MUTUALITY. 31. THE TRANSFER FEE RECEIVED BY THE ASSESSEE SOCIETY IS ALSO CONNECTED WITH THE COMMERCIAL ACTIVITY AND HENCE, IN OUR VIEW, THE DOCTRINE OF MUTUALITY SHALL NOT APPLY TO THE SAME. SIMILARLY, THE ACTIVITY OF ADVANC ING LOANS AND RECEIVING INTEREST THEREON ARE ALSO TAINTED WITH COMMERCIALITY AND HENCE THE DOCTRINE OF MUTUALITY SHALL NOT APPLY TO THE SAME. FURTHER THE MEMBERS OF THE CO - OPERATIVE SOC IETY SHALL RECEIVE DIVIDENDS AS SHARE HOLDERS ONLY . HENCE, APPLYING T HE PRINCIPLES ENUNCIATED BY THE HON BLE SUPREME COURT IN THE ABOVE CITED CASES, WE HAVE TO HOLD THAT THE ACTIVI TIES CARRIED ON BY THE ASSESSEE ARE COMMERCIAL ACTIVITIES AND HENCE IT CANNOT TAKE THE BENEFIT OF DOCTRINE OF MUTUALITY. 32. THE ASSESSEE, AD MITTEDLY, HAS NOT DECLARED ANY PROFIT OUT OF THE CONSTRUCTION ACTIVITY. THOUGH THE ASSESSEE SOCIETY HAS CLAIMED THAT THE HOUSES/FLATS BELONG TO IT, YET WE HAVE ALREADY NOTICED THAT IT HAS DISCLOSED THE COST OF THE SAME AS PROGRESSIVE COST OF FLATS CONST. UNDER THE CATEGORY OTHER ASSETS AND RECOVERIES , I.E., THE ASSESSEE NEVER TREATED THE COST OF HOUSES/FLATS AS ITS FIXED ASSETS. IN ANY CASE, WE HAVE ALREADY NOTICED THAT THE TREATMENT GIVEN 22 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR IN BOOKS OF ACCOUNT IS NOT RELEVANT TO DECIDE ABOUT THE TAXABI LITY OF A PARTICULAR ITEM. THUS, IT IS SEEN THAT THE ASSESSEE SOCIETY HAS FAILED TO SHOW THAT IT DID NOT MAKE ANY PROFIT OUT OF THE CONSTRUCTION ACTIVITIES BY FURNISHING PROJECT WISE DETAILS OF COST OF CONSTRUCTION AND THE SALE PROCEEDS RECEIVED ON THE AL LOTMENT OF HOUSES. WE HAVE ALREADY NOTICED THAT THE ASSESSEE IS RECOVERING THE COST OF HOUSE/FLAT IN INSTALMENTS ALONG WITH INTEREST. UNDER THESE SET OF FACTS, THE ASSESSING OFFICER SHALL HAVE NO OTHER OPTION, BUT TO ESTIMATE THE INCOME FROM CONSTRUCTION ACTIVITIES. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD CIT(A) IN CONFIRMING THE ESTIMATION OF INCOME FROM CONSTRUCTION ACTIVITIES MADE BY THE ASSESSING OFFICER. 33. IN THE RESULT, ALL THE APPEAL S FILED BY THE ASSESSEE ARE DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 0 5 - 1 2 - 2014 SD/ - SD/ - [ H.L. KARWA ] [ B.R. BASKARAN ] PRESIDENT ACCOUNTANT MEMBER DT. 05 - 12 - 2014 PLACE : RANCHI PP, SR. PS COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT : M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY L IMITED TD,JSR 6 - S PHASE - III,ADARSH NAGAR, SONARI,JSR - 831011 2 THE RESPONDENT: DCIT, CIR - 1,JSR 3. .THE CIT, 4.THE CIT(A), 5.DR, ITAT CIRCUIT BENCH, RANCHI 6. GUARD FILE. TRUE COPY, BY ORDER, ASSTT. REGISTRAR 23 IT A NO S. 129,136 - 138 /RAN/1 0 - M/S ADARSH SAHAKARI GRIH NIRMAN SWABLAM B I SAMITY LTD,JSR 1 DATE OF DICTATION ............. 24 - 11 - 2014 . & REST OF T HE PORTION DRAFTED AND WHOLE MATTER CORRECTED AND FINALIZED BY THE MEMBER AND THE SAME RETURNED ON 4 - 12 - 14 .... FOR PRINTING ................. 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER ........................OTHER MEMBER ....... ....................... 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. ..................... 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT............................................................ .................... 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S ................ 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK ....................................... 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ................ ......................... 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER ................................................................................................. 9. DATE OF DESPATCH OF THE ORDER .......... ....................................................