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Charity and Mutuality

Income Tax - By: - RameshKumar Patodia - Dated:- 1-2-2019 - 1. The principle of mutuality is based on the principle that an organization cannot derive income from itself, meaning that an organizations income consists only of funds derived from external sources. Therefore when a number of persons(i.e., members of a club, association or organization) contribute to a common fund which is created and controlled by those persons for a common purpose, any surplus arising therefrom, for the common purp .....

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y based on the anticipated price of the commodities to be purchased. If it ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselves, a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent savings and not income. The Income-tax Act seeks to tax income and not savings. If this principle is borne in mind, then it wo .....

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ub Ltd 1953 (10) TMI 9 - SUPREME COURT 2. Charity & Mutuality -whether can exist together In case of a charitable organization, the primary condition is that the organization cannot distribute surplus amongst the members and the surplus is always for the benefit of public at large. In such a situation, it is always believed that cannot go together. It is pertinent to refer to the decision of Australian Court decision in the case of Coleambally Irrigation Mutual Co-operative Ltd Vs FCT(2004) .....

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under 'any other object of general public utility'. Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such association is not chargeable to tax. In such cases, there must be complete identity between the contributors and the participants. Ther .....

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the surplus has been distributed in accordance with the objects or not. Thus in such a situation even in case of a charitable organizations ,the principle of mutuality becomes applicable. 3. Mutuality-Identity between classes The mutuality principle is dependent upon the existence of an identity between contributors to the fund and those who are entitled to participate in it. The identity required is not an identity between individuals, but an identity between classes , and all that is required .....

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e or business with himself. In this regard, the Apex court in the case of Commissioner of Income-tax Vs Royal Western India Turf Club 1953 (10) TMI 9 - SUPREME COURT held that The cardinal requirement is that all 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 sat .....

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be expended or returned to themselves 5. Types of Organizations (i) Clubs (ii) Trade Associations (iii) Housing Society (iv) Mutual benefit society (v) Employees benefit society (vi) Professional Associations (vii) Kitty in modern day. (viii) Chit fund (ix) Association of persons for mutual help (x) Puja Pandals 6. Impact of mutuality on income-Broad principles The practical effect of the principle is that receipts derived from mutual dealings with an organization s members(mutual receipts) are .....

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ly by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot be said that they are not participators in the surplus. This clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should wil .....

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ion of principle of mutuality is not destroyed on account of transaction with non-members One extreme contention advanced on behalf of the revenue was that where a club had taxable income from trading or business activities, then there was no scope for the application of any principle of mutuality, even assuming that the subscriptions could be brought within the ambit of this principle. In Carlisle and Silloth Golf Club v. Smith [1912] 6 TC 48, 54, 55 (KB). there was a club, which was a bona fid .....

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in the carrying on of an enterprise which is in itself outside the scope of the club and is distinct from the ordinary objects and activities of the club;............. I think, therefore, that at the outset the club has, for considerations sufficient in its own view, annexed to its ordinary enterprise of a golf club the rendering of services systematically to strangers for the purpose of obtaining, among other advantages to itself the revenue that those strangers provide..........; it is a case .....

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shut out from considering the question of mutuality by virtue of (a) transactions with non-members or (b) maintenance of common accounts. 9. All the participators must be contributors to common fund In the case of CIT Vs Kumbakonam Mutual Benefit Fund Ltd 1964 (5) TMI 2 - SUPREME COURT , the Hon ble Apex Court held that essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed as shareholders, the principle of mutuality is not satisfied. .....

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de the purview of the levy of income-tax on principles of mutuality. 12. Principle of mutuality applies to what type of income? Principle of mutuality applies to all non-commercial activities. As regards income from commercial ventures, the club or society would not be entitled to claim principles of mutuality in respect of adventures of commercial nature. (a) Sports Club of Gujarat Ltd Vs CIT 1987 (10) TMI 21 - GUJARAT HIGH COURT Receipts from interest on bank deposit can be treated as exempt o .....

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harges and common amenity fund charges. 13. Advertisement collected from members- taxable -AUTOMOBILE ASSOCIATION OF BENGAL VERSUS COMMISSIONER OF INCOME-TAX, CALCUTTA [1967 (11) TMI 21 - CALCUTTA HIGH COURT]- the principle of mutuality was held to be not applicable as the money was collected by the association from some of the members as advertisement charges but benefits came out of the same to the members not as advertisers but as members. Moreover, the advertisers got commercially benefitted .....

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uality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance org .....

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COURT] , the issue of taxability or otherwise of interest on fixed deposit with banks was discussed threadbare and the court was not inclined to follow the decisions of Karnataka High Court in the case of CANARA BANK GOLDEN JUBILEE STAFF WELFARE FUND VERSUS DEPUTY COMMISSIONER OF INCOME TAX [2008 (7) TMI 239 - KARNATAKA HIGH COURT].Later on the decision in the case of Common Effluent has been approved by the Apex Court in INCOME TAX OFFICER, MUMBAI VERSUS VENKATESH PREMISES COOPERATIVE SOCIETY L .....

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s of promotion of game and other ancillary activities carried were only incidental to said game only, registration already granted u/s 12AA cannot be cancelled. Even otherwise, principle of mutuality is applicable. CBDT Circular No 11/2008 followed. Also ITO (E) -1, Kolkata Vs Indian leather Products Association 2015 (12) TMI 901 - ITAT KOLKATA 17. DELHI STOCK EXCHANGE ASSOCIATION LIMITED VERSUS COMMISSIONER OF INCOME-TAX, DELHI [1960 (11) TMI 23 - SUPREME COURT] In this case the apex court held .....

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h are , subject to the provisions of taxing act, taxable profits. The reason for taking such a stand that the society was formed under the Industrial and Provident Societies Act, 1893 which contemplated that the society registered under the said act will be a profit-making concern. The Court noted that when the constitution, rules and business practices of the appellant society so closely conform to the pattern of an ordinary profit-making concern, how can it plausibly be maintained that no prof .....

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pplied to an incorporated company which carries on business of horse racing and realizes money from the members and from the non-members for the same consideration, by the giving of the same or similar facilities to all alike in the course of one and the same business carried on by it. (III) Lastly the Club was held not to be a trade or professional or similar association u/s 10(6) of the Income-tax Act,1922. 20. Specific services- Section 10(6) of 1922 Act and Section 28(iii) of 1961 Act- The m .....

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objection fees (VII) Interest on savings deposit (VIII) Interest on fixed deposit 22 Whether to claim mutuality or charity or both? A question arises as to if in the case of an organization the provisions of both are applicable, then which provisions should be applied. It is always advisable to apply mutuality provisions since the income is totally exempt in such cases without any fetters whereas in case of charitable organizations, there are conditions regarding utilization of funds and other s .....

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rd parties, in such a situation the mutuality is not applicable. See Also CIT Vs Natraj finance corporation 1987 (8) TMI 76 - ANDHRA PRADESH HIGH COURT 25. Chit fund-V Raj Kumar Vs CIT 2014 (3) TMI 388 - MADRAS HIGH COURT The hon ble Madras High court held that where chits are run as a business by a third party and assessee subscribes to that merely as a subscriber, the dividend income received over and above what has been subscribed by the assessee, has to be assessed as income and cannot be cl .....

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auction or by drawing lots. It was held that the contributions made to chit fund cannot be treated as revenue expenditure nor the receipt of any amount therefrom can be treated as a business receipt. 27. Interest income of a society-whether mutuality applicable. Wankaner Jain Social Welfare society Vs CIT 2002 (9) TMI 53 - MADRAS HIGH COURT Though a member was of necessity also a depositor he was not required to be a borrower. Thar was wholly optional. The income of the fund was by way of intere .....

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