W.T.AS. NOS. 704/KB AND 705/KB OF 1986-87, DECIDED ON 30TH APRIL, 1992. VS W.T.AS. NOS. 704/KB AND 705/KB OF 1986-87, DECIDED ON 30TH APRIL, 1992., 1992 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1187 (1992)

Per Kabirul Hasan, Judicial Member, Manzurul Haque, Accountant Member agreeing--

(a) Wealth Tax Act (XV of 1963)--

----Ss. 2 & 3---Assessee, a co-operative housing society which had acquires land for the use and benefit of its members---Held, in case of a co-operative society which was a juristic person/body incorporate, only those immovable properties could be subjected to wealth tax which were held for the purpose of letting out or business of letting out; construction and letting out and construction and sale and in order to bring the cooperative society under the clutches of Wealth Tax Act, 1963, it was very essential that such conditions were fulfilled---Difference in dealing with its members and non-members by the co-operative society was also very important and in such a case the Wealth Tax Officer was to proceed cautiously to actually ascertain the liability of the society within the four corners of law.

In case of co-operative society, which is a juristic person/body incorporate, only those immovable properties can be subjected to wealth tax which are held for the purpose of--

(i) letting out or business of letting out;

(ii) construction and letting out; and

(iii) construction and sale.

In order to bring the Cooperative Society under the clutches of Wealth Tax Act, it is very essential that the aforesaid conditions are fulfilled otherwise, very purpose of Cooperative Society would be defeated. Difference in dealing with members and non-members is also very important, where the Wealth Tax Officer has to proceed cautiously to actually ascertain the liability of the Society within the four corners of law.

A Cooperative Society is a body corporate by the name under which it is registered. A cooperative society can be treated as "association of persons" in view of explanation (iii) to clause (m) of section 2 of the Wealth Tax Act.

Keeping in mind the doctrine of mutuality, it can be safely laid down that a co-operative society duly registered under the Cooperative Societies Act, 1925 is a "Body Corporate" and is a juristic person and doctrine of mutuality shall apply in full force to Cooperative Societies dealings with its members.

Classes of assessees mentioned in S.3, Wealth Tax Act, 1963 are liable to Wealth Tax in respect of their net wealth on the corresponding valuation date.

A Cooperative Society is a body corporate under the Cooperative Societies Act, 1925 and accordingly it may find some place in charging section 3 of the Wealth Tax Act, but as per Act, ,Wealth Tax is payable on the net wealth of the assessee in which certain assets are to be included, therefore, the assets defined under section 2 (e)(ii) are to be included in the net wealth of the assessee/society. Therefore, the legal proposition would be that a co-operative society is a body corporate for the purpose of wealth tax, but to bring the society into the clutches of Wealth Tax Act, it is essential to prove that the assets held by the society are being used for the purpose of the business of construction and sale or letting out. A cooperative society is a body corporate whose purpose is to do something for the benefit of its members on the basis of doctrine of mutuality and there is no element of business involved and hence the transaction of cooperative society would not attract the provisions of Wealth Tax Act unless it is firstly proved that society is holding some assets and secondly that such assets were being held for the purpose of the business of construction and sale or letting out.

A solitary transaction of sale cannot create inference that the society was involved in the business of construction and sale and is liable to wealth tax Concept of taxability is based on real existing facts and not on far-fetched notional or imaginative facts. A person may have some intention of doing something but his taxability will be materialised only when he has done something in furtherance thereof.

Even if it is presumed that from the date of agreement the assessee became taxable under S.3 read with section 2(o) of the Wealth Tax Act then still its chargeability cannot be back-dated on simple assumption. Also in wealth tax proceedings the valuation date is very important because the net wealth of an assessee consists of all assets, wherever located, belonging to the assessee on the valuation date. From the definition of valuation date it appears that even if the assets arc sold 3 or 4 days earlier than the valuation date then they would not be included in the net wealth of the assessee unless such assets are required to be included in his net wealth in view of the other provisions contained therein.

The WTO would have jurisdiction if it is proved that the society is indulging in the business of construction and sale only then the assets of the society would attract the provisions of Wealth Tax Act.

If a land is sold to non-members by a society then it is a violation of bye-laws of the society and for that the society is accountable to the authorised officer mentioned in the Co-operative Societies Act.

S.M. Zakria's case 1976 PTD 234; 1959 PTD 639 ref.

Per Manzurul Haque, Accountant Member agreeing with Kabirul Hasan, Judicial Member---

(b) Wealth Tax Act (XV of 1963)--

----Ss. 2 & 3---Assessee, a Co-operative Housing Society had acquired land for the use and benefit of its members---Solitary transaction of sale would not create inference that the society was involved in the business of construction and sale and was liable to wealth tax---Concept of taxability is based on real existing facts and not on far-fetched notional or imaginative facts---Person may have some intention of doing something but taxability would materialise only when he had done something in furtherance thereto.

The intention of the assessee to sell 430 plots surfaced during the assessment year 1981-82. For this, the Wealth Tax Officer concluded that the plots must have been held for the purpose of "development and sale to non?members during the assessment years 1979-80 and 1980-81".

Assessment cannot be made on conjectures and surmises. The W.T.O. could only be justified to draw the above conclusion during the assessment year 1981-82 onwards and not in any year prior to it. The additions made during the assessment years 1979-80 and 1980-81 on account of sale of plots were therefore, rightly deleted.

(c) Wealth Tax Act (XV of 1963)--

----Ss. 2 & 3---Valuation date ---Importance---Chargeability to wealth tax cannot be back-dated on a simple assumption.

Mahmood A. Hashmi for the Appellant.

Nawal Rai N. Oad, D.R. for Respondent.

Date of hearing: 22nd January 1992.

ORDER

SYED KABIRUL HASSAN (JUDICIAL MEMBER).--These appeals relating to assessment years 1979-80 and 1980-81 are directed against the consolidated order of the learned AA.C. F-Range, Karachi dated 29-10?1986. Since in these appeals the common issues are involved, therefore, we intend to dispose of these appeals by this consolidated order.

2. The assessee is a Housing Cooperative Society duly registered under the Cooperative Societies Act, 1925. As like other Housing Societies the assessee also acquired 230 acres of land for the benefits/allotment to its members after development. On 11-1-1981 the assessee entered into an agreement with a construction company for the construction of houses on certain plots, which were to be made out of 10 acres of land out of the total land allotted to the society. These plots according to assessee were after construction to be sold to Overseas Pakistanis. According to the WTO 430 plots-of various sizes were made out of the said 10 acres of land and the value of these plots amounting to Rs.69,12,000 was subjected to Wealth Tax for the said assessment years.

3. Mr. Mahmood A. Hashmi, the learned counsel for the assessee argues before us that provisions of section

2(a)(ii) of the Wealth Tax Act are not applicable to Cooperative Societies and alternatively states that even if for the sake of argument it is considered that the plots were sold to the M/s. Kwick Construction Company in the assessment year 1981-82, then how it can be inferred from that transaction that ten acres of land was set part for sale to non-members during the assessment years 1979-80 and 1980-81. According to him this is simply? guesswork and is based on conjectures or surmises. Lastly he argues that the sale of immovable property can take place without execution of sale-deed. This transaction was simply a transaction of subletting of work on behalf of the members. Whereas the learned D.R. submits that when the sale of ten acres was made to M/s. Kwick Construction Company the intention of the assessee became clear that the land was being kept or held for the purpose of construction and sale to non-members and therefore under the provisions of Wealth Tax Act, the assessee was taxable as being "Body of Individuals".

4. We have heard both the Representatives and perused the records. Since in these appeals a very important law point has been raised and in our opinion it is the first time that a cooperative housing society has been subjected to Wealth Tax, we therefore propose to take into consideration the various provisions in order to arrive at correct findings.

5. First we take up the contention of the learned counsel for the assessee that the provisions of Wealth Tax arc not attracted in case of Cooperative Society. This will bring us to the fact as to what is the status of a Cooperative Society. The status of Cooperative Society has been defined in Cooperative Societies Act, 1925. It would be material to reproduce the provisions of section 23, which are very material to resolve this controversy:

"23. Societies to be bodies corporate-- The registration of a society shall render it a body corporate by the name under which it is registered, with perpetual succession and a common seal, and with power to hold property, to enter legal proceedings and to do all things necessary for the purposes of its constitution."

From the perusal of above provision, it appears that cooperative society is a body corporate by the name under which it is registered. This can also be contended that a cooperative society can be treated as "association of persons" in view of explanation (iii) to clause (m) of Section 2 of the Wealth A Tax Act. But this point has already been resolved in S.M. Zakria's case reported as 1976 FM 234, wherein on page 236 it is held:--

"The question is whether `the aforesaid Society, upon its registration with the Registrar of Cooperative Societies, became a single legal person. To this question the answer lies in section 23 of the Sindh Cooperative Societies Act, 1925 which says that the registration of a society shall render it a body corporate by the name under which it is registered with perpetual succession and a common seal, and with power to hold property to enter into contract to institute and defend suits and other legal proceedings and to do all things necessary for the purposes of its constitution. Thus, as in the case of a Company incorporated under the Companies Act, 1913, a Co-operative Society registered with the Registrar of Co-operative Societies under the Sindh Cooperative Societies Act, 1925, becomes juristic person distinct from its members. As a limited company is one and single person, likewise a cooperative society, if so registered, is one and single person. As it is not possible to treat a limited company as an association of persons, because it has two or more persons as members, likewise a cooperative society registered under the Sindh Cooperative Societies Act,.1925, cannot be treated as an association of persons because two or more persons are its members, section 23 of the Act makes the Society, upon its registration, a separate juristic legal entity altogether distinct from its members. This being the legal position, Section 44 of Income Tax Act, 1922 could not .be invoked in the case of the aforesaid society, which already stood wound up as such society could not be treated as an association of persons."

The cooperative society vis-a-vis doctrine of mutuality was also considered in case reported as 1959 PTD 639 wherein on page 646 after considering the number of cases it is observed:--

"It will have to be noticed that the decision in each one of the aforementioned case it confined to its own facts. But their close examination has led .us to the conclusion that in determining the applicability of the doctrine of mutuality one should look to

(1) the constitution of the assessee;

(2) the objects with which it is formed;

(3) the true character of the relationship between the assessee and its members from whom the income in question has been derived;

(4) the terms of the agreement between the assessee and its members;? and

(5) the application of the income and fund of the assessee."

Keeping in mind the doctrine of mutuality, it can be safely laid down that a cooperative society duly registered under the Cooperative Societies Act, 1925 is a "Body Corporate" and is juristic person and doctrine of mutuality shall apply in full force as regards the Cooperative Societies dealing with its members.

6. No doubt the above citations pertain to Income-tax Law, but since in all the cases the assessee is a cooperative society, therefore, they may be considered as an aid to resolve this controversy.

7. Now after ascertaining the status of the cooperative societies; in order to determine its liability under the Wealth Tax Act, we have to examine the various provisions of the Act. The first relevant provision is charging section 3 which is reproduced as below:--

"Charge of Wealth Tax--Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of July 1963, a tax (hereinafter referred to as wealth tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family, firm, association of persons or body of individuals, whether incorporated or not, and company) at the rate or rates specified in the Schedule."

From the perusal of above it appears that classes of assessees mentioned therein are liable to Wealth Tax in respect of their net wealth on the corresponding valuation date. The words " net wealth" and "valuation date" have been defined in the Act as under:--

"2. Definitions.--In this Act, unless the context other otherwise requires,--

" ....(m) "net wealth" means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owned by the assessee on the valuation date other than--

(i) debts which under section 7 are set to be taken into account; and

(ii) debts which arc secured on or which have been incurred in relation to any asset in respect of which wealth tax is not payable under this Act;

(Explanation--For the purposes of this clause,--

(i) any property, other than agricultural land, owned by any minor child of the assessee shall be deemed to belong to the assessee:

Provided that any immovable property so deemed to belong to the assessee shall not be included in the net wealth of the spouse or minor child of the assessee;

(ii) "assessee" shall be the (parent) determined by the Wealth Tax Officer; and

(iii) Where the right, title or interest to or in any immovable property other than agricultural land vests in more than one person, such persons shall in respect of such property, be assessed as an association of persons and the value of such right, title or interest shall not be included in the net wealth of an individual provided wealth tax is charged on such right, title or interest.;

"....valuation date" in relation to any year for which an assessment is to be made under this Act, means--

(i) the last day of the previous year as defined in clause (ii) of section 2 of the Income Tax Act, 1922 or

(ii) the last day of the income year as defined in clause (26) of Section 2 of the Income Tax Ordinance, 1979 as the case may be, if an assessment were to be made under that Act or Ordinance for that year:

Provided that where in the case of an assessee there are different previous years under the Income Tax Act, 1922 from different sources of income the valuation date for the purposes of this Act shall be the last day of the last of the pervious years aforesaid."

In order to determine net wealth certain types of assets are to be considered therefore, we have to refer to the definition of the assets also:

(a) "Assets includes--

(ii)....in the case of a firm, an association of persons or a body of individuals, whether incorporated or not, and a company, immovable property held for the purpose of the business of construction and sale, or letting out, of property;"

The following explanation was added in this clause in 1991:

"Explanation.--For removal of doubt, it is hereby declared that immovable property and the purpose, referred to in this sub-clause includes---

(i) immovable property held for the purpose of letting out, or business of letting out, of property;

(ii) immovable property held for the purpose of construction and letting out of property; and

(iii) immovable property held for the purpose of construction and sale of property."

(This explanation according to the amendment has to take retrospective effect from the date of the applicability of the Act.

8. If all the above provisions are read together, it becomes very clear that a cooperative society is a body corporate under the Cooperative Societies Act, 1925 and accordingly it may find some place in charging section 3 of the Wealth Tax Act, but as per Act, Wealth Tax is payable on the net wealth of the assessee in which certain assets are to be included, therefore, the assets defined under section 2 (e)(ii) are to be included in the net wealth of the assessee/society. Therefore, the legal proposition would be that a co-operative society is a body corporate for the purpose of wealth tax, but to bring the society into the clutches of Wealth Tax Act, it is essential to prove that the assets held by the society are being used for the purpose of the business of construction and sale or letting out as we have already said above that a cooperative society is a body corporate whose purpose is to do something for the benefit of its members on the basis of doctrine of mutuality and there is no element of business involved and hence the transaction of cooperative society would not attract the provisions of Wealth Tax Act unless it is firstly proved that society is holding some assets and secondly that such assets are being held for the purpose of the business of construction and sale or letting out.

9. The findings of the Wealth Tax Officer, which created this controversy have been spelt out in the assessment order in the following manner:--

"In compliance to notice under section 17 of the Wealth Tax Act, return declaring nil net wealth has been filed. In response to notice under section 16(2) of the Wealth Tax Act, Mr. Mehboob Alam, Managing Director of the assessee-company attended with whom the case was discussed. During the assessment proceedings the assessee contended that the cooperative society is not assessable on the ground of doctrine of mutuality. It is stated that the doctrine of mutually may be applicable in income tax cases in general law the surplus accruing to a mutual concern cannot be regarded as income, profit or gain for the purpose of Income Tax Act, yet in the Wealth Tax Act motive of making profit or the actual earning of the profit from the assets cannot be regarded as the essential factor for. determination of assess ability under the Wealth Tax Act. What is more important 'is that the assessees must be taxable entities under the Wealth Tax Act and must have assets within the meaning of section 2(c) of the Wealth Tax Act, In this case the status of the assessee is `Body of Individuals' and the assets are the assets defined under section 2(e)(ii) of the Wealth Tax Act and therefore, it is taxable and the Wealth Tax Act. From the record it appears that approximately 10 acres of land were sold to M/s. Kwick Construction Company Limited vide agreement of sale dated-11th January 1981. These lands were divided into small plots as under:--

(a) 156 plots of .120 sq. yds.

(b) 138 plots of 80 sq. yds.??????

(c) 136 plots of 120 sq.yd in flat site

(Total 430 plots).

These plots were sold @150 per sq.yd. The total sale consideration was Rs.69,12,000. These plots were sold with the condition that after construction of houses the allottees were given lease direct by the society assessee. This addition in the sale agreement will not affect factual position that 430 plots were sold to non-members in the assessment year 1981-82. This indicates that these plots were held for the purposes of development and sale to non-members during the assessment year 1979-80."

From the perusal of above, it appears that the WTO has subjected the value of plots which were made out of ten acres purported to have been sold to M/s. Kwick Construction Company Ltd. It will be interesting to refer 'to agreement entered into between assessee and M/s. Kwick Construction Company Ltd. on 11th January, 1981. The most important paras are paras. 1, 2, 3 and 8 which arc reproduced below:--

"THAT in consideration of this AGREEMENT the COMPANY has paid to the SOCIETY a sum of Rs. 1,00,000 (Rupees One Lac only) and the said payment is hereby admitted and acknowledged by the SOCIETY who has also issued separate receipt of the same, under the signature of Mr. Syed Hasan, its Attorney.

2. THAT it is specifically agreed that the SOCIETY shall at its OWN COST and expense obtain NOC from the MASTER PLAN DEPTT. OF KDA for construction and sale of residential houses on 80 sq.yds. plots in the area presently marked as FLAT SITE IN SECTOR-I measuring approximately 7.50 Acres.

3. THAT THE SOCIETY SHALL prepare a LAY-OUT PLAN and demarcate plots of 80 sq. yds. in the Flat Site area in Sector-I noted above and shall cut down and remove all the trees and shall hand over possession of all such plots to COMPANY within 30 days of this Agreement. The SOCIETY has this day handed over possession of 100 plots oL80 sq. yds. in SECTOR III and 144 plots of 120 sq. yds. in SECTOR-1I and SECTOR-111 as per details given in the schedule annexed herewith to THE COMPANY for the purposes of construction and sale of houses built thereon BY THE COMPANY.

8. THAT THE COMPANY shall be entitled to sell the houses built by it to the members of the public at its own terms and conditions and it shall intimate to the SOCIETY the particulars of the person to whom it has sold the houses. On such intimation SOCIETY shall execute a registered lease deed in favour of the persons so named and they will also be enrolled as MEMBERS of the Society."

From the reading of the above agreement and specially the para 8 it appears that the construction company was empowered to sell the houses built by it on the land of society to the public at its own terms and conditions and was required to inform the names and addresses of members of public and society was required to execute a registered lease deed in favour of these persons. From this it appears that Society on the one hand was selling the land but on the other hand the title in land was not transferred to Buyer.

10. Now we advert to the arguments of the learned counsel for the assessee that it is an established principle of law that a sale of immovable property is not made without registration of sale-deed/lease-deed and since in this case simply there was an agreement of sale therefore it was not sale in stricto sensu. This contention of the learned counsel for the assessee for the reasons to be stated hereinafter has no force, in so far as there are two types of land, which are sold in the market. One is leased land and other is an allotted land. The difference in those two types of land is that, in case of leased land, land cannot be transferred without registration of sale-deed, but in case of allotted land, the land can be sold without execution of sale-deed merely by an agreement of sale and transfer of possession. This is being done in many cases and is recognised practice of transfer of land in our country specially in Karachi. No doubt this may not have the blessing of law, but this procedure is being followed and recognised. In this case the land was merely allotted land, therefore, a sale could have been effected by mere an agreement of sale and handing over possession of the land. This contention that it was not a sale as argued by the learned counsel for the assessee has no force and is rejected.

11. Now we come to the second contention, whether a solitary transaction of sale can create inference that the society was involved in the business of construction and sale and is liable to wealth tax. In this respect, we would like to observe that concept of taxability is based on real existing facts and not on far-fetched notional or imaginative facts. A person may have some intention of doing something but his taxability will be materialised only when he has done something in furtherance therefore. The line of action adopted by the assessing authority is unique and even if it is presumed that from the date of agreement the assessee became taxable under S.3 read with section 2(o) of the Wealth Tax Act then still its chargeability cannot be back-dated on simple assumption. Also in wealth tax proceedings the valuation date is very important because the net wealth of an assessee consists of all assets, wherever located, belonging to the assessee on the valuation date. From the definition of valuation date mentioned above it appears that even if the assets are sold 3 or 4 days earlier than the valuation date then they would not be included in the net wealth of the assessee unless such assets are required to be included in his net wealth in view of the other provisions contained therein. Therefore in this case, both the authorities have misdirected themselves anal ignored the fact that the assessee after entering into agreement with Messrs Kwick Construction Company Limited on 11-1-1981 becomes liable to wealth tax for preceding years. What if the agreement is considered sales simpliciter then the property becomes the property of M/s. Kwick Construction Company and still the assessee would not be liable to wealth tax. The only question in this case would be whether the cooperative society was authorised to sell the land allotted to it to non?members. For this the bye-laws of the society were there, if there was violation of bye-laws then the society was responsible to the authorised person under the Cooperative Societies Act and cannot become answerable to the WTO. The WTO would have jurisdiction if it is proved that the society is indulging in the business of construction and sale, only then the assets of the society would attract the provisions of Wealth Tax Act.

12. It has also been contended before us that it is binding on the society not to sell its land to non-members. This contention is also misconceived in view of Section 36 of the Cooperative Societies Act and which is reproduced below:--

"36. Restriction on other transactions with non-members.-- Consumers, Producers and Housing Societies may to the extent permitted by their bye-laws trade with persons who are not members, but the transactions of a Resource Society with persons other than members, except as provided under section 34 or 35 shall be subject to such prohibitions and restrictions if any, as the Provincial. Government may by rules prescribe."

From above it is clear that if a land is sold to non-members by a society then it is a violation of bye-laws of the society and for that the society is accountable to the authorised officer mentioned in the Cooperative Societies Act.

13. Considering the above facts and circumstances, the reasonings of the assessing authority do not appeal to our common sense. We are inclined to hold that agreement of sale dated 11-1-1981 entered into between the society and M/s. Kwick Construction Company Ltd. is defective and cannot be treated as agreement of sale because of the fact that the material ingredients of sale are missing from it i.e. transfer of possession with clear cut transfer of title. In view of this the WTO was justified to presume that the agreement of sale was made to hoodwink the wealth tax authorities in order to nullify burden of wealth tax, but the WTO has arred in drawing inference that during the assessment years 1979-80 and 1980-81 it was the intention of the society to do business of construction a and sale and hence is liable to wealth tax. According to the facts of the case if there was any liability to wealth then it would have arisen in the assessment year 1981-82 because such intention had become apparent after agreement of sale was entered into between the parties on 11-1-1981.

14. the upshot of above discussion is that in case of co-operative society, which is a juristic person? or body incorporate,? only those immovable properties can be subjected to wealth tax which are geld for the purpose of :

(i) letting out or business of letting out;

(ii)construction and letting out ; and

(iii) construction and sale

In order to bring the Co-operative Society under the clutches of Wealth Tax Act, it is very essential that the aforesaid conditions are fulfilled, otherwise, very purpose of Co-operative Society would be defeated. Difference in dealing with members and non-members is also very important, where the Wealth Tax Officer has to proceed cautiously to actually ascertain the liability of the Society within the four corners of law.

15. For reasons aforesaid, the assessments for both the years cannot be maintained and are, therefore, cancelled. .

MANZURUL HAQUE (ACCOUNTANT MEMBER).--I agree with the finding of my learned brother, the Judicial Member. The intention of the assessee to sell 430 plots surfaced during the assessment year 1981-82. From this, the Wealth Tax Officer concluded that the plots must have been held for the purpose of "development and sale" to-non-members during the assessment years 1979-80 and 1980-81.

Assessment cannot be made on conjectures and surmises. The W.T.O. could only be justified to draw the above conclusion during the assessment year 1981-82 onwards and not in any years prior to it. The additions made during the assessment year 1979-80 and 1980-81 on account of sale of plots have, therefore, rightly been deleted.

M.B.A./1615/T??????????????????????????????????????????????????????????????????????????????????? Order accordingly