Whether contributions to “Sinking Fund” and “Repairs and Maintenance Fund”
recovered from members by the Co-operative Housing Society is chargeable to
GST? Whether it can be said that members are contributing these amounts as
“consideration” for future supply of repair and other services?
(1) A co-operative housing society is supposed to recover certain
contributions from members which are to be used for formation of various
funds like “Sinking Fund” and “Repairs and Maintenance Fund” etc. These
funds are created pursuant to Clause 13 of the Model Bye-laws promulgated
under the Maharashtra Co-operative Societies Act which all co-operative
housing societies are obliged to follow.
(2) A society is deemed to be a separate person by the GST law.
Similarly, a society registered under the Maharashtra Co-operative Societies
Act is deemed to be a body corporate with separate legal personality as per
Section 36 of the Maharashtra Co-operative Societies Act.
(3) Under the law, the land and building are legally owned by the
Co-operative Housing Society. If the society has been declared to be a
separate person, that fiction must be taken to its logical conclusion, which
is that the society is also responsible for the maintenance of the building
and for repairs. Thus, when the society undertakes any repairs etc., it is
for its own benefit. There is no direct service being rendered to members of
the society as such. The members may be indirectly benefitted, but that does
not change the fact that the society undertakes repairs for its own sake.
(4) In Gupta Modern Breweries v. State of Jammu and Kashmir [(2007) 6 SCC
317], the Supreme Court has laid down in clear terms that when a person is
undertaking any activity for his own benefit, that person is not said to be
providing any service to anyone else. In that case, the Excise department
used to audit the factories and business premises of taxpayers and charge a
“fee” for the same. The department argued that the fee is recovered in
return for “audit services” given to taxpayers. The Supreme Court held that
the department undertakes audit for its own benefit and that there is no
service being provided to taxpayers in such a case.
(5) It is pertinent to note that in case of members’ contributions to
“Sinking Fund” or “Repairs and Maintenance Fund”, it is not certain that a
member who is contributing will even get any indirect benefit of the
contribution. These repairs etc. are not undertaken routinely and many a
times, the person who has made contributions will have sold off his flat to
someone else and may not actually get the benefit of the repairs etc.
(6) Secondly, the suggestion that the contributions are made in return
for future supply of services is wrong. It is based on a fallacious reading
of the Model Bye-laws and the Maharashtra
Co-operative Societies Act.
(7) Under Clause 14 of the Model Bye-laws, the “Sinking Fund” can be
utilised only if the General Body passes a resolution permitting such
utilisation. Similarly, the “Repairs and Maintenance Fund” cannot be
utilised without the specific prior approval of the General Body. Thus,
merely by making contributions to the “Sinking Fund” or the “Repairs and
Maintenance Fund”, the member does not get any right to avail of the alleged
repair and other services being provided by the Society. A member may
regularly make such contributions and demand repair services, but the
General Body may not entertain the same. The member is not contractually
entitled to any services whensoever he wishes and the Society is not
contractually bound to give any of the alleged services.
(8) Tax can be levied under Section 9 of the CGST Act only if there is a
“supply of goods or services”. A “supply” is defined in Section 7 to mean a
“supply made or agreed to be made for consideration”. This phrase “supply
for consideration” has been borrowed from other jurisdictions like the
European Union, Australia, New Zealand, Canada, South Africa etc. The Courts
of all such jurisdictions have taken the view that the word “for” used in
the phrase “supply for consideration” requires a sufficient and close nexus
between the supply and the consideration. A payment is not “consideration”
till it can be said to have a sufficient and close linkage to a supply.
(9) In Australia, the meaning of the term "supply for consideration" has
been succinctly explained. In AP Group Ltd. v. Federal Commissioners [(2013)
FCAFC 105], the Court held that a “supply” can be said to be made “for
consideration” when the supply is made to “obtain that consideration”.
Similarly, a consideration can be said to have sufficient nexus with a
supply only when the consideration can be said to have been given “for
obtaining that supply”. In short, the supply and the consideration must be
given to obtain each other. This is known as the element of reciprocity
which is one of the classic tests of determining whether a payment is linked
to a supply for the purposes of levying GST. This test is also used in the
European Union and in New Zealand and in other countries. The element of
“bargain” between supply and consideration is well recognised in all GST/VAT
(10) In Commissioner of Inland Revenue v. New Zealand Refining Co.
[(1997) 18 NZTC 13,187] the New Zealand Court of Appeals has held that the
term “supply for consideration” requires that there be some legal
relationship between the parties. It is necessary that after payment of
consideration, the payer can demand the performance of the supply. The
recipient of the consideration must be obliged under contract, statute or in
equity to perform the supply in return for the payment. Where such an
obligation is not there, it cannot be said that the supply
was made “for” any consideration whatsoever.
(11) In this case, there is no statutory or contractual or equitable
obligation on the society to undertake any repairs on demand made by a
member. Contribution made by the member does not entitle him to any rights
qua the said funds. It is up to the General Body to decide whether or not
the repairs should be undertaken.
(12) In our view, the real nature of the funds is nothing but a “trust”
which is formed by the members for the benefit of the society. This is an
implied trust formed under the provisions of the Maharashtra Co-operative
Societies Act. Every member makes a payment into the trust fund for the
benefit of the society. The trustees are the General Body which decides how
the fund is to be utilised. However, the trustees (i.e., the General Body)
are not allowed to go beyond the restrictions imposed on the trust fund. For
example, the trustees (i.e., the General Body) cannot utilise the Repairs
and Maintenance Fund for throwing a Diwali party. They can only use the
funds for the purpose for which the trust is created and only for benefit of
the contributors. All the hallmarks
of an implied trust are fulfilled in this
(13) In Chatham Islands Enterprise Trust [(1999) 19 NZTC 15,075], the New
Zealand Court of Appeals has held that payments made by a creator of a trust
(known as settlor) for the functioning and performance of the duties of the
trust are not “consideration” for any “supply”. In that case, the Government
of New Zealand formed a trust for the people of Chatham Islands. The trust
was supposed to provide services to the people of Chatham Islands. The
Government of New Zealand made annual payments to the trust. The
Commissioner of Inland Revenue held that the payments made by the Government
of New Zealand were “consideration” for the provision of services by the
trust to the people of Chatham Islands.
(14) However, the Court of Appeal in New Zealand held that there was no
supply of services by the trust. The trustees were merely performing their
duties, which may directly or indirectly benefit the Government of New
Zealand as well as the people of Chatham Islands. Furthermore, the payments
had no connection with the duties performed by the trust. Even if the
Government of New Zealand stopped all the payments, the trustees would be
obliged to perform the duties imposed on them.
(15) In this case, the obligation of the Society to undertake repairs and
maintenance exists independently of these contributions. Bye-law 154 obliges
the Committee to maintain the Society building in good condition. Bye-law
158 enumerates those repair works which are obligatory for the Society to be
carried out at its own cost. Neither in Bye-law 154 nor in Bye-law 158 is
the obligation dependent on whether a Sinking Fund or a Repairs or
Maintenance Fund has been created or maintained at any particular time. Even
if there is no sinking fund or repairs and maintenance fund, it cannot be
said that the Society is not obliged to keep its building in a healthy
condition. The funds are thus nothing but a trust mechanism to help the
Society fulfil its obligation of undertaking repairs from time-to-time.
(16) It is therefore our considered view that contributions to Sinking
Fund or Repairs and Maintenance Fund are not liable to GST.