How to apply the principle of mutuality for claiming tax exemption while filing income tax return fo

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Abhay Brahme (Querist)
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28 December 2022 I am a managing committee member in a cooperative housing society and I need to file income tax return for our cooperative housing society located in Pune, Maharashtra.

Now, my tax consultant is saying that he doesn't know the way to show the surplus as indicated in our audited balance sheet as not an income while filing the Income Tax Return form ITR 5.

My question is how does one show / claim in the ITR form 5 that the surplus (and member contributions) in case of a cooperative housing society is not at all the profit as such and is not the taxable income of the society? Which specific entries are needed to be made while filing the ITR 5 form in this regard?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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09 July 2024 Filing an income tax return for a cooperative housing society can be a bit complex, especially when it comes to showing that the surplus and member contributions are not taxable income. Cooperative housing societies often operate on a principle of mutuality, where the income generated from members is not considered taxable income. Here's how to reflect this in the ITR 5 form:

### Key Points to Consider:
1. **Principle of Mutuality**: Income from transactions with members is not taxable as it is based on the principle of mutuality. Surplus arising out of contributions from members is not considered income for tax purposes.

2. **ITR 5 Form**: Cooperative societies file their income tax return using ITR 5. Properly distinguishing between taxable income and non-taxable surplus is crucial.

### Steps to Reflect Surplus as Non-Taxable in ITR 5:

1. **Filing ITR 5**:
- Download the latest ITR 5 form from the [Income Tax Department's e-filing portal](https://www.incometaxindiaefiling.gov.in/home).

2. **Part A: General Information**:
- Fill in the basic details about the cooperative housing society, including PAN, address, and type of return.

3. **Schedule BP (Business and Profession)**:
- This schedule is for reporting business income. However, since the surplus from member contributions is not business income, you should not include this surplus here.

4. **Schedule OS (Other Sources)**:
- Only include income that is actually from other sources (like interest income from bank deposits, if any).

5. **Schedule HP (House Property)**:
- Report any income from house property if applicable. Generally, housing societies do not have taxable house property income.

6. **Schedule TI (Total Income)**:
- Summarize the total income here. Ensure that the surplus from member contributions is not included as income.

7. **Schedule EI (Exempt Income)**:
- In the "Exempt Income" schedule, mention the surplus as exempt income under the principle of mutuality. You can describe it as “Surplus from member contributions - exempt under the principle of mutuality.”
- Provide details in the "Any Other" section within this schedule.

### Specific Entry:
In **Schedule EI (Exempt Income)**:
- **Nature of Income**: Surplus from member contributions - exempt under the principle of mutuality.
- **Amount**: Mention the total surplus amount.

### Important Notes:
- **Auditor’s Report**: Ensure that the auditor’s report clearly states that the surplus is derived from member contributions and is not taxable due to the principle of mutuality.
- **Detailed Explanations**: Attach a detailed explanation or a note if possible, providing clarity on why the surplus is not considered taxable income.

### Example of Filling Schedule EI:
```plaintext
Nature of Income: Surplus from member contributions - exempt under the principle of mutuality
Amount: XXXX (total surplus amount)
```

### Practical Steps:
1. **Consultation**: Ensure your tax consultant is well-versed in the principle of mutuality and cooperative housing society taxation.
2. **Documentation**: Keep all supporting documents and auditor's statements handy.
3. **Software Use**: Consider using reliable tax filing software that can assist in correctly filling out the ITR 5 form and reflecting exempt income properly.

### Conclusion:
The surplus arising from member contributions in a cooperative housing society should be shown as exempt income under the principle of mutuality in Schedule EI of the ITR 5 form. It's essential to provide a clear description and the amount to ensure accurate reporting and compliance. If there are any specific doubts, consulting with a tax professional experienced in cooperative society taxation is advisable.