Our housing society collects maintenance, transfer fees and non-occupancy charges from members and earns interest on its fixed deposits. What is actually taxable?
The member receipts are not. The Supreme Court held in ITO v. Venkatesh Premises Co-operative Society Ltd that transfer charges, non-occupancy charges and common amenity fund charges collected from members are covered by mutuality and are not income. The bank interest is taxable: in Secunderabad Club v. CIT the same Court held mutuality does not reach interest on fixed deposits, whether or not the bank is a member. Receipts earned through the society's own assets from non-members are taxable too.
Mutuality is not an exemption in the Act. It is a proposition about what income is: a person cannot make a profit out of himself, so an amount a body receives from its own members, to be spent on those same members, never becomes income at all and never reaches the charge in section 4. That is why the doctrine turns on identity rather than on any statutory condition.
The conditions usually worked with are the three drawn from English & Scottish Joint Co-operative Wholesale Society Ltd v. CAIT [1948] AC 405 — identity of the contributors to the fund with the recipients of the fund; the body being treated as a mere entity for the convenience of the members, an instrument obedient to their mandate; and the impossibility that the contributors should derive profits from contributions made by themselves to a fund which could be expended or returned to themselves. The Supreme Court in Bangalore Club v. CIT (2013) 350 ITR 509 put the underlying idea more shortly: the principle relates to the notion that a person cannot make a profit from himself, and an amount received from oneself is not regarded as income and is therefore not subject to tax.
On the receipts side of a housing or premises society, the question was settled by the Supreme Court in ITO v. Venkatesh Premises Co-operative Society Ltd (2018) 402 ITR 670. Non-occupancy charges, transfer charges, common amenity fund charges and other similar amounts collected from members are not taxable, because the principle of mutuality applies to all of them. The transfer fee point is worth following closely, because it is the one officers press. The charge is payable by the outgoing member; where the transferee pays part of it for convenience that does not give the receipt the character of profit or commerciality, because the society appropriates the amount only after the transferee has been admitted to membership and returns it if admission is refused. The Court's sentence is that the moment the transferee is inducted as a member the principles of mutuality apply. Non-occupancy charges — payable by a member who does not occupy the flat himself but lets it to a third person — were held to be within mutuality on the footing that the funds were utilised only for the common benefit of facilities and amenities to the members. Ordinary maintenance and service charges follow the same reasoning a fortiori: they are contributions by members to a common fund spent on the same members.
One housekeeping point from the same case. The 2001 notification issued under section 79A of the Maharashtra Co-operative Societies Act, 1960, which caps non-occupancy charges, was held to apply to housing societies and not to premises societies holding non-residential property. Before you rely on a State cap, check which kind of society you are.
Mutuality stops where the money leaves the circle. In Secunderabad Club etc. v. C.I.T.-V etc. (17 August 2023) the Supreme Court held that the principle does not apply to interest earned on fixed deposits made by the clubs with banks, irrespective of whether the banks are corporate members of the club. The reasoning is that placing the surplus with a bank diverts it into a commercial dealing with a third party rather than applying it to services for members, which breaks the identity mutuality depends on; the interest is ordinary income under section 2(24), taxed like any other income from other sources. The Court also decided in the same batch that income the clubs earned through their assets and resources from persons who are not members is taxable, and disposed of the argument that the earlier order in Cawnpore Club Ltd left the question open — that order was brief and unreasoned and, without any indication of what the other questions before it were, could not operate as a precedent.
So the practical division for a society or club is this. Column one: subscriptions, maintenance and service charges, sinking and repair fund contributions, transfer and non-occupancy charges, amenity fund charges — all from members, all outside the charge. Column two: interest and dividends on deposits and investments, rent or licence fees from an outsider such as a telecom operator or a hoarding contractor, hire of the hall to a non-member, and any surplus generated on dealings with non-members — all inside the charge. Where an item is mixed, apportion it and say so, rather than claiming mutuality over the whole.
Mutuality is not the same argument as section 80P, and confusing the two is expensive. Section 80P is a deduction available to a co-operative society on defined heads of income and is subject to its own conditions, including the filing deadline in section 80AC and the exclusion in section 80P(4). Mutuality is a prior question about whether there is income at all. The two do meet in one place — the Supreme Court in The Citizens Cooperative Society Ltd v. ACIT denied section 80P partly because the society had failed the test of mutuality, its nominal members not being members in law, so the contributors to the surplus and the participators in it were not the same body. For a housing society that ends up with taxable income after all this, the residual deduction in section 80P(2)(c) is the fallback; that is covered separately in this library.
The notice a housing society or a club receives is almost always about transfer fees or fixed deposit interest, and the two now go opposite ways in the Supreme Court. A reply that claims mutuality across the whole of the income and expenditure account invites the officer to reject the claim as a whole rather than confine the addition to the interest; a reply that concedes the interest and defends the member receipts on Venkatesh Premises is a much shorter argument and a winnable one. The distinction also drives the accounts: a society that does not maintain the member column and the non-member column separately has no way of proving which is which when asked.
Our members' club keeps its surplus in fixed deposits with banks that are themselves corporate members — is the interest exempt on the principle of mutuality?
I live in my own house and earn nothing from it. Can Parliament tax me on a notional annual value as income from house property?
My client took his share on a partition and is now the only member — unmarried, no wife, no children. He wants to file as an HUF because the property he received is ancestral. Can he?
The trustees of my settlement are being assessed on the trust income. The department has now also included the same income in my own assessment under s.64. Does s.161(2) stop it?
My members-only club owns its own club house and uses it for members. Can the Department tax the annual letting value of that building as income from house property?
I collected sales tax from buyers and kept it in a separate account because I dispute the liability. Is that collection my income?
Partners have come and gone over the years and a fresh deed was drawn up. Is my firm still the same assessable unit, or has a new firm come into existence?
My members' club charges for drinks, rooms and subscriptions and ends the year with a surplus. Is that surplus taxable income?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.
