Sind Coop. Hsg. Society v.ITO ITA NO. 931 OF 2004

Applicability of principle of mutuality qua transfer fee received by a Co-operative Housing Society governed by MCS Act, 1960 and Rules thereof The principle of mutuality will apply to a Co-operative Housing Society which has its predominant activity, the maintenance of the property of the society which includes its building or buildings and as long as there is no taint of commerciality, trade or business in such activity. HIGH COURT OF BOMBAY Sind Coop. Hsg. Societyv.ITO ITA NO. 931 OF 2004JULY 17, 2009RELEVANT EXTRACTS :** ** ** ** ** **  In all these appeals, the appeal is admitted on the following question :“Whether on the facts and in the circumstances of the case any part of transfer fees received by the assessee societies – whether from outgoing or incoming members – is not liable to tax on the ground of mutuality?”19. In C.I.T. Vs. Adarsh Cooperative Housing Society Ltd. (Guj) 213 ITR 677, the issue again was whether on transfer of lease, the amount received by the society from the member out of the premium received by him from the purchaser was exigible to tax. After considering the provisions of the Gujarat Cooperative Societies Act, 1961, the Gujarat High Court noted that the corpus of fund is not divisible as such pro rata between the members on the winding up of the society. However, 21 such surplus is to be devoted to any object or objects provided in the bylaws of the society if they specify that such a surplus shall be utilized for particular purpose. The court therefore, held that the right of the members to deal with the surplus was not destroyed and that did not detract from the concept of return of surplus to members which they had contributed. The court also noted that there was identity of contributors and beneficiaries. It was also reiterated that it is not necessary that the participants of the surplus need be the same individuals who have contributed but they must bear the same character, namely, contributor member.20. Considering these principles, the question is whether on the facts before us, the principle of mutuality would be attracted in respect of the transfer fee received by the Housing Cooperative Societies governed by the provisions of the M.C.S. Act and rules. In Walkeshwar Cooperative Housing Society (supra), the tribunal itself has held that the amount received from the transferor member would not be exgible to tax. It is only the amount received from the transferee, that is exgibile to tax. We have noted that in so far as Sind CHS and National CHS Ltd. their bylaws provide that the amount has to be paid by the transferor member. The issue therefore, of transferor or transferee for those assessees really does not arise. However, we will have to answer the issue considering what was considered in the case of Walkeshwar CHS and considering the model bye-laws which are now adopted by most housing societies. We have noted the bye-laws as also provisions under the Act and Rules. The transfer fee can be appropriated only if the transferee is admitted to membership. The fact that a proposed transferee may make payment in 22 advance by itself is not relevant. The amount can only be appropriated on the transferee being admitted as a member. As it is a transfer fee, if the transferee is not admitted as a member, the amount received will have to be refunded, as the amount is payable only on a transfer of rights of the transferor in the transferee. If it is held that payment of transfer fees is by a stranger, it will certainly be in the nature of gift and not income. If an amount is received more than what is chargeable under the bye-laws or Government directions, the society is bound to repay the same and if it retains the amount it will be in the nature of profit making and that specific amount will be exigible to tax. Considering the bye-laws, as the main activity of a housing cooperative Housing Society is to maintain the property owned by it and to render services to its members by way of usual privileges, advantages and conveniences, there is no profit motive involved in these activities. The amount legally chargeable and received goes into the fund of the society which is utilized for the repairs of the property and common benefits to its members.21. We may now deal with some other submissions advanced on behalf of the Revenue. It was contended that the class of members means, members such as permanent, temporary, honorary etc. This is based on the assumption that there can be different classes of members. In a Cooperative Housing Society there can be members and associate members. We have already quoted from the judgments where reference is to members as a class and that class may be diminished by members going out or increased by the members coming in. But the class remains the same. As already noted by the Supreme Court in Bankipur Club (supra), the 23 identity must be as a class of contributers and participants and it does not matter that the class may; be diminished or increased by members going out or coming in. Similarly it is not necessary that each member should contribute or each member should participate in the surplus and get back from the surplus what he has paid, as long as they have control over the surplus.22. It was also sought to be contended that the payment is not voluntary and at any rate the excess amount charged than what is permitted in the bye-laws will be exigible to tax. Firstly whether it is voluntary or not would make no difference to the principle of mutuality. Secondly payments are made under the bye-laws which constitutes a contract between the society and its members which is voluntarily entered into and voluntarily conducted as a matter of convenience and discipline for running of the society. If it is the case that the amounts more than permissible under the notification had been received under pressure or coercion or contrary to Government directions, then considering section 72 of the Contract Act, that amount will have to be refunded. At any rate if the society retains the amount in excess of binding Government notification or the bye-laws that amount will be exigible to tax as it has an element of profiteering.23. It was then sought to be contended that the premium charged is a profit. As we have already noted and considering the bylaws, the society is registered with the object principally of looking after the property including building thereon. There is no trading or business transactions. The members by adopting the bylaws agree amongst themselves that a fee for transfer of flat/tenement when it is sold would be 24 paid to the society. It may be that both incoming or outgoing member have to contribute to the common fund of the society. The amount paid however, is to be exclusively used for the benefits of the members as a class.  24. 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 nature of trade, business or the like in which event the assessee 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 of 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.25. It was also contended that the case should be covered by section 28(3) of the Income Tax Act. Section 28(3) would have no application to the facts of the case as it deals with the income derived by the member from professional or similar association from the specific services performed for its members. A cooperative society has no similarity whatsoever with a professional association. In CIT Vs. Apsara (supra) the Calcutta High Court there held that even if the case of member or professional association, general fees levied by the association on its members by way of entrance fees or periodical subscription or otherwise would not constitute business. Since these are not related to any specific services rendered by its members. We are in respectful agreement with that view.26. In so far as Section 80P is concerned, the deduction is available in respect of the charges from certain commercial activities by the cooperative housing society. That is not relevant for the issue being answered.  27. An argument has been advanced that the societies are charging more than the amount as notified or permitted by the Government Notification dated 9.8.2001. The cases before us are for the assessment years previous to that. Earlier notification of 20.12.1989 provided that only if the bye-laws were amended in terms of the notification dated 27.11.1989, then the society could not charge more than what was set out in the notification. We really would not be concerned therefore, in this group of cases with notification as now notified by the Government. If therefore, any amount has been received beyond the amount notified by the Government and that amount has not been refunded to the members to that excess amount as already held, the principle of mutuality will apply.  28. Let us now apply the various tests which are to be considered for applying the principle of mutuality to a case of a cooperative housing society based on our earlier discussion.(1) Is there any commerciality involved.This has to be found from the byelaws of the cooperative housing society. In case of the cooperative Housing society, admittedly there is no commerciality involved. Once there is no commerciality involved the first test of profitability does not exist. The first requirement of mutuality is therefore, 26 met.(2) From the moneys received are the services offered in the nature of profitsharing or privileges, advantages and conveniences. In case of a cooperative housing society, the only activities which it can carry out in terms of its bye-laws are basically maintenance of its property which includes building or buildings. The subscription and or contributions received by the members can only be expended for the purposes of maintenance and providing other privileges, advantages and conveniences to its members in terms of its bye-laws. Another test of mutuality is thus satisfied.(3) Are the participants and contributors identifiable and belong to the same classin the case of cooperative housing society. The class of members are clearly identifiable. Members are ordinary members or associate members. The participants and contributers are the members. The members may come in or go out. The fact that only some members from those who contributed may participate in the surplus, as held by the Supreme Court is irrelevant as long as the class is identifiable. This test is also satisfied in the case of a Housing Cooperative Society.  (4) Do the members have the right to share in the surplus and do they have a right to deal with its surpluses. In terms of the bye laws it is only the members who have a right to share in the surplus. Under the M.C.S. Act, no part of the funds, as provided in 27 section 64 can be paid by way of bonus or dividend or otherwise distributed among its members except as provided therein. Under Section 67, there is a limit on the dividend to be paid on liquidation. Under section 110 of the M.C.S. Act. The surplus can only be dealt with in the manner provided therein which includes any member or devoted to objects provided by the bye-laws or be transfered to another society with similar object. Rule 90 of the Rules provide how the surplus is to be divided. The surplus then can be distributed in terms of the bye-laws to members and or by operation of law to another society having the same objective. In other words yet another test of mutuality is satisfied.29. Once these tests are satisfied, in our opinion, there can be no doubt that the principle of mutuality will apply to a cooperative Housing Society which has its predominant activity, the maintenance of the property of the society which includes its building or buildings and as long as there is no taint of commerciality, trade or business.  30. For all the aforesaid reasons, the questions as framed will have to be answered in favour of the assessee and against the revenue.** ** ** ** ** **

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ICAI backs rotation of partners every 5 years

Following the outcry over role of auditors in the Satyam scam, auditing regulator ICAI has recommended major changes in auditing processes, which include among other things, joint auditors for big companies and rotation of partners every five years.

These recommendations of a high-powered committee of ICAI, formed after the Satyam scam, will now be considered by the government. The committee, headed by ICAI president Uttam Prakash Aggarwal, was tasked with suggesting changes required to make the auditing process in India more effective and foolproof after the Satyam scandal shook corporate India and led to the arrest of auditors of Price Waterhouse.

"Joint audit is one of the major recommendations and the committee has said this could be mandated for listed public limited companies," sources in the know said, though Aggarwal refused to confirm. "The other major recommendation is rotation of partners every five years instead of the current stipulation of seven years," the sources said. The move aims at checking complicity between the company management and the engagement partner. The concept of joint audit - where more than one firm audits the financials - is not very popular globally and out of the G20 countries, only France practices this. In India, public sector companies and banks have joint audits.

Ernst & Young's Rahul Roy, former president of ICAI, doubted the success of joint audits. "It is normally looked down upon globally. Also, while internationally all the joint auditors are responsible for the veracity of the entire audit, in India an auditor is held liable only for the portion of audit he has carried out. This is a serious defect that has to be rectified first," he said, adding that it would not be an effective tool to check against malpractice between management and a particular auditor. However, Sunil Talati, another former president of ICAI, said joint audit can be an "effective tool" to check malpractices or negligence in audits. 

And while experts welcome rotation of partners, the only technical problem is that around 90% of practising CAs in India are sole proprietorships. "However, the concept of peer review has been introduced for the sole proprietorships to tackle this issue," sources said.

Sources:Times Of India

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CIT vs. Sri Mangayarkarasi Mills (Supreme Court)

Replacement expenditure is neither “current repairs” nor “revenue”

The assessee incurred expenditure on replacement of machinery in a textile mill and claimed the same as revenue expenditure on the ground that it was merely for replacement of spare parts in the spinning mill system and did not give rise to a new asset. In the books, the expenditure was capitalized. The CIT (A), ITAT and High Court decided in favour of the assessee. However, on appeal by the revenue, HELD, reversing all the lower authorities:

 

(i) Each machine in a textile mill is a separate and independent item though it is a part of the integrated process of manufacture of yarn and is integrally connected to the other machines in the mill for production of the final product. The machine cannot be treated as a mere part of an entire composite machinery of the spinning mill. 

 

(ii) To constitute “current repairs” u/s 31 the expenditure must be incurred to ‘preserve and maintain’ an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For determination of ‘current repairs’ the question whether the expenditure is revenue or capital is not the proper test. However, as the machine was an independent entity, its’ replacement brought into existence a new asset and was not current repairs. 

 

(iii) The expenditure was also not “revenue” u/s 37 (1) as the replacement brought into existence a new asset and also gave rise to an enduring benefit. 
 

(iv) Though accounting practices may not be the best guide in determining the nature of expenditure, the fact that the assessee treated the expenditure as an addition to the existing assets shows that the claim for deduction under the Act was made merely to diminish the tax burden and not under the belief that it was actually revenue expenditure.

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In Re WorleyParsons Services Pty. Ltd (AAR)

(Extract)

Where the assessee, an Australian company, entered into an agreement with Reliance and it was agreed that the consideration thereof constituted “royalty” but the assessee claimed (i) that the said royalty was “effectively connected” with a permanent establishment (PE) and consequently assessable as business profits, (ii) that the portion of such “profits” as was not “attributable” to the PE was not assessable to tax in India and (iii) that even otherwise the royalty was not assessable to tax in view of Ishikawakima 288 ITR 408 (SC) where it was held that fees for technical services (and royalty) was not assessable to tax u/s 9(1)(vii) (9(1)(vi)) if it was not rendered and utilized in India, HELD:

 (i) In order to be “effectively connected”, the PE should be engaged in the performance of royalty generating services. There must be a real and intimate connection and clear co-relation between the services giving rise to royalty and the PE. A connection between the PE and the contract is not enough;  (ii) On facts, as the bulk of the work was done outside India, the royalty was not “effectively connected” with the PE so as to qualify as business income. The fact that the said work was done based on inputs from India and the end-product was delivered and utilized in India was not relevant as that was pursuant to a different agreement; (iii) Ishikawajima cannot be read to mean that the mere existence of a PE is enough to trigger the exclusion clause and cause royalty income to be assessed as business income. It does, however, imply that there may be situations where though the royalty may be “effectively connected” with the PE, still it may not be “attributable” to the PE; (iv) It is not clear why in Ishikawajima reference has been made to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two deal with different situations and why it was stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” is not to be found even in the inapplicable clause (c). Though it is difficult to find an answer, the dicta has to be respected without invoking the doctrine of per incuriam as far as possible; (v) Further, though in Ishikawajima it was observed that “the legal fiction created by s.9 should be construed having regard to the object which it seeks to achieve”, it was not indicated as to what is the object of the said provision that deters the legal fiction being carried to the extent specifically provided by the language of the section. The object of s. 9(1) is to deem certain incomes as accruing or arising in India so as to widen the net of taxation and this object will not be defeated if the legal fiction enacted by s. 9 is taken to its logical extent (other judgements of SC referred to where it was held that a fiction has to be given full effect); (vi) Though in Ishikawajima it was held that the location of the source of income within India would not render sufficient nexus to tax the income from that source, this cannot be construed to mean that the age-old test of source of income should be eschewed altogether while considering territorial nexus (other judgements of SC on territorial nexus referred to); (vii) There is a doubt why Ishikawajima proceeded on the basis that the offshore services performed by the contractor executing a turn key project as a step-in-aid to the execution of the project and deploying those services in India had no real connection to the Indian territory even though it gave rise to a ‘live link’ with the Indian territory and why it was felt that the income arising therefrom did not accrue or arise in India, not to speak of deemed accrual; (viii) A decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi; (ix) Though the AAR has to give full effect to the law laid down in Ishikawajima vis-à-vis s. 9 (1) (vii) and territorial nexus, on facts, there was territorial nexus and a “live link” because a part of the services were rendered in India. The extent and magnitude of services is not decisive.

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Jacobs Engineering vs. ACIT (ITAT Mumbai) Even “foreseeable losses” are allowable as deduction

Even “foreseeable losses” are allowable as deduction  The assessee was engaged in the business of executing works contracts and was following the mercantile system of accounting and the “percentage completion method”. It claimed a deduction for “foreseeable losses” on incomplete projects which was disallowed by the AO and CIT (A) on the basis that it was merely an anticipated loss based on an estimate. It was also held that as a major part of the work was not completed, the losses could not be properly anticipated. On appeal by the assessee, HELD, allowing the appeal: (i) Para 13.1 of Accounting Standard 7 (AS-7) mandates that a foreseeable loss on the entire contract should be provided for in the financial statements irrespective of the amount of work done and the method of accounting followed; (ii) The fact that AS-7 has not been notified by the Central Government as an accounting standard for purposes of s. 145 (2) is not relevant; (iii) In principle, anticipated losses on incomplete projects are allowable as a deduction subject to their being calculated as per AS-7

(EXTRACT of case law)

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What is an internal audit (an booklet released by ICAI)

The purpose of this Booklet is to throw light on the important aspects of internal audit, viz., evolution of internal audit, need for internal audit, defining internal audit, internal audit in Indianscenario, value addition made by internal audit in an organisation and understanding of internal audit report. The Booklet also informs about the initiatives taken by the Internal Audit Standards Board of the Institute of Chartered Accountants of India in the field of internal audit.

Its good Just click here to download the booklet:Booklet

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Announcement for November 2009 examinations

Professional Competence Examinations

It is clarified that in Part –II : Service tax and VAT of Paper 5 : Taxation, students will not be tested on specific questions covering individual taxable services

Integrated Professional Competence ExaminationsIt is clarified that in Part –II : Service tax and VAT of Paper 4 : Taxation, students will be examined only inrespect of the following taxable services:1. Renting of immovable property2. Tour operator’s services3. Commercial training or coaching services4. Erection, commissioning and installation services5. Works contract services

Final Examinations (Both Existing and New)

Paper 8 : Indirect taxes/ Paper 8 : Indirect Tax Laws

It is clarified that in respect of taxable services covered in the syllabus of Paper 8 : Indirect taxes/ Paper 8 :Indirect Tax Laws, students will be examined only in respect of the following taxable services: Intellectual Property Services1. Franchise services2. Intellectual property services Financial services3. Banking & other financial services4. Credit rating agency’s services5. Stock broking services Transport of goods services6. Goods transport agency’s services7. Courier services8. Mailing list compilation and mailing services9. Transport of goods by air services10. Clearing and forwarding services11. Cargo handling services12. Customs house agent’s services13. Storage and warehousing services14. Transport of goods through pipeline or other conduit15. Transport of goods in containers by rail by any person, other than government railway Professional Services16. Practising chartered accountant’s services17. Management or business consultancy services18. Consulting engineer’s services19. Scientific and technical consultancy services20. Technical testing and analysis services21. Market research services22. Opinion poll services23. Public relations services Real estate & infrastructure services24. Construction services in respect of commercial or industrial buildings or civil structures25. Construction services in respect of residential complexes26. Architect’s services27. Real estate agent’s services28. Site preparation and clearance, excavation, earthmoving and demolition services29. Interior decorator’s services Business services30. Business auxiliary services

31. Business support services

32. Manpower recruitment or supply agency’s services

CA. R. Devarajan

Director, Board of Studies

Sources:ICAI

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