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Principle Of
Mutuality – A Study
Taxation (Hons
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com

Electronic copy available at: http://ssrn
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The old adage that a penny saved is a penny earned
may be a lesson in household economics, but not for tax purposes, since money saved cannot be
treated as taxable income
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Mutuality principle
offers a tax shelter, as long as its character of a mutual association is retained, with its income
not tainted by commerciality
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The Principle of Mutuality is beneficially utilized by mutual concerns like members' clubs, cooperative societies, mutual benefit funds or chit funds, etc
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Such organizations
where the objectives are not of `General Public Utility’ and therefore their incomes are not
eligible for exemption u/s 11 of the Income Tax Act, 1961 as the benefits are available to only a
`Class of Public’ instead of `General Public’ take the shelter of Principle of Mutuality
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The Principle of Mutuality, a concept, borrowed from the `English Decisions’ has been refined
over the years with the various decisions pronounced by the Supreme Court and High Courts and
Income Tax Appellate Tribunals
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Now, as far as the recognition of the Principle of Mutuality under the Income Tax Act, 1961
goes, the `Act’ has the following indirect references to this principle:
a) Section 2(24)(vii) states:“income” includes “the profits and gains of any business of
insurance carried on by a mutual insurance company”
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v
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Adam 2 T
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387

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Electronic copy available at: http://ssrn
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c) Circular no
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The whole structure of the Principle of Mutuality rests upon three pillars, which have been
discussed in the light of judicial interpretation from time to time:
1
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What would constitute complete identity between the contributor and the participator?
3
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Thus, income derived from oneself cannot be treated as income thus
cannot be taxed
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Concept of mutuality was developed in late 1800’s
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Presently we can see such organizations existing in the shape of
insurance companies, societies, clubs, associations etc
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The concept of mutuality was legally argued in a court of law in
the Glasgow Corporation Waterworks Acts v
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The courts held that the concept of mutuality
in based on the fact the there is existence of an association of persons joined together to achieve
a common objective by mutually contributing to the same with absolute and clear mind not to
earn any profits or gains
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ii
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iv
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The Principle of Mutuality has been derive from the English laws and it was mainly a Common
Law concept before it was inculcated in the Income Tax Act, 1961
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New York Life Insurance Co
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It was
clarified by the Privy Council in English and Scottish Joint Co-operative Wholesale Society Ltd
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Commissioner of Agricultural Income-tax4, that mutuality principle will have application only
if there is identity of interest as between contributors and beneficiaries
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Apsara Co-operative Housing Society Ltd
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Indo Oriental Bank and Commerce Welfare6
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Natraj Finance
Corporation7, but was dissented in Wankaner Jain Social Welfare Society v
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Kumbakonam Mutual Benefit Fund Ltd
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It
was for these reasons that even where there is no return on the contribution, as in
the case of an association formed for the purpose of general public utility,
mutuality may not be lost
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CIT v
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Andhra Chamber of Commerce 11
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It is likely that both the
shelters, whether mutuality principle and concessions meant for charities subject
to conditions, may be available for the same entity
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It is in this sense that the law postulates that there must be a complete
identity between the contributors and the participators
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A person cannot trade
with himself
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Commissioner of Income-tax v
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12: In the earliest case of
Royal Western India Turf Club, the Supreme Court adopted a very strict approach in applying
the principle of mutuality
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It gave to its members
7

(1988) 169 ITR 732 (AP)
(2003) 260 ITR 241 (Mad)
9
(1964) 53 ITR 241 (SC)
10
(1980) 121 ITR 1 (SC)
11
(1965) 55 ITR 722 (SC)
12
[1953] 24 ITR 551 (SC)
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the same or similar amenities as it gave to non-members
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Commissioner of Income-tax v
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13: The assessment years involved are
1960-61 to 1964-65
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The assessee had income from house
property and also from business or profession
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The Income Tax Officer held that the
profit on the sale proceeds of the drinks by the club is income and so, liable to be taxed
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Outsiders were
not allowed
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The
members pay the monthly subscription and in addition, they enjoy the benefit of this privilege of
supply of drinks to them on additional payment and so, there is no profit-earning motive
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Supreme Court upheld the judgments in Royal
Western14 and Kumbakonam15 further elaborated the Principle of Mutuality in more clear words
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Commissioner of Income-tax16: The appellant provides recreational and
refreshment facilities exclusively to its members and their guests
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The Club is run on 'no profit no loss' basis in that the members pay for all their
expenses and are not entitled to any share in the profits
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The Clubhouse which is the subject matter of these appeals is
owned by the appellant and is used for providing facilities to its members for which the members
paid fees
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The principle of mutuality clearly applies to the surplus earned as a result of such
activities
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The contributors to the fund are the same persons who are also the recipients from the
fund
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The entity is incorporated only for the convenience of the members i
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the object should
not be to earn profit
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There is an impossibility that the contributors would derive profit from an activity where
they are the contributors as well as the recipients of the funds
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J
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Organisation17: Here, in this case, while applying the
principle laid down by the Apex Court in the case of Royal Western India Turf Club Ltd
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There is no finding that the respondentorganisation was catering to the need of any outsider
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Yum! Restaurants (Marketing) (P
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v
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It was set up to carry out and
economize cost of advertising and promotion by catering to specific needs of franchisees of
YRIPL in order to enable them to concentrate on restaurant operations and management
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HC upheld decision of Tribunal and
Commissioner (Appeals) noting the fact that assessee-company had not only received
contributions from various franchisees but also from `P’ Ltd
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Commissioner of Income-tax v
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K
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(supra) and followed in the case
of Chelmsford Club (supra) to the facts of the present case, we find that the Organisation has
been formed to promote and protect the interest of its members and it also provided that upon
dissolution the surplus shall be distributed amongst the members of the organisation on the basis
of their contribution
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The principle laid down by the Apex Court in the aforementioned cases are
fully applicable in the present case
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Deputy Commissioner of Income-tax20: The question which arose
for the decision of the court was: “Whether the interest income of the assessee received from its
corporate members on the investments of surplus funds as Fixed Deposits or Debentures etc
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As held in the
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[2005] 144 TAXMAN 560 (ALL
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)
20
[2009] 183 TAXMAN 333 (MAD
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I
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I
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Canara Bank Golden Jubilee Staff Welfare Fund v
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T
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Employees Death and
Superannuation Relief Fund 23 is not applicable to the facts and circumstances of this case as far
as the two relevant assessment years are concerned
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The Karnatka High Court while delivering the Canara Bank Golden Jubilee Staff Welfare
Fund judgment elaborately distinguished the judgment of I
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I
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The principal reason of two diametrically opposite judgments was `Source of Funds’
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T
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Employees, the management contributed funds which were invested
in bank deposits and therefore lost the benefit of mutuality, however the in the case of `Canara
Bank’, sources of funds were from members only in last two relevant assessment years and
therefore were granted the benefit of Principle of Mutuality
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A formal organization indicating
mutuality as between members with bye-laws spelling out mutuality may, however, be necessary
as proof of claim to mutuality either as a society or a company registered under Section 25 of the
Companies Act, 1956, or even as managed by a public trust, with such activities primarily
intended to be confined to its members
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The Income Tax Act, 1961, 2010-’11, Universal Law Publishing Co
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Ltd
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Dr
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Singhania & Dr
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3
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Girish Ahuja & Dr
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Ltd
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http://taxguru
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html
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blogspot
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html
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taxmanagementindia
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asp?ArticleID=1054
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thefreedictionary
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http://www
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com/mutuality

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