Principle of Mutuality/Mutual Concerns - Income Tax - Ready Reckoner - Income Tax

Basic Principle of Mutuality The first basic principle of mutuality is that no person can trade with himself or make income out of himself. A mutual association arise when a group of persons associate together with a common object and contribute monies for achieving that object and divide the surplus amongst themselves. The objective should not be profit. The objective should be social security, entertainment, professional development, etc. If, instead of one person, more than one person combines themselves into a distinct and separate legal entity for rendering services to themselves by only charging themselves, the resulting surplus is not chargeable to tax. The principle of mutual association is that all the contributors to the common fund are entitled to participate in the surplus and all the participators to the surplus must be the contributors to the common fund. It is not necessary for the mutual concern to distribute the surplus immediately. The participation in the surplus may be by way of reduction in future contributions or division of surplus on dissolution. The fact that the mutual concern is incorporated as a company does not make any difference because incorporation does not destroy the identity of the contributors and participators. The income of a mutual concern is exempt from tax as far as it is derived from activities of mutual nature, i.e., income received from members is exempt. The income from trading so far as it is confined to own members is also exempt. Where a mutual concern derives income from an activity with an outsider, then tax exemption will not apply to such income, i.e., income received from non-members is taxable. Even a company assessee can claim exemption on the basis of mutuality principal where its memorandum and articles of association provide that the funds of the company should be utilised solely for the promotion of object and that no portin of the income or property shall be paid or transferred directly or indirectly, by way of dividends, bonus to any member or former member. [ Commissioner of Income Tax versus Escorts Dealers Development Association Ltd. - 2001 (9) TMI 66 - Punjab and Haryana High Court ] Contributions made by members to mutual concern cannot be subject matter of tax merely because of part of its excess of income over expenditure is invested in mutual funds. [ Commissioner of Income Tax-3 versus M/S Air Cargo Agents Association of India - 2016 (4) TMI 743 - Bombay High Court ] Income of a mutual concern is taxable in the following circumstances: Where the mutual concern is a trade, professional or similar association, then the income derived from specific services performed for its members is taxable as Profits Gains of Business or Profession under section 28 . However, if mutual concern is a resident welfare association, sports club, etc. then income derived from specific services performed for its members is not taxable. Income received from non-members.