ITAT orders donation received by CHS exempt from tax

From ET Realty

MUMBAI: Casa Grande, a Malabar Hill cooperative housing society, has obtained a favourable order from the Income-tax Appellate Tribunal (ITAT).

In its January 29 order, the ITAT has held that a voluntary donation of Rs 70 lakh received by Casa Grande from a member, a flat owner, was not taxable in the society’s hands. This decision will benefit cooperative housing societies (CHS) which face similar litigation, especially those in Mumbai.

The concept of principle of mutuality governs taxability of income in the hands of cooperative societies, including CHS. According to this concept, a cooperative society is a mutual association and no one can make profit out of itself. Transfer fees or donations received from society members are typically credited to a fund, which is, in turn, used for the benefit of the society and its members. Thus, such income is tax exempt for the CHS.

Even in this case, when a donation of Rs 70 lakh was received during financial year 2006-07 from member Kirit R Jasani, it was credited to the “building repair and renovation fund” and reflected as such in the society’s balance sheet or books of accounts.

In the course of tax assessment, though, I-T officials treated it as an income which would be taxable in the hands of the housing society. The commissioner of I-T (appeals) passed an order in favour of the society, which was contested by the I-T department at the ITAT level. Relying on various past orders, including that of the Bombay high court, in the case of Darbhanga Mansion CHS and Su Prabhat CHS, the ITAT held that the donation received based on the principles of mutuality could not be taxed in the hands of Casa Grande.

Incidentally, even in respect of an earlier year, Casa Grande had won a favourable order from the ITAT for a donation of Rs 1.75 crore made by another member, which was used for repair work.

“The issue of mutuality in the case of cooperative societies has been much debated over the years and there have even been several judgements by courts in favour of the taxpayer, including by the Supreme Court in the case of Bankipur Club. Yet, the I-T department keeps litigating. I am glad that the ITAT has reiterated its earlier decisions and passed a very good and clear order,” said Anil Harish, an advocate specializing in real estate matters.

“Given the spate of continued litigation, now it is for the Central Board of Direct Taxes to ensure that such issues are not agitated again and again,” added Harish.

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