Exemption under section 54 is devoid on the basis that constructed houses and properties of members cannot be deemed to be purchased or constructed

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘A’: NEW DELHI

BEFORE SHRI R.P.TOLANI, JUDICIAL MEMBER AND

SHRI T.S.KAPOOR, ACCOUNTANT MEMBER

ITA Nos.4465/Del/2007 to 4470/Del/2007

Assessment Years: 1999-2000 to 2004-05

M/s Asha Pushp Vihar

Sahkari Awas Samiti

Limited,

Sector-14, Kaushambi,

Ghaziabad.

PAN: AAAAA7060K.

(Appellant)

Vs.

(i) Additional Commissioner of

Income Tax, Range-1, Ghaziabad.

(ii) Commissioner of Income Tax

(Appeals), Ghaziabad.

 (Respondent)

ITA Nos.4601/Del/2007 to 4606/Del/2007

Assessment Years: 1999-2000 to 2004-05

Additional Commissioner of

Income Tax,

Range-1,

Ghaziabad.

(Appellant)

Vs.

M/s Asha Pushp Vihar Sahkari

Awas Samiti Limited,

Sector-14, Kaushambi,

Ghaziabad.

PAN : AAAAA7060K.

 (Respondent)

Assessee by: Shri Ajay K.Sharma, Advocate.

Revenue by: Mrs. Anusha Khurana, Sr.DR.

ORDER

PER BENCH:

This is a group of cross-appeals for the AY 1999-2000 to 2004-05.

2. Brief facts are that the assessee is a cooperative society engaged in the construction of about 476 flats. It has claimed that due to dispute between different groups of members, complaints were made for violation of cooperative group housing society laws and bye laws. Consequently, a survey u/s 133A was carried out in the office premises of the society on 14.12.2005. it was found that books of account and other documents were already impounded by CB-CID, Meerut in connection with certain criminal investigations about the alleged irregularities. The remaining papers were seized during the course of survey. 148 notices were issued accordingly. Assessee filed its returns of income based on copies of audited accounts. In view of various complaints, IT authorities appointed Special Auditor M/s Pary & Co. to conduct of special audit which was carried out. The Special Auditor reported that various documents were in the custody of the CB-CID for which a report was prepared. It was reported that copies of balance sheets, profit & loss accounts, receipt and payments for various financial years from 1998-99 to 2003-04 were not prepared by normally accepted methods, therefore, they could not be examined. The report was accordingly submitted which is reproduced in the assessment orders. The assessee claimed exemption from tax relying on the principle of mutuality on the ground that the society has existence based on the collective strength of the Members. The surplus, if any, was to be distributed among the Members only and in the case of dissolution of the society also the remainder was to be distributed amongst the Members. Assessing Officer negated the claim of the assessee on the ground that the society’s affairs were not conducted in accordance with bye lays, rules and provisions. It was further held that:

(i) the real nature of the assessee’s society was carrying out trading activity or business of flats.

(ii) There was no complete identity between the society and members. The activities of the society were arranged in a manner for avoidance of tax. As the status of the cooperative society was merely a farce to defraud the Revenue.

(iii) The assessee did not qualify for applicability of principle of mutuality as laid down by various judicial authorities. On this basis, the income declared in the returns was further added by the amounts of credit in the profit & loss account as well as debited in profit & loss account as mentioned in the respective orders.

(iv) The assessments were framed accordingly raising the demand for all these years.

2.1. Aggrieved, assessee preferred first appeals where learned CIT(A) upheld the Assessing Officer’s contention that the assessee has failed to satisfy the basis of mutuality on various grounds which inter-alia included that proper bye laws were not furnished to demonstrate the existence of complete identity between the cooperative society and the members. The affairs of the society were not carried out in the manner as prescribed under the Act. In the absence of bye laws and record, it was not possible to ascertain the claim about ingredients of principle of mutuality. This ground of the assessee was rejected in all these years. However, coming to the quantum addition, learned CIT(A) held that Assessing Officer has erred in adding both credits and debits in the profit & loss account as income of the assessee alongwith the surplus income returned by the assessee. CIT(A) held that as all the credits of income and expenditure had been added, the expenditure side was to be allowed excluding the following types of expenditure:-

(i) The expenditure which is treated as inflated and bogus.

(ii) The expenditure is made out of the money from undisclosed sources.

2.2. Since the Assessing Officer had not brought anything so as to treat the expenditure as bogus or out of the undisclosed sources, the double additions were deleted. Accordingly, the appeals were partly allowed on quantum of additions.

2.3. Aggrieved, both the parties are before us by thee cross appeals. The assessee is against rejecting the applicability of principle of mutuality and retention of quantum additions and the Revenue is against part relief given on quantum in all these years.

3. The learned counsel for the assessee contends that the assessee is a registered society and as per the society’s laws, the cooperative society is nothing but a collection of members and in this case surplus is to be distributed amongst members either by way of dividend or by mutually agreed services. Similarly, at the time of dissolution of the society, the surplus was to be distributed amongst the members. It is pleaded that CIT(A) has erred in refusing to allow this claim of applicability of principle of mutuality. Apropos the quantum addition, it is contended that the addition retained by CIT(A) is excessive and unjust.

4. The learned DR, on the other hand, vehemently argues that the burden to prove the existence of mutuality i.e. complete identity between members and society lies squarely on the assessee. The same cannot be assumed on mere contentions or general impressions. The assessee has failed to produce the complete set of bye laws and the cooperative society act and rules to demonstrate the ingredients of mutuality. Assessee has filed only copies of relevant pages of bye laws without any authenticity, therefore, assessee has failed to discharge its burden to prove the existence of mutuality in its case. Even before the Tribunal, nothing further is supplied to justify the claim of mutuality.

5. We have heard the rival contentions. We find force in the arguments of learned DR. The burden to claim any benefit including principle of mutuality on the assessee. It has not been disputed by assessee that complete set of bye laws, rules etc. have not been produced either before the lower authorities or before us. In the absence thereof, it cannot be ascertained as to whether there is complete identity between the members and the assessee. Besides, the provisions about distribution of surplus in the event of dissolution of cooperative society cannot be examined or verified. Thus the assessee has failed to discharge the burden cast on it to prove the existence of mutuality in all these assessments. In view thereof, we uphold the order of learned CIT(A) refusing to apply principle of mutuality in all these assessments and reject relevant grounds raised by the assessee in these appeals.

6. Coming to the quantum part, the learned counsel for the assessee drew our attention to the profit & loss accounts for all these years and it was contended that learned CIT(A) held that Assessing Officer has failed to prove that any expenditure was undisclosed or bogus. Therefore, only the surplus after allowing all the expenditure should have been allowed and not the entire credit side of the P&L A/cs. Therefore, the additions should be reduced to this extent.

6.1. The learned DR, on the other hand, argued that it is assessee’s own admission that all his account books, vouchers and records have been impounded by CB-CID. Therefore, the allegation that Assessing Officer has failed to prove them as bogus is not borne out by record. By assessee’s own admission, the expenditure incurred by the assessee is not verifiable. It is further pleaded that learned CIT(A) has failed to observe that interest income received by the assessee is from FDRs and other bank deposits. The interest is earned on the surplus funds and is distinct in taxable under the head “income from other sources”. Therefore, interest income should be treated as income from other sources and balance receipts should be taxed without giving any allowance for the expenditure.

6.2. We have heard the rival contentions on additions. As the facts emerge, assessee has earned substantial interest income in all the years which is credited to profit & loss account. The said interest income has been earned by the assessee by deposit of the surplus funds and there is no doubt that the interest income is to be treated as “income from other sources”. No borrowed funds have been used for earning this interest in various years, which has not been disputed by the assessee. In view of these facts, we are inclined to hold that interest income credited to profit & loss account in each year is taxable under the head income from other sources.

7. Coming to the other surplus and expenditure in every years, the record of the society had been impounded either by CB-CID or by IT authorities, therefore, in the absence of this relevant record to determine the taxable income, an estimate of the assessee’s income and expenditure is to be made.

7.1. We may mention here that the misuse of siphoning of funds and other irregularities of the office bearers of the society are in their personal capacity, criminal investigations are going on in this behalf. But it cannot be denied that the assessee society carried out huge construction of more than 400 flats and required office, supervisory and other staff and administrative expenses. The assessee received surplus on account of membership fee, transfer fee etc. From the perusal of the profit & loss account, it emerges that the expenditure incurred by the assessee far exceeds the other receipts. In our view, it will be a distorted view to disallow all the expenditure only because the record is seized. Since a fair and reasonable estimate of income has to be made, in our view, the reasonable expenditure is to be allowed to the assessee in all these years. Looking at the quantum of other receipts, the expenditure incurred clearly outweighs the receipts in P&L A/c, therefore, in our considered view the other income of the society shall be estimated at nil. In consideration of all the facts, we decide the issues about quantum in these years as under:-

(i) The benefit of mutuality cannot be allowed to the assessee.

(ii) The interest income in the assessee’s profit & loss account shall be taxed as income from other sources in all the years. Assessing Officer will adopt the same from P&L A/cs of respective years.

(iii) We may mention that there are some debit of interest which is not related to FDRs or earning of interest as admitted by the assessee, therefore, the same will not be allowed.

(iv) The remaining income will be treated as nil.

8. Coming to the last year i.e. AY 2004-05, there is an issue about long term capital gains received by the assessee on acquisition of land at Rs. 1,65,35,891/- from GDA. The assessee has claimed the gains to be exempt u/s 54F on the plea that houses constructed by members are deemed to be the houses constructed by the society and as the amount invested in construction exceeds any long term capital gains received, the same is exempt u/s 54. The assessee’s plea has been rejected by the CIT(A) who upheld the Assessing Officer’s order by following observations:-

“9.3. The submissions of the learned AR have been considered along with the facts brought on record by the AO in the assessment order. The contention of the learned AR on this point

is that –

(i) Since the appeal of the GDS in the Honourable High Court is still pending, the compensation received is not final and, therefore, the same should not be taxed in the hands of the appellant and

(ii) The interest component of the consideration can never be assessed under the head capital gain.

`As regards contention of the appellant that since the appeal of the GDS in High court is pending, the compensation received is not final and the same is not taxable in the hands of the appellant, it is now clearly established that the compensation is to be taxed on receipt basis. In this case, though the GDS has filed appeal before the Honourable High Court which is pending but the appellant has actually received the amount of additional compensation, which the AO has rightly brought to tax on the basis of actual receipt. The same laws relied upon by the appellant are clearly distinguishable to the facts of the appellant’s case.

As regards the taxability of interest component, it is stated that the relevant evidences regarding the nature of receipt has not been furnished before the undersigned and hence no interference is called for on this a/c. The action of the Assessing Officer n in this regard is accordingly confirmed.”

8.1. We have heard both the parties and perused the material on record.

The issue about LTC in A.Y. 2004-05 is decided as under:-

(i) The assessee’s claim of exemption u/s 54 is devoid of merits as the concept of mutuality has not been extended to the assessee besides the constructed houses or the properties of the respective members cannot be deemed to be purchased or construction of the houses belonging to the society. In view thereof, the claim u/s 54 has been rightly denied by AO and CIT(A).

(ii) Apropos the amount of compensation part, Hon’ble Supreme Court in the case of CIT Faridabad v. Ghanshyam, HUF 315 ITR 1, has laid down the formula of computation of capital gains. By this judgment, the general proposition, as laid, provides about the taxability of interest and compensation, we set aside the issue back to the file of the Assessing Officer to allow the assessee benefit of long term capital gains by indexation of cost as per law. The Assessing Officer will decide the computation of long term capital gains in view of the judgment of Hon’ble Supreme Court in the case of Ghanshyam HUF, cited above, in respect of capital gains, interest and solatium etc. This issue is restored back to the file of the Assessing Officer.

9. In the result, all the appeals are partly allowed.

Decision pronounced in the open Court on 28th June, 2012.

                                                         Sd/-             Sd/-

                                         (T.S.KAPOOR)      (R.P.TOLANI)

                             ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 28.06.2012

MP

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT

Assistant Registrar