What is the mutuality under the Income Tax Act?
What is mutuality under the Income Tax Act?
There are a number of entities, the income / surplus of which is governed by the principle of mutuality and therefore, such income / surplus is not liable to income-tax. In other words, any surplus in the case of mutual concerns is exempt from income-tax and therefore, it would not form part of the gross total income of such mutual concerns.
The mutual concerns like social clubs and co-operative societies have various sources of incomes, some of which are governed by the principle of mutuality and hence not liable to income tax.
The principle of mutuality indicates the contributors to the common fund should be eligible to participate in the surplus with all the participators in the surplus are contributors to the common fund.
The basic principle of mutuality is that none of the contributors makes a profit out of themselves, which means one cannot involve in a business with himself.
When there is a mutual concern or an association of persons 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.
The capacity and the contributors remain the same and involve in the principle of mutuality that the members should be taking the surplus to themselves.
What are the principles followed in the mutuality?
For understanding the principles of mutuality, here are some cases that explain it:
Case 1: CIT vs. Kumbakonam Mutual Benefit Fund Ltd.
In this case, the Supreme Court of India pointed out the principle of mutuality lies in the return of the contribution one has made to a common fund. If the profits are distributed like the shareholders, then the mutuality is not satisfied. The Court specified that the participants must be contributors to the common fund. Mere entitlement to contribute will not suffice.
Case 2: CIT vs. West Godavari District Rice Millers Association
The concept of mutual benefit funds or societies in respect of the income of which the principles of mutually are generally claimed is applicable. The entity regulated by the principle of mutuality is ordinarily called mutual concerns.
Case 3: CIT vs. Bankipur Club Ltd.
Under the Income-Tax Act, to specify the levy of tax, it is important to understand that any surplus returned to the contributors cannot be regarded as profit. It is necessary to keep a complete identity between the contributors and participates. The expenditure generated from the facilities extended by a club to its members were exempt on the ground of mutuality.
Case 4: Canara Bank Golden Jubilee Staff vs. Deputy Commissioner of Income Tax
Here, the court specified that the assessee was a registered society comprising of the employees of the Canara Bank established with the object of promoting welfare amongst the members who contributed towards the corpus fund. The assessing officer taxed the interest income on investment and dividend income on shares. The Court observed the po0rtion of fund which was not advanced to the members were invested and therefore shall believable to levy tax.
Case 5: CIT vs. Apsara Co-operaqtive Housing Society Ltd.
It was held that as the Tribunal found that there was no profit element in the transaction, the society, under its regulations or bye-laws, realizes transfer fee from a member when the member intends to transfer the flat to any other person, member or otherwise and this amount was taken for the benefit of the members of the society and not for business purposes. Therefore, it shall be availing the exemption.
Case 6: CIT vs. Indian Paper Mills Association
In this case, the assessee was held to be a mutual concern and consequently the income derived by the assessee by way of subscription and admission fees was held not liable to be taxed.
The mutual operations require marked by an impossibility of profits. However, it does not mean that there cannot be any surplus with the assessee at the end of the year. There is no absolute right of the members to get a share in the surplus and insist on its distribution. Additionally, in case of distribution of surplus of a mutual concern, the reason is not a redistribution of profits as in the case of a company or firm.