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By Ajay R. Singh, Advocate

S.45 : Capital Gains — Sale of land – Business income The objects clause is not determinative – income received by Co-operative Society — Finding that lands did not constitute stock-in-trade of assessee, therefore gains on sale assessable as Capital Gains and not as Business Income:

S. 4 : Charge of income-tax – Mutuality-transfer charges receipts by Co-operative society from its members - exempt from Income-tax Act based on the principle of mutuality:

The assessees hitherto are part of 14 Co–operative Housing Societies formed in the year 1947 for providing housing to middle class persons in the suburbs of Vile Parle, Mumbai. The Government of Bombay Province (Housing Board) allotted plots to these housing societies in the year 1960. Out of the plots allotted to the housing societies, the Housing Board earmarked certain Plots for amenities and public utilities and share of each housing society in the said plot was also specified. The area comprising the various amenities plots and the purpose thereof was also specified by the Government while conveying the land to the Societies. Since, a part of amenities plot was encroached by some people and the Co–operative Housing Societies could not evict them, all the 14 Co–operative Housing Societies decided to dispose off the said plot on “as is where is” basis in the previous year relevant to assessment year 1995–96. The sale proceeds received from sale of the said plot was divided amongst all the 14 Co–operative Housing Societies in the ratio of their respective shares in the said land. The income received by each Co–operative Society towards their respective shares in the sale proceeds of the land was offered to tax under the head Capital Gains. However, the Assessing Officer while completing the assessment treating the income received from sale of land as business income of the assessees.

The Tribunal held that the identical dispute came up for consideration before the Tribunal in case of two of the Housing Societies viz., The Nutan Laxmi Co–operative Housing Society Ltd. and the Swarna Nagar Co–operative Housing Society Ltd. in ITA No. 4255/Mum./2014 and ITA No. 4802/Mum./2014, the Tribunal vide order dated 7th September 2018, accepted the claim of the assessee holding as under:–

We notice that the AO has mainly treated the impugned receipts as Business Income for the reason that the object clause mentions that they are involved in trading in plots. Another reason cited is that these societies could not prove their ownership rights. The Hon’ble Supreme Court has held in the case of Raj Dadarkar & Associates (supra) that the object clause is not determining factor and the circumstances of each case should be examined to determine the nature of receipt. We notice that these Societies have sold the plot as its owner and the buyer has also accepted the same as owner. According to the societies, these common amenity plots have been owned by them jointly for about 15 years or more. When there is no dispute on this aspect, we are unable to understand as to how the AO was questioning the ownership. We also notice that the AO has not conducted any enquiry with any of the authorities to disprove the claim of the societies. We have noticed that these societies have sold another plot in the year relevant to AY 2004-05 to Indian Police Service, in which police quarters were proposed to be constructed. It can be noticed that the above transaction has taken place with a Government Agency. Had these societies not been the owners of the plots, a Government agency, which is a part of Police department, would not have acquired the plot from these Societies. Hence we do not find any reason to suspect the ownership claim of the plots. Further our foregoing discussions would show that the reasoning given by the AO fails. There is no other instance to show that these societies were indulging in purchase and sale of plots. Accordingly we are of the view that there is no reason to assess the impugned receipts on sale of plot as Business income of the assessee. Accordingly we set aside the orders passed by tax authorities in the hands of both the assessees herein and direct the AO to compute the income under the head Capital Gains as provisions of the Act.”

Following the aforesaid decision of the Co-ordinate Bench ITAT directed the AO to compute the income received by the assessees from their respective shares in the sale proceeds of the land sold under the head Capital Gains.

The next common issue is that the assessees in the relevant previous year received transfer fees of different amounts for giving no objection certificate to Members who sold their Plots / structures to incoming Members. The assessees claimed the amount received towards transfer fee to be exempt from taxation under the principle of mutuality. However, the AO rejecting the claim of the assessee assessed the amount received towards transfer fee to tax.

The Tribunal relying on the decision of Venkatesh Premises Co-op Hsg. Society Ltd. (402 ITR 670)(SC) rendered by Hon’ble Supreme Court directed the AO to delete the addition relating to Transfer fees in both the cases.

DCIT vs. Vallabhnagar Co–operative Housing Society Ltd., ITA No.4256-4257/Mum/2014, Bench F, AY 1995-96; DOH: 23/01/2019 (Mum.)(Trib.)

Vallabhnagar Co–operative Housing Society Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.orga> under Knowledge Centre.

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