Mutual Concern – Income Tax
Mutual Concern – Income Tax
A mutual concern or association is a group of people who agree to contribute funds for some common purpose that is mutually beneficial and gain the benefit of the remaining amount in the same capacity in which the contributions were made. This article deals with the concept of mutual concern under Income Tax.
Principle of Mutuality
- A mutual association is formed when a group of people associate together with a common objective and contribute funds to achieve the cause. However, any amount earned in addition to the contribution would be mutually shared amongst the members of the association or concern.
- The principle of mutuality does n0t permit the participators to trade on their own to make income out of themselves. Hence, mutual concerns are not taxable under income tax as the concept of mutuality is exempted from its purview. The principle of mutuality is applicable to mutual benefit funds, wherein the contributors are not expected to gains profits as the income received by them are almost synonymous with their contribution and any amount that is received from oneself is not regarded as an income.
- The people who are part of such associations work for the purpose of social security, entertainment, professional development, and with other similar objectives in mind. The principle of mutual association is that all contributors should have a common fund entitled to participate in the surplus and all the participants to the surplus should be contributors to the common fund. The mutual concerns are not necessitated to distribute the surplus immediately. Any excess amount that is generated through this fund is held by the association to cater to the contributors in the future.
Elements of Mutual Organization
The essential elements of a mutual organization are as follows:
- An association or people called as members: Every member of the group makes a contribution and there should be a complete identity between the contributors and the participants.
- Common cause: The actions of the participants and contributors should be in furtherance of the mandate of the association.
- Non-Profit Initiative: The members should not have any intention of profiteering from a fund for which they have extended their contributions, as the same could only be extended or returned to themselves.
Essence of Mutuality
The principle of mutuality is normally applicable to mutual benefit funds or societies. Any entity that is governed by the principle of mutuality is called a mutual concern. A mutual association or concern is an association of people who agree to contribute funds towards a common purpose and gain the benefit out of the excess amount in the same capacity as the contribution. The contributors, in this case, do not discharge their funds with an intention to trade but as an act of rendering mutual help. The sum received from the contribution shall not be considered as profits as profits cannot be churned out of one’s own contribution.
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
- PHD chambers
Exceptions of Doctrine of Mutuality
The following associations do no fall under the doctrine of mutuality as specified in the Income Tax Act. They are:
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.
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.
The income-tax for mutual concerns is taxable in the following manner:
Instances of non-mutual concerns: A co-operative society that carries on an ordinary banking business with non-members is not a mutual benefit society, which effectively means that the tax implications prescribed for the particular society will apply.
Interest earned from banks other than co-operative banks: The interest earned from investments in any banks other than co-operative banks is taxable under this provision.
Interest on fixed deposits is liable to tax: The amount of interest earned by an assessee from fixed deposits in the bank is not included within the ambit of mutuality and therefore is taxable on the hands of the taxpayers.
Tax Exempted Incomes
The income of mutual concern is exempted from tax. The additional income received from trading within the members of the concern is also exempted. On the other hand, exemptions are not accorded if a mutual concern derives income from an activity pursued with an outsider.
Contribution from members: Maintenance charges, electricity charges, penalties, the interest that is charged on outstanding maintenance charges, and other items of similar nature are some of the contributions that are made by the members of the association. The association works only as an agent that collects these charges and uses it for various common purposes. Any excess amount during a fiscal year is carried forward to the next fiscal year, with no tax exemptions.
Interest earned from co-operative banks: Any interest earned from investments made to co-operative banks qualifies for a deduction at the rate of 100%.
Dividend: According to Section 10(34), the dividend income received by Indian Companies are completely exempted from tax. Also, the dividend that is received from co-operative banks is exempted.
Rentals received from members for utilizing facilities: Considering the ‘Concept of Mutuality’, income received from common facilities such as community hall, open spaces, terrace, and other public areas cannot be taxed.
Applicability of the Principle of Mutuality
The basic principle of mutuality applies to every non-commercial activity. Income earned from commercial pursuits such as a club, society or any other entity of an adventure which is commercial in nature is not considered as a mutual concern and hence are not exempted. Mutual concerns like social clubs and co-operative societies have various sources of income, a few of which are governed by the principle of mutuality and are therefore not accountable to income tax provisions, while a few others are not governed by this doctrine are considered to be taxable.