Co-operative housing society and the concept of mutuality

One of the most complex concepts in income tax act over the years has been the understanding of doctrine of mutuality. Different people and organizations decipher the doctrine as per their understanding, which often lead to confusion and possible law suits. Let us try and take a look at the core principles behind the doctrine of mutuality. The working mechanism of the principle of mutuality rests on the basics that when a group of individuals pool in their surplus income in a common fund of the underlying association, the amount gets tax exemption as it is not regarded as personal income anymore.

Understanding Mutuality in Income Tax

For example, if a group of people form an association and pool in funds which are referred to as common fund for the working of the association, the amount generated is no longer regarded as income of any one individual and therefore not subject to any income tax. There is however a set of three basic conditions that each association needs to satisfy before they can claim tax exemption using doctrine of mutuality.

Firstly all members of the group or association must be completely identified amid each other. Any action of the contributing members of the association needs to be in furtherance of the same and lastly no contributions must be used for personal profiteering or individual returns. Hence all associations satisfying the above three criteria can be considered as exempted from tax under the doctrine of mutuality.

What is a Concept of Mutuality for housing societies?

Concept of mutuality is based on the fact that one cannot trade with oneself and cannot make profit out of oneself. A co-operative society is a mutual association and surplus from the contributions from members is not an income chargeable to tax. Thus, surplus from the contribution after deducting the housing society’s expenses are covered by the concept of mutuality. Sometimes a housing society carries on some activities which are mutual and some may not be mutual. Then, the Concept of Mutuality can be considered only for those activities which are mutual. The contribution collected from non-members are income chargeable to tax.

Overview if Taxation of Co-operative Housing Societies (CHS)

Since co-operative housing societies usually come under the umbrella of doctrine of mutuality; they are usually exempted from any income tax liability. A large number of co-operative housing societies therefore do not bother to get a PAN number. While there is no denying to the fact that vast majority of housing societies are exempted for income tax, there can be various chargeable incomes for which the co-operative housing societies need to pay tax and file their IT returns.

The income chargeable to tax

• If the co-operative housing society earns interest on other income, the interest income earned is fully taxable.
• If the rentals received are from non members of the society, the earnings shall be fully taxable under the head income from house property.
• Non occupancy charges: In case a housing society charges non occupancy charges from members, the earnings would come under the income tax prerogative as the amount is received from members not staying in the society premises. In this case the contributor to the society fund does not enjoy the amenities of the society as hence liable for income tax as per law.
• Parking charges for non-members: Any funds earned from parking charges applicable to non members however would qualify as business income of the co-operative housing society. The income is however open for general deduction under section 80 p(2)(c) up to Rs. 50,000 as per the Income Tax Act of 1961.

Tax exemption on the concept of mutuality

• Contribution from members: Most co-operative housing societies dwell on earnings contributed by society members. The society in this case acts as a collection agent collecting funds on behalf of its members and paying out on various expenses of the society. Hence any surplus funds generated for such co-operative housing societies fall under the definition of doctrine of mutuality and exempted from income tax.
• Interest charged by society on outstanding dues: In case the co-operative housing society has earnings from interest made in any co-operative banks, it is eligible for 100% tax deduction under Section 80 P (d) of the Income Tax Act.
• Rentals from use of open spaces / terrace received from members: In case the co-operative housing society earns rentals from use of open spaces and terrace, the concluding point is if it receives the same from members or non members. In case the rentals received are from members then there is no tax obligation under the doctrine of mutuality.
• Parking charges: For parking charges earnings of co-operative housing societies, any charges from members of the society are exempted from income tax as they come under the principle of mutuality.