1. Understanding the Principle of Mutuality
The principle of mutuality relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore, not subject to tax; only the income which comes within the definition of section 2(24) of the Income-tax Act (the Act) is subject to tax. Income from business involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of section 2(24) of the Act.
The concept of mutuality has been extended to define groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount of surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable.
2. What Constitutes a Mutual Concern?
A mutual concern or association is an Association of Persons (AOP) where members agree to contribute funds for a common purpose that benefits all contributors. They receive back any surplus left out in the same capacity in which they made the contributions. The key here is that the capacity as contributors and participants remains consistent. The participation envisaged in the principle of mutuality does not require members to take the surplus for themselves; it is sufficient if they have a right of disposal over the surplus.
3. Conditions for Exemption under Mutuality
When claiming an exemption based on mutuality, the following three conditions must be satisfied:
- Identity of Contributors and Recipients: The assessee must establish the identity of contributors (members) and recipients (participants).
- Instrumentality of the Assessee: The association must demonstrate its role in carrying out the mandates of its members.
- Impossibility of Deriving Profit: The association should prove that it cannot derive any profit from the contributions made to it.
4. Landmark Judgments on Principle of Mutuality
CIT Vs. Bankipur Club Ltd., 226 ITR p.97 (SC),-
It was held in this case that excess of receipts over expenditure received by club from facilities extended to its members as part of advantage attached to such membership, is not taxable as income.
The second judgement is in the case of Chelmsford Club Vs. CIT, 243 ITR p.89 (SC), . It was held in this case that
(i) Income of a mutual concern is not assessable to tax,
(ii) the charge of tax is on income from property and not on the property itself, and
(iii) the income from property of a mutual concern is not assessable to tax.
In the case of CIT Vs. National Sports Club of India (No.1), 230 ITR p.777 (Delhi), [1997],it was held that the rent receipt from members to whom rooms were let out by the assessee-club, which was a mutual concern, along with other facilities, was not taxable as income. The aforesaid view has been affirmed by the Apex Court in the case of Chelmsford Club Vs. CIT, 243 ITR p.89 (SC).
The Kerala High Court in the case of CIT v. Bus Operators Association [2013] 33 taxmann.com 568/[2012] 344 ITR 268 (Ker.), , following the decision of the Supreme Court in the case of Chelmsford Ltd.(supra), held that where the assessee, an association of bus operators, was engaged in purchase and distribution of tyres, automobile spares, etc., to its own members and profit, if any, arising in such transactions went to its members, principle of mutuality applied to that case.
5. Special Consideration Section 28-
Section 28 deals with the income chargeable under the head “profits and gains of business or profession”. Under S.28, various types of incomes are chargeable to income-tax under the head “profits and gains of business or profession”. Under S. 28(iii), income derived by a trade, professional or similar association from specific services performed for its members is chargeable to income-tax under the head “profits and gains of business or profession”. This clause makes an exception to the general rule that income of a mutual association is not subject to charge of income-tax. In order words, the concept behind S. 28(iii) is to cut at the mutuality principle being relied upon in support of a claim for exemption, when the assessee actually derives income for making profits as a result of rendering its specific services for its members in a commercial manner. This clause creates a statutory fiction –CIT Vs. South Indian Film Chamber of Commerce, 129 ITR p.22 (Mad.), . This clause applies to income derived by a trade, professional or similar association from the specific services performed for its members. A “Trade Association” is an “association of tradesmen, businessmen, or manufacturers for the protection and advancement of their interest”. Every trade, professional or similar association which renders its specific services to its own members for remuneration related to those services would come within the purview of S. 28(iii) –Indian Tea Planters’ Association Vs. CIT, 82 ITR p.322 (Cal.), [1971] 82 ITR 322 (CAL).
The word “specific” only means definite, distinctly formulated or stated with precision. The expression “performing its specific services” in S. 28(iii), means “conferring particular benefit”, that is, conferring on the members some tangible benefits which would not be available to them unless they paid the specific fees charged for such benefits – CIT Vs. Calcutta Stock Exchange Association Ltd., 36 ITR p.222 (SC),.
Section 44A- Special provision for deduction in the case of trade, professional or similar association.
44A. (1) Notwithstanding anything to the contrary contained in this Act, where the amount received during a previous year by any trade, professional or similar association (other than an association or institution referred to in clause (23A) of section 10) from its members, whether by way of subscription or otherwise (not being remuneration received for rendering any specific services to such members) falls short of the expenditure incurred by such association during that previous year (not being expenditure deductible in computing the income under any other provision of this Act and not being in the nature of capital expenditure) solely for the purposes of protection or advancement of the common interests of its members, the amount so fallen short (hereinafter referred to as deficiency) shall, subject to the provisions of this section, be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under the head “Profits and gains of business or profession” and if there is no income assessable under that head or the deficiency allowable exceeds such income, the whole or the balance of the deficiency, as the case may be, shall be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under any other head.
(2) In computing the income of the association for the relevant assessment year under sub-section (1), effect shall first be given to any other provision of this Act under which any allowance or loss in respect of any earlier assessment year is carried forward and set off against the income for the relevant assessment year.
(3) The amount of deficiency to be allowed as a deduction under this section shall in no case exceed one-half of the total income of the association as computed before making any allowance under this section.
(4) This section applies only to that trade, professional or similar association the income of which or any part thereof is not distributed to its members except as grants to any association or institution affiliated to it.
6. Concluding Remarks
The doctrine of mutuality serves as a crucial instrument in promoting cooperation and shared benefits within societies and associations. By recognizing that certain income streams arising from mutual contributions are exempt from taxation, the doctrine strikes a balance between individual interests and collective well-being.
In summary, the principle of mutuality remains a fascinating and complex aspect of income tax law. As taxpayers and legal practitioners, understanding its nuances is essential for navigating the intricate landscape of taxation.
