Home > Knowledge Centre > Transfer Fees of any Amount not Taxed in Housing Society

In the year 2003, the Special Bench of the ITAT, Mumbai, had delivered a judgment in the case of Walkeshwar Triveni Co-operative Housing Society Ltd. Vs. ITO [2003] 80 TTJ 673 (Mumbai) (SB), which had generated lot of controversy in the legal circles. This judgment disturbed the well settled legal position in respect of the tax treatment regarding the Transfer Fees received by a Co-operative Housing Society.

In the aforesaid judgment, the ITAT had laid down that:

(i) Transfer fees or premium received by a Co-Operative Housing Society from the outgoing member on Transfer of the flat etc., up to the limit allowed by law viz. Rs.25,000/- per flat; is not liable to tax.

(ii) Transfer fees or premium received from the incoming member or the Transferee is liable to tax. 

(iii) Any amount received by the Society from any member whether the Transferor or the Transferee on the sale of flat beyond the limits prescribed in the Bye-Laws or the Government Notification, is liable to tax.

However, contrary to the above, in the year 2013, the Mumbai Income-Tax Appellate Tribunal exempted the Transfer Fees received by a South Mumbai based Housing Society against an appeal filed in a dispute relating to Transfer Fees received from two of its members in the fiscal year 2008-09.

In its judgment, the Tribunal held the Transfer Fees of nearly Rs. 45 lakhs as tax exempt received by the Chambers Co-operative Housing Society. Last year, too, the Society had obtained a favorable order from the Tribunal on the same issue.

Transfer Fees continue to be the breeding ground of tax litigation in Mumbai. According to Income-Tax Authorities, Housing Societies charge exorbitant Transfer Fees ranging from 1% to 5% of the value of a flat which has been sold. Usually, these payments are contributed equally by the flat Seller and Buyer. The Housing Society Model Byelaws in Maharashtra and the Govt. Notification prescribes that the Transfer Fee to be recovered by Housing Society should not exceed Rs. 25,000/-.

However, such payments are often disguised and camouflaged as payments received towards repair fund, amenities fund or even voluntary donations. Hence, Income-Tax Authorities assert that these Societies in fact, are generating a lucrative profit and hence, the amount so received should be taxed.

But given this order, Housing Societies in Mumbai can now continue to breathe easy. The principle of mutuality which is governing the favorable decisions by the Tribunal implies that no one can make a profit out of itself. Thus, there can be no tax incidence. Transfer Fees received in whatever form are credited to a fund which is used for the welfare of the Housing Society and its members. The cardinal requirement is that the flat owners, who are members of the Society, are entitled to participate in the surplus, if any, as per the experts’ opinion from certain CA’s and Legal Firms.

In the given case, the Tribunal relied on precedents set by the High Court in the Case of Mittal Court Premises where it had been held that contributions paid by new members towards a fund, be it a common amenity, repair or welfare fund is not taxable in the hands of the Housing Society as the principles of mutuality prevail. (Refer the Judgment: http://indiankanoon.org/doc/388672/)

A Special Leave Petition filed by the Income-Tax Department against this order is pending in the Supreme Court. The Tribunal also relied on another ruling of High Court in the case of Sind Co-operative Housing Society where Transfer Fee in the form of voluntary contribution received from incoming and outgoing members, was also treated as tax exempt. (http://itatonline.org/archives/wp-content/files/walkeshwar_sind_co-op_society_transfer_fees_mutuality.pdf).

It now remains to be seen as to how the Supreme Court reckons this issue and sets the legal criterion in the matter of Transfer Fees received by the Housing Societies irrespective of any amount in any form beyond the limit prescribed under the law. 

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