I.T. AS. NOS.2920/LB TO 2925/LB OF 1998, 2650/LB TO 2655/1,13 OF 1998 VS I.T. AS. NOS.2920/LB TO 2925/LB OF 1998, 2650/LB TO 2655/1,13 OF 1998, 2000 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1172 (1999)

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss.2(17), 80-B & & First Sched. Part I, Para.A---Cooperative Society-- Interest income--- Assessee was a Cooperative Housing Society---Department found that interest income of the assessee did not fall within the ambit of S.80-B of the Income Tax Ordinance 1979---Validity---Provision of S.80-B of the Income Tax Ordinance, 1979 had come in super session to other provisions and assessee being a juridical person was covered under the provision of S.80-B of the Income Tax Ordinance,. 1979---Department was directed by Appellate Tribunal to charge the tax on interest under S.80-B of the Income Tax Ordinance, 1979 and not beyond that.

1998 PTD 2017 rel.

(b) Income Tax Ordinance (XXXI of 1979)---

----S.2(17) & Second Sched., Part I, cl.103---Cooperative, Housing Society- -Income of Cooperative Societies---Membership fee---Nature of receipts-- Taxability---Business of Cooperative Society was to sell plots to its members only---Membership fee received from members was capital receipts which could not be taxed as purpose of the Society was not distribution of the profit in any manner.

I.T.A. No.5453/LB of 1991 rel.

(1977) 35 Tax 165 ref.

(c) Income Tax Ordinance (XXXI of 1979)---

----S. 2(17)---Cooperative Housing Society ---Receipts---Expenditure-- Allowance/deduction---Actual basis---Percentage base---Doctrine of mutuality---Nexus of expenses to income---Expenditures incurred by Cooperative Society were to be allowed against its receipt on actual basis-- Receipts and expenditure were essentials of a Cooperative Society for running its affairs---Receipts and expenditures were mutually exclusive and doctrine of mutuality was fully applicable---Whether a Society was to be allowed a percentage of expenditure against claim had already been disapproved by the Income Tax Appellate Tribunal---Sources of receipts in a Cooperative Society in one year may not be the same for the subsequent year---If Cooperative Society had some income on account of sale of plots for one year and some expenses were allowed, it could not be said that in subsequent years on receiving penalty from members the same would be disentitled to claim of such expenses---Societies were entitled to expenditure even against those receipts wherein apparently, no physical involvement of the concerned Authorities was visible---Appellate Tribunal set aside order as to disallowance of expenses for de novo consideration.

Messrs Engineering Cooperative Housing Society Limited's case I.T.As. Nos. 2444 to 2450/LB of 1998 rel.

Atta Hussain Khan Ltd. v. C.I.T. 1969 PTD 679 ref.

(d) Income Tax Ordinance (XXXI of 1979)---

----S.2(17)---Cooperative Society---Membership fee---Late fee---Transfer fee---Taxability---Membership fee would not be taxable income of the Society while late fee would be fully charged to income-tax ---Transfer fee would also be a taxable amount as the same was a regular source of income of the Cooperative Society according to transfer of one plot to another-- Claim of exemption of transfer fee being capital receipt was rejected by Appellate Tribunal.

(e) Income Tax Ordinance (XXXI of 1979)---

----S.2(17)---Cooperative Society---Income received through horticulture-- Agricultural income---Exemption---Income from sale of nursery items (horticulture) by the assessee/Society was covered under agricultural income -Addition made in income of the assessee/Society-by the Assessing Officer in respect of sale of horticulture was deleted by Appellate Tribunal.

Talat Altaf, D. R. and Shafqat Mahmood Chohan, L.A. for Appellant (in I.T.As. Nos.2920/LB to 2925/LB of 1998).

S.A. Khan for Respondent (in I.T.As. Nos.2650/LB to 2655/LB of 1998).

S.A. Khan for Appellant (in I.T.As. Nos.2650/LB to 2655/LB of 1998).

Talat Altaf, D. R. and Shafqat Mahmood Chohan, L.A. (in I.T.As. Nos.2650/LB to 2655/LB of 1998).

Date of hearing: 5th May, 1999.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).---Theseappeals have been filed by the assessee as well as by the department. The departmental appeals are on one common issue i.e. enhancement in allowances of expenditure from 10% to 20% of the receipts. This issue has been taken up by the assessee as well and he has contested the method of allowance of expenditures. It is claimed that the expenditure relatable to assessee's business should have been allowed after modification.

The assessee's appeal is on various issues and additional grounds have also been filed for assessment years 1993-94, 1994-95 and 1995-96 which are as follows:--

Assessment year 1993-94

(1) That the status of the assessee has erroneously been determined as Private Limited Company whereas the assessee is a Cooperative Society.

(2) That the rate of tax has erroneously 'been adopted of Private Limited Company whereas the assessee is a Cooperative Society.

Assessment year 1994-95

(1) That the learned DCIT and CIT (Appeals) have erroneously held that interest receipts by the assessee amounting to Rs.1,36,255 falls outside the purview of section 80B of the Income Tax Ordinance.

(2) That the status has erroneously been determined as Private Limited Company whereas the assessee is a Cooperative Society.

(3) That the tax rate calculation is- contrary to the Part-IV of 1^st Schedule to the Income Tax Act.

Assessment year 1995-96

(1) That the status of the assessee has erroneously been assigned as Private Limited Company whereas the assessee is a Cooperative Society.

The Appeal is disposed of as follows:-

Assessment year 1990-91

The assessee first of all has challenged the Department's action of holding that the interest income does not fall within the ambit of section 80B. His reliance is upon the latest judgment of ITAT reported as 1998 PTD 2017 wherein the Tribunal has in unequivocal terms held that the Cooperative Society is not a Limited Company though stands incorporated with the Registrar of Cooperative Societies under Societies Registration Act and is a legal person for all intents and purposes. However, in income tax the liability of tax in its case is to be calculated in accordance with para-A Part-I of the 1st Schedule. It has further been held in the referred judgment that section 80B has come in supersession to other provisions and Society being a juridical person is also covered under the provisions of section 80B. The learned Tribunal has dilated upon all important issues regarding cooperative societies. Determination of status and tax implication have been sorted out in detail. The judgment being applicable on all fours on the impugned appeal. We direct the Department to charge the tax on interest under section 80B and not beyond.

In view of the above findings, the other arguments of the assessee that adjustment/off-set be allowed become infructuous. The other exemption claimed by the assessee is in respect of amount of late fee at Rs.67,610, depreciation claimed at Rs.23,257 and reduction in amount of Zakat paid at Rs.28,963. At the time of hearing learned A.R. has not, touched his claim regarding depreciation and Zakat. However, he has contested that the late fee having been paid by the members was 'covered under the doctrine of mutuality. He said that the membership fee received by the Society is also exempt and the learned ITAT had confirmed the same for the assessment year 1988-89 vide its order registered as I.T.A. No.5453/LB of 1991, dated, 23-2-1997. It has been observed that the membership fee is surplus of the Cooperative Society which, is not distinguishable from its members. The members pay membership fee in fact to themselves and certain other sums of money for certain other conveniences and the membership fee as such cannot be considered as profit. The Society never distributes any profit to anybody in any form as dividend or surplus of profit which also makes it clear that no profit motive exists so as to cover the same under the charge of Income Tax. Reliance in the above case was placed on to the New York Life Insurance v. Styles which speaks as follows:---

"(1) that was a case relating to a life insurance company, the only members of which were the holders of participating policies, each of whom was entitled to a share of the assets and liable for all losses. The greater part of the surplus of the premiums received from members over expenditure was returned to the policy holders as bonuses, and the remainder was carried forward as funds in hand to the credit of the general body of the members. It was held by the House of Lords that no part of the premium income received from members was liable to be assessed to income tax as profits or gains, a distinction being drawn between such income and that which was derived from non-members. Lord Management said: 'I do not understand how person contributing to a common fund in pursuance of a scheme for their mutual benefit---having no dealings or relationship with any outside body---can be said to have made a profit when they find that they have overcharged themselves. and that some portion of their contributions may be safely refunded.' Similar observation occurs to the judgment of Lord Harschell, who also held that it was immaterial that the persons, thus, associated had been incorporated, and that a legal entity which it was composed.

Another case cited in that of the Carlisls and Silloth Golf Club v. Smith (2) in which a similar distinction was drawn by the Court of Appeal between money received from members of the Club, and applied for the benefit of members, and money received by the Club from outsiders.

It is, thus, clear that under the law of England the income derived by the Society or Club from its. members is not liable to be assessed and I think that the same principle should be followed in the present case unless there is any reason for supposing that it was intended under the Indian Act that such income should be taxable.

Mr. Mackay urges that the case of the United Service Club is all the stronger as no portion of its profits is paid to members in the shape of dividends, but I think that it does not really make any difference whether the surplus is paid to members or whether it is applied to improving the Club. The only material point is that the Club derives, no income from out-sider.

Further reliance was placed on (1977) 35 Tax 165 (H.C. Lahore) wherein the learned High Court gave following observation:---

"The effect of the status of a mutual insurance association is that as members deal with themselves as a class, the surplus is not a profit to the company but only meant to either deal with an unforeseen situation or an eventuality concerning themselves or to divide the same between themselves at the time of winding-up. Thus, only such profits, as have been derived by the Company from its dealings with outsiders and not from its members, can be 'termed as profits or gains' and brought within the definition of section 2(6C) of the Income Tax Act.

The petitioner is registered as a mutual insurance company with the Controller of Insurance under that Act and admittedly there being mutuality of interest between its members there is no option but to hold that the conditions of mutuality stand proved and that the petitioner is entitled to all the benefits of mutual insurance company." (page 169-B)

Coming to assessee's argument that doctrine of mutuality is applicable in this case. We are fully conscious that even if the subscription is treated as revenue receipt and not capital one it cannot be charged to tax as the purpose behind the same is not distribution of profit in any manner. The Society is formed with the intention of providing benefit to its members and it is to no one's personal advantage it any shape. The surplus of the society on account of money received from its members cannot benefit to a third party as the same is utilised for essentials required for running of the society and for the general welfare of its members. The society is not a commercial organisation. Moreover, the provisions of clause (103) of the 2nd, Schedule which was applicable up to the relevant assessment year 1993 also provides exemption to the income of Cooperative Societies which they derive as a result of dealing with its members involving sale of goods for personal use. This provision also is fully applicable on the facts and circumstances of the case. The assessee Cooperative Society has been developed to sell plots to its members only and in this respect if any membership fee is received from them, it is a capital receipt which remains in reserve of the society for all times to come and if at all the same is used, it is for the essentials of running of the society which obviously is for the mutual interest-of the members.

The other issue relates to the amount of late fee received by the society. The arguments of learned A.R. in respect thereto also are the same.

These two claims have been disposed by learned CIT(A) but not against the grounds of doctrine of mutuality as in his opinion the grounds of appeal do not cover this argument. He has, however, disposed of the issue of claim of expenditures by accepting assessee's plea that 'the same were relatable to business to the extent of 20% of the claim as against 10% allowed by the DCIT. The arguments of learned A.R in respect of allowance of expenditure is that the assessee has spent more expenses than allowed by the learned CIT(A) hence 20% in this case is not sufficient. He said that the reasonableness of the expenditures is admittedly no criterion and the department is only entitled to examine as to whether the expenditure claimed is wholly and exclusively spent for the purpose of earning income.

The learned L.A. on behalf of the department said that the assessee's income is fully taxable as doctrine of mutuality is not applicable in this case. He said that a person comes within the tax net first before he is allowed exemption under the provisions of Income Tax Ordinance. In his opinion late fee; transfer fee and partnership fee are fully chargeable under the provisions of Income Tax Ordinance He said that these are those sources of income of the society against which no expenditure have been incurred. He further added that expenses, if any, are relatable to office maintenance etc. which directly have no nexus to the income of the society. He said that the doctrine of mutuality cannot be applied as a blank chit so as to cover each and every expenditure incurred by a society. Society has got a variety of income which includes bank interest against which no expenditures are incurred. Similarly the income from membership fee, late fee or any other penalty is not a source of income against which the expenditure can be related. The business of the society is purchase and sale of plots. Other sources of income are not its regular sources hence the same on one hand cannot be, considered as exempt and on the other hand no expenditure are relatable to these sources of income. In his opinion the- purpose of society not being earning of income through membership fee, late fee and other penalties are not mutually exclusive and the doctrine of mutuality does not apply.

The issue of taxability of various sources of cooperative societies has been discussed by the ITAT in so many judgments. Earlier when interest income was taxed under section 30 the allowance of expenditure under section 31 came to discussion on more than one occasions. The learned Tribunal found that the assessee was entitled to claim certain claims/deductions under section 31-B, however, its nexus towards the income was to be determined. In this regard the Tribunal was of the opinion that a cooperative society maintaining its office, an establishment, staff, office equipments etc. for the year is entitled to the expenditure incurred even if the same is from a source like interest. The justification in term of reasonableness is not within the frame of the Income Tax Law. It is the office-bearer of the cooperative society and Cooperative Department who are to see the justification of the expenditure, besides members of the society also keep watch on such expenses. The Cooperative Society is an association wherein the members deal with themselves as a class. No profit making motive arises in- any shape and no one can be called as a beneficiary. Its Managing Committee or Executive Committee as the case may be, meet quite often as per rules and regulation of the society wherein as per regular procedure previous expenditure are approved and future budget is also allowed. The society is legally obliged to commence annual general meeting in which the activities vis-a-vis expenditures come to discussion. The receipts and expenditure statement and balance sheet are prepared every year which are audited by internal as well as external auditors appointed by Cooperative Department and same come to discussion by each and every member. The detail mentioned above highlights following things:---

(1) That a cooperative society is not for any individual's benefit.

(2) It is not a commercial organization.

(3) There is no profit-making motive and if any profit accrues, the same is not disbursed among individuals.

Coming to the issue again, in fact, we have already given a finding in favour of the assessee vide I.T.A. No.5453/LB of 1991-92 for the assessment year 1988-89, dated 23-2-1997 wherein we have declared the membership fee as an amount of capital nature and we have no reason to disagree with our earlier view.

Coming to the issue of expenditure a lot of water has flown on the subject. `The ITAT in a chain of judgments has held that the expenditures incurred by the cooperative society are to be allowed against its receipt on actual basis. The receipt and expenditure are essentials of a cooperative society for running its affairs. The same are mutually exclusive and doctrine of mutuality is fully applicable on it. The question as to whether a society is to be allowed a percentage of expenditure against claim has already been disapproved by the Honourable ITAT vide its judgment, dated 3-9-1998 in the case of Messrs Engineering Cooperative Housing Society Limited, Lahore I.T.A. No.2444 to 2450/LB of 1998 (Assessment years 1988-89 to 1995-96). Relevant para. wherefrom is as follows:---

"We are convinced that the assessee-appellant is legally entitled to actual revenue expenditure incurred in carrying out the overall management of the society subject to the condition that the expenses claimed are verifiable and read-missiable as per relevant provisions of law. As no such case has been made out by the Department, the expenses claimed shall be allowed in toto except that part of the income which is taxed under section 80B of the Income Tax Ordinance."

The criterion which could be fixed in respect of such circumstances is that the expenses should have nexus to income. In a cooperative society the sources of receipts in one year may not be the same for the subsequent year and in certain years there may not be any income at all. Hence, to say that if for the earlier few years the cooperative society had some income on account of sale of plots and some expenses were allowed to him, it cannot be said that in subsequent years on receiving penalty from members it will be disentitled to claim of such expenses. In our opinion the societies were and are entitled to expenditure even against those receipts wherein apparently no physical involvement of the concerned authorities is visible. We can give the example of interest income. The earlier view of the learned Tribunal of allowing 10% against this source was because of its proportion in total receipts. This is where the proportionate allowance of expenditure shall come into force. The determination of percentage has generally been disapproved where the same is allowed as a blanket chit. The expenses can definitely be proportioned in relation to the income which are charged to tax as it is being done in the cases having different sources including there, covered under presumptive tax regime, for example in the case of person who is involved in the local sale business as well as export. We, therefore, disapprove the action of allowance of its expenses to 10% or 20% as the same has not been done keeping view the claim of the assessee. In the impugned case it is not disputed that the expenditures have been incurred. The dispute is on reasonableness which we disapprove keeping in view the judgment reported as 1969 PTD 679. In the case of Mr. Atta Hussain Khan Ltd. v. C.I.T., the important factor, therefore, is determination of commercial expediency of the expenditure. We, therefore, have no objection in holding that the membership fee is not taxable income of the society while late fee is fully chargeable to income tax. However, on the issue of allowance of expenses we deem it more appropriate to set aside the case for de novo consideration of the Assessing Officer who shall allow the same keeping in view our directions above. This may end in even more expenses than allowed by C.I.T. or vice versa.

Assessment Year 1991-92

The departmental appeal for 1991-92 relates to enhancement of the expenses to 20% against 10%. We have already given a clear finding on the subject for assessment year 1990-91. The same finding shall be applicable for 1991-92 also. The assessee's appeal for 1991-92 is against exclusion of interest receipt from the purview of section 80-D, charge of late fee and transfer fee to taxable receipts and profit and loss expenses. Regarding depreciation and Zakat, the assessee has not contested before us these two issues. Moreover, except for transfer fee all other points have been decided in assessment year 1990-91. The same, therefore, shall apply on all fours for 1991-92 also. The transfer fee, however, in our opinion is a taxable amount as the same is a regular source of income of the cooperative society as it accrues on transfer of one plot to another. It is true that the same is among members and society but we are not willing to agree with learned A.R. that it is exempt or that it is a capital receipt. The assessee, however, is entitled to expenses which the I.T.O. shall give keeping in view the findings in our earlier order.

Assessment years 1992-93 to 1995-96.

The department appeal being again on the same issue that the expenditures allowed at 20% is excessive for all the year is disposed of in the manner as above. The I. T..O. shall see the nexus of the expenses towards income as already directed. Similarly, the assessee"s appeal also being on the same issue hardly needs any further discussion. The findings given by us for the assessment year 1990-91 shall apply in full.

From the assessee's side, the exemption has been claimed in l of the income received by him through horticulture for the assessment years 1994-95 and 1995-96. It is said that income from sale of nursery items (horticulture) stands covered under agricultural income and reference is made to the judgment of Ishaque Nursery. The learned L. A. wanted to take exception from the said judgment but, however, failed to advance any distinction between the horticulture and agriculture.

We, therefore, at this stage consider ourselves handicapped and following the judgment referred by learned A.R. delete this addition also.

All the appeals, therefore, are decided in the manner and to the extent as mentioned above.

C. M. A. /M. A. K./4/Tax(Trib.) Order accordingly.