PRINCIPLE OF
TAXATION
MODULE 5: PRINCIPLE OF MUTUALITY
BY: SUSHIL JAIN
ASSISTANT PROFESSOR, KPMSOL, NMIMS MUMBAI
PRINCIPLE OF MUTUALITY
No man can make a profit out of himself; this principle
is named as the principle of mutuality, which is
extended to a group of persons in respect of dealings
among themselves. This principle basically offers a tax
shelter to certain entities, as far as they form a mutual
association with their income that is not tainted by
commerciality.
IMPORTANT ELEMENTS
(i) Identity of the contributors to the fund and the
recipients from the fund;
(ii) Treatment of the company, though incorporated as a
mere entity for the convenience of the members and
policy holders, as an instrument obedient to their
mandate; and
(iii) Impossibility that contributors should derive profits
from contributions made by themselves to a fund which
could only be expended or returned to themselves.
WHAT IS MUTUAL CONCERN?
A mutual concern or association is an association of
persons (AOP), who agree to contribute funds for some
common purpose mutually beneficial and receive back
the surplus left out in the same capacity in which they
have made the contributions.
3 QUESTIONS WHILE APPLYING
PRINCIPLE OF MUTUALITY
1. Is there any commerciality involved?
2. What would constitute complete identity between
the contributor and the participator?
3. Whether the benefit is available to the non-mutual
income?
Example of Mutual Receipts
Membership subscriptions
Membership entrance fee
Payments received by the members for particular
services that are provided by the organization
Example of Mutual Concerns
Resident Welfare Associations
Social clubs
Sports clubs
Bar association
Shop owner association
FICCI
PHD chambers
Exceptions of Doctrine of Mutuality
1. Trade or Profession Associations: According to
Section 28(iii), the income derived from trade,
professions or similar association from a specific
service performed for its members are not included
under the doctrine of mutuality.
2. Mutual Insurance Association: According to Section
44, the profit of the insurance business, whether life or
non-life, which is carried on by a company or co-
operative society are not classed under mutual
associations.
Taxable Incomes for mutual
concerns
1. Instances of non-mutual concerns:
2. Interest earned from banks other than co-operative
banks
3. Interest on fixed deposits is liable to tax
Tax Exempted Incomes
1. Contribution from members
2. Interest earned from co-operative banks
3. Dividend
4. Rentals received from members for utilizing facilities
Principle of Mutuality under the
Income Tax Act, 1961
a) Section 2(24)(vii) states:“income” includes “the profits and
gains of any business of insurance carried on by a mutual
insurance company”.
b) Section 28(iii) states: The following incomes shall be
chargeable to income-tax under the head: `Profits and gains of
business or profession’: “income derived by a trade, professional
or similar association from specific services performed for its
members”.
c) Circular no. 11/2008, dated 19-12-2008 states: “Therefore,
where industry or trade associations claim both to be charitable
institutions as well as mutual organizations and their activities
are restricted to contributions from and participation of only
their members, these would not fall under the purview of the
proviso to section 2(15) owing to the principle of mutuality.”
CASE LAWS
Q. whether the principle of mutuality was applicable to
funds deposited by the said club in four nationalised
banks who were also members of the club, especially
when the fund was raised from the contribution of
several members, including the four banks, and the
interest derived from it is visualised by several
members of the assesses club.
Answer: Bangalore Club vs. CIT
CASE LAWS
Q. Whether annual letting value of the Club building is
not assessable to income-tax under the head Income
from property ?
Answer: M/S. Chelmsford Club v Commissioner Of
Income-Tax
CASE LAWS
Q. Whether, on the facts and in the circumstances of
the case the profits arising from the sales made to the
regular members of the club is entitled to exemption on
the doctrine of mutuality.
Answer: CIT Vs. Bankipur Club Ltd
CASE LAWS
Q. Whether certain receipts by co-operative societies
from its members (non-occupancy charges, transfer
charges, common amenity fund charges) are exempt
based on the doctrine of mutuality?
Answer: Venkatesh Premises Co-op Society v. CIT
