Brief on taxation of Co-operative Housing Societies and Income Tax Return

In general, the perception is that the income of Co–operative Societies (‘CHS’) are not chargeable to tax and therefore many societies do not bother to take PAN number and file Income Tax Returns. This is simply a wrong perception since certain income of CHS is exempt however there are other incomes which are chargeable to tax.

Let’s examine on a case-to-case basis the income which normally earned by CHS:

a) Contribution from Members:

This are the most commonly credit side of profit and loss account of any CHS. They are credited under different heads namely Maintenance Charges, Municipal Taxes, Electricity Charges, Lift Maintenances Charges, Water Charges, etc.

It may be emphasized that the society merely acts as an agent who collects this charges on behalf of members and spend or utilise the same to meet the various day-to-day expenditure of the society. Any surplus generated from type of income is not chargeable to tax as it is exempted based on the ‘concept of Mutuality’. The basic principle of Mutuality is a mutual association arises when persons forming a group, associate together for a common object and contribute money for achieving that object and divide the surplus amongst them in the character. The cardinal requirement in case of mutual association is that “all the contributors to the common fund must be entitled to participate in the surplus and all the participators to the surplus must be contributors to the common trade.” In other words there should be complete identity between the contributors and the participators.

 b) Interest Charged on member Outstanding:

Interest charged by society on outstanding dues of members again forms a part of contribution from members. Moreover, it qualifies the test of mutuality since the contributors and participators are the same persons. Thus this is also an exempt income based on the concept of Mutuality.

c) Interest Income Earned on Investments:

Interest income earned can be further classified into interest earned from investments made in Co-operative Banks and interest from other Investments. Interest earned from any investment made in Co-operative Banks qualifies for deduction at 100% under section 80P(d). However other interest income on investments is fully taxable.

d) Dividend:

Dividend income received from Indian Companies is fully exempt u/s 10(34). Dividend received from Co-operative Banks qualifies for exemption under 80P(d) is therefore 100% deductible.

e) Rental Income from Advertisement Hoardings:

This is fully taxable under the head Business Income / Income from other sources. However expenses which can be directly attributable to earning of this income can be claimed against this income on a proportionate basis.

 f) Rental from Mobile / Cable Towers etc.:

Rental from mobile and cable towers is taxable under the head Income from House Property, considering the same it is eligible for standard deduction u/s 24 (a) at 30% of the rent. Also if society has borrowed capital to construct said building in which the tower has been erected than a proportionate deduction can be claimed for interest paid on borrowed capital.

 g) Rentals from use of open Spaces / Terrace:

If the Rentals are received for use of open ground or terrace the point which should be considered is whether it is received from Members or Non-members and if it is received from Members than it can be argued that it is not taxable on the grounds of ‘Mutuality’ and If it is received from Non-members or outsiders it shall be fully taxable under the head Income from House Property and will qualify for deductions as mentioned earlier.

h) Non – Occupancy Charges:

Though non – occupancy charges are being collected from members in their periodic bills, income tax departments view point has been that this amount is received from a members who has not been staying in the premises of the society. Therefore though he is a contributor he is not enjoying the amenities of the society is thus not a participator. Considering the same the mutuality concept is not satisfied and therefore this income is chargeable to tax.

However this view point is debatable and can always be argued in society’s favor as in some of the cases the ruling given is that “While comparing the contributors and participators in concept mutuality they should be compared as a class and not isolated or individual contributors”.

i) Parking Charges:

Again in this case the point to be seen is whether the collections are from Members or Non – Members. In case of collections from members, they are covered by concept of Mutuality. However, in case of societies having shopping complexes parking charges collected from outsiders would be taxable.

j) Transfer Fees:

Transfer Fees received by Co-operative Housing Society from the outgoing member on transfer of the flat up to the limit allowed by law viz. Rs. 25,000/- per flat, is not liable to tax.

As per the judgment of the Special Bench of ITAT, Mumbai, transfer fees received by a Co-operative Housing Society are exempt from income tax under the principle of mutuality. ITAT has also observed that if a society charges transfer fees or premium more than what is prescribed under the law, stern action should be taken against such society.

Further the societies are taxed as per the following slab:

Income upto   Rs 10,000                                     10%

Income upto   Rs 20,000                                     20%

Above Rs. 20,000                                                30%

The income tax as arrived above has to be increased by 4% of tax payable towards Health and Education Cess.

– By CA Hemant Ajmera

  Partner, DAS