Judicial Analysis Court Copy Headnote Facts Arguments Court observation

Advocates appearing for:
Appellant: Sri A. Shankar, Adv.
Respondent: Sri M.V. Sheshachala, Adv.

Result: Appeal allowed.

Headnote:(A) Income Tax Act, 1961 - Sections 4, 143 and 147 - Excess income over expenditure - Exemption - Assesee a registered society - Source of corpus fund - Constitutions made by its members - No donations or other monetary grants received from outside source - Loan advanced from corpus fund only to members - Interest received on - Fund not so advanced kept in Bank for safety - Interest earned on - Hence no motive of deriving profit - Rent received by hiring holiday homes to members - Bank in which surplus fund is deposited no doubt forms a third party vis-a-vis assessee - But identity between contributors and receipients not lost - Held, principle of mutuality applies and hence, interest on investments and dividend income on share have to be treated as non-taxable income.
       (B) Income Tax Act, 1961 - Section 4 - Mutuality - Doctrine of - Requisite conditions.
       Held: Under the Doctrine of Mutuality, the following three conditions should exist before an activity could be brought under the concept of mutuality: (1) That no person can earn from himself; (2) That no profit motivation and (3) That no sharing of profits.
       (C) Income Tax Act, 1961 - Section 4 - Doctrine of mutuality - Application of - Crucial test.
       Held: Under the general Law relating to mutual concerns, the surplus accruing to a mutual concern cannot be regarded as income, profits or gain for the purpose of the Act (Section 4), as where the contributors are to receive back a part of their own contributions, the complete identity between the contributors and recipients negatives the idea of any profit, for no man can make profit out of himself. Therefore a mutual concern can carry on an activity with its members, though the surplus arising from such activity is not taxable income or profit. The principle of mutuality has also been accepted in the case of a voluntary organisation, which receives contributions from its members.
        Thus the crucial test of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. In other words there must be complete identity between the contributors and the participators. If this requirement is satisfied the particualr form which the association takes is immaterial. Conversely, where there is no such identity between the class of contributors to the common fund and the class of participators in the surplus, the profits of the association would be assessable to tax.

Canara Bank Golden Jubilee Staff Welfare Fund vs Deputy Commissioner of Income Tax, Circle - 2008 Supreme(Kar) 482