[2020] 

116 taxmann.com 801 (Article)

Date of Publishing: May 27, 2020

Analysis of Doctrine of Mutuality

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S. KRISHNAN
CA

1. Introduction

The principle of mutuality relates to the notion that a person cannot make a profit from himself. An
amount received from oneself is not regarded as income and is therefore, not subject to tax; only the
income which comes within the definition of section 2(24) of the Income-tax Act (the Act) is subject to
tax. Income from business involving the doctrine of mutuality is denied exemption only in special cases
covered under clause (vii) of section 2(24) of the Act.

The concept of mutuality has been extended to define groups of people who contribute to a common
fund, controlled by the group, for a common benefit. Any amount of 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.

The Supreme Court in the case of Yum Restaurants (Marketing) (P.) Ltd. v. CIT [2020] 116
taxmann.com 374 (SC), through a detailed judgment delivered on 24th April,2020 while affirming the
decision of the Delhi High Court in the case of Yum! Restaurants (Marketing) (P.) Ltd. v. CIT [2009]
180 Taxman 27 (Delhi) has held that "where the assessee was incorporated with approval of Secretariat
for Industrial Assistance for purpose of economisation of cost of advertising and promotion of member
companies, to be operated on a non-profit basis on principles of mutuality but it accepted contributions
both from members and non-members and one member was vested with powers to control functioning
and interests of other members, such an assimilation could not be termed as a social intercourse devoid
of commerciality; assessee, being not a mutual concern, could not be entitled to tax exemption."

Before analysing the decision of the Supreme Court in the case of Yum Restaurants (Marketing) (P.)
Ltd. (supra) let us analyse the concept of strict interpretation in construction of exemptions.

2. The English and Scottish Joint Co-Operative Wholesale Society Ltd. v. The
Commissioner of Agricultural Income-Tax Date of decision 27th April,1948-
legalcrystal.com/946089-[1948] AC 405 -P.C

The following words of Lord Macmillan were quoted in the decision of Privy Council in The English and
Scottish Joint Co-Operative Wholesale Society Ltd' s case (supra)

"The cardinal requirement 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 particular form which the association takes is
immaterial."

Lord Herschell in [1889] 14 AC 3812 gave a very illuminating illustration in the following words-

[Extracted in the judgment of The English and Scottish Joint Co-Operative Wholesale Society Ltd.'s
case (supra)]

"Persons who agree to contribute to a common fund for mutual insurance certainly would not in
ordinary parlance be regarded as carrying on a trade or vocation for the purpose of earning profit.
Let us see how the so-called profit arises. It is due to the premiums which the members are
required to pay being in excess of what is necessary to provide for the requisite payments to be
made upon the deaths of members, and not being, as the case states they were intended to be,
commensurate therewith.... The members contribute for a common object to a fund which is their
common property; it turns out that they have contributed more than is needed, and therefore more
than ought to have been contributed by them, for this object, and accordingly their next
contribution is reduced by an amount equal to their proportion of this excess, I am at a loss to see
how this can be considered as a 'profit' stating or accruing to them from a trade or vocation which
they carry on."

Lord Normand delivering the judgment in the case of The English and Scottish Joint Co-Operative
Wholesale Society Ltd.(supra) after extracting the above passage from [1889] 14 AC 3812 stipulated the
following three conditions in the words of Lord Herschell for establishing doctrine of mutuality,

(1)   the identity of the contributors to the fund and the recipients from the
fund;
(2)   the treatment of the company, though incorporated, as a mere entity for
the convenience of the members and policy holders, in other words as an
instrument obedient to their mandate; and
(3)   the impossibility that contributors should derive profits from
contributions made by themselves to a fund which could only be
expended or returned to themselves.

The Privy Council held at para.22 as under-

22. Their Lordships will therefore humbly advise His Majesty that the judgment of the High Court
should be varied by the substitution for an affirmative answer to the question of this following
answer:
"The Society is not exempt from liability to Assam Agricultural Income - tax in respect of profits
from the sale to its members of tea cultivated or manufactured at its Deckiajuli Estate in the
province of Assam" and that subject thereto the appeal should be dismissed.

The decision of the Calcutta High Curt in the case of The English & Scottish Joint Co-operative
Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax [1945] 13 ITR 295 (Calcutta) was
affirmed by the Privy Council in the case of The Commissioner of Agricultural Income-Tax ( supra) in
[1948] AC 405 (supra).

3. Understanding the concept of mutuality

3.1. Mutuality is not a form of organization, even if the participants are often called members. Any
organization can have mutual activities. A common feature of mutual organizations in general, is that
participants usually do not have property rights to their share in the common fund, nor can they sell
their share. When they cease to be members, they lose their right to participate without receiving a
financial benefit from the surrender of their membership.

It has also been established through Court decisions that the identity between the contributors and the
participators need not necessarily be of individuals, because an identity of status or capacity that
matters. The individual members of an association may be different at different times, but so long as the
contributors and participators are both holding the membership status in the association, their identity
would be clearly established and the principle of mutuality would be available to them. The contributors
to the common fund and the participators in the surplus must be an identical body.

3.2. In the Law of Taxation by Thomas M. Cooley, 4th Edition, Volume 2, Pg. 671, the rule regarding
strict construction of exemptions is succinctly summarised thus:

"672. Strict construction-Rule stated. An intention on the part of the legislature to grant an
exemption from the taxing power of the state will never be implied from language which will admit
of any other reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language used, for it is a
well-settled principle that, when a special privilege or exemption is claimed under a statute, charter
or act of incorporation, it is to be construed strictly against the property owner and in favour of the
public. This principle applies with peculiar force to a claim of exemption from taxation.
Exemptions are never presumed, the burden is on a claimant to establish clearly his right to
exemption, and an alleged grant of exemption will be strictly construed and cannot be made out by
inference or implication but must be beyond reasonable doubt.............. Moreover, if an exemption
is found to exist, it must not be enlarged by construction, since the reasonable presumption is that
the state has granted in express terms all it intended to grant at all, and that unless the privilege is
limited to the very terms of the statute the favour would be extended beyond what was meant…"

3.3. Lord Watson in Salomon v. Salomon & Co. [1897] AC 22 made the following pertinent
observations-

"Intention of the Legislature is a common but very slippery phrase, which, popularly understood
may signify anything from intention embodied in positive enactment to speculative opinion as to
what the legislature probably would have meant, although there has been an omission to enact it.
In a Court of Law or Equity what the Legislature intended to be done or not to be done can only be
legitimately ascertained from what the Legislature intended to be done or not to be done can only
be legitimately ascertained from that which it has chosen to enact, either in express words or by
any reasonable and necessary implication."

These observations have been quoted and followed by the Constitution Bench of the Supreme Court in
the case of Hansraj Gordhandas v. H. H. Dave, Assistant Collector of Central Excise & Customs 1970
AIR 755, 1969 SCR (2) 343 wherein the Supreme Court was called upon to interpret a notification
issued under the Central Excise Act and also followed by the Constitution Bench in the case of
Commissioner of Customs (Import) v. M/s.Dilip Kumar and Company & Others Civil Appeal No.3327
of 2007-Judgment dated 30th July,2018 for deciding a similar issue..

4. Analysis of the decision of the Supreme Court in the case of Yum Restaurants
(Marketing) (P.) Ltd

Point of note-

Nomenclatures H and S have been used respectively for holding company and subsidiary company for
easy identification.

The assessee-company S was incorporated by H as its fully owned subsidiary after obtaining approval
from the Secretariat for Industrial Assistance (SIA) for the purpose of economisation of the cost of
advertising, marketing and promotional activities (AMP) of S and the franchisees as per their needs.
While granting approval certain conditions were imposed by SIA regarding the functioning of the
assessee and one of the conditions imposed was that S was obligated to operate on a non-profit basis on
principles of mutuality.

Subsequently H, S and the franchisees entered into a tripartite agreement as per which S would receive
contribution from the franchisees as well as franchisees of H at 5% on their gross sales in order to
effectively carry on AMP effectively. This agreement also envisaged that that the purpose of
incorporating S was to really carry (on) the marketing activities of each of the brands of which H was a
licensee for the mutual benefit of the franchisees. The entire activity of S was to be carried out on no-
profit basis and that the assessee-company was obliged not to repatriate any dividends.

It was also stated that the management of the proposed New Company would vest with H and
application of contributions will be decided by H in consultation with the franchisee.

It was agreed that S would allocate the advertising contribution received from the franchisees including
franchisee for each Restaurant to the respective Brand funds established for that brand.

It was also agreed between the parties that the advertising contribution paid into a brand fund would be
used for the AMP Activities relating to that brand.

The franchisees would also be directed to spend 1% on certain terms and conditions stipulated either by
H and/or S.

It was also stipulated that H on the request of S but at its sole discretion pay to S any amount(s) as it
may deem appropriate to support the AMP. But it was also clarified and agreed that H would have no
obligation to pay any such amounts in the event of it choosing not to do so.

It was also agreed that any surplus left over in any of the Brand Funds would be carried at the end of an
accounting period and this amount would be retained by S to be spent on AMP activities during the
following accounting period but the option, subject to approval by its Board of Directors, was given to
refund the surplus amounts to the franchisees including the Franchisee in the same proportion as the
actual advertising contribution made by each franchisee including the Franchisee in that accounting
period.

With regard to deficit, it was stated that any deficit arising in any of the brand funds at the end of an
accounting period would be carried forward to the next accounting period and be met out of the
advertising contribution paid by the franchisees including the Franchisee for that accounting period. It
was also agreed between the parties that H and/or S would not be obliged to fund the deficit.

The assessee filed the return for the relevant assessment year declaring NIL income claiming mutuality
though there was a surplus from the above stated AMP activities but this did not meet with the
approval of the Assessing Officer who held that the assessee company S had its sole absolute discretion
to pay to H any amount as it may deem appropriate but H would have no obligation to pay any such
amounts in the event of it choosing to do so. The Assessing Officer thus observed that "this clearly
showed that H was under no legal obligation to pay any amount of contribution as per its own version
reflected from tripartite agreement."

The Assessing Officer, thus, levied tax on the surplus

The Commissioner of Income-tax (Appeals) dismissed the appeal of the assessee by holding that "unlike
in the cases of a club, the appellant co. is not existing for any social inter course nor is it for cultural
activities where the idea of profit or trade does not exist. What is essential is that there should not be
any dealing with outside body which results in a benefit which promotes some commercial/business
venture. -------------- Thus, though the form taken up to conduct its revenue activity undoubtedly
resemble a mutual concern but the contributions made on the other hand are undeniably for business
considerations. In my opinion, taking an overall view of the intent and motive of the appellant company
to form a 'mutual concern' it can be concluded that the underlying purpose was solely for commercial
consideration. Therefore, in view of the above as demonstrated by the appellant Co. the excess of
receipts over the expenditure i.e. the surplus in my opinion would be income liable to tax…."

The Tribunal, on second appeal by the assessee, dismissed the appeal of the assessee after making the
following pertinent observations-

"However, in the present case it is seen that contributions are also received from one P and H. P is
neither a franchisee nor a beneficiary. Similarly, some contribution is also received from H which
H is not under any obligation to pay. Thus, it can be said that essential requirement that of the
contributors to the common fund are either to participate in the surplus or they are beneficiaries of
the contribution is missing. Through the common AMP activities, no benefit accrues to P or H.
Accordingly, the principles of mutuality cannot be applied. It is a different fact that the assessee
was established with the object not to make profit but it is also a fact that there is a surplus
in the hands of the assessee which arose due to contribution from certain persons
who were neither the beneficiaries nor have right to receive the surplus...."

The High Court on appeal from the assessee dismissed the appeal after holding as under- refer-Yum!
Restaurants (Marketing) (P.) Ltd. (supra)-

"The principle of mutuality as enunciated by the Courts in various cases is applicable to a situation
where the income of the mutual concern is the contribution received from its contributors. The
expenses by the mutual concerns are incurred from such contributions and, hence, on the principle
that no man can do business with himself, the excess of income over expenditure is not amenable
to tax. However, in the instant case, the authorities below had returned a finding of fact that the
contributors such as 'P'. were not benefited from the APM activities. Moreover, the principle of
mutuality is applicable to those entities whose activities are not tinged with commercial purpose.
As a matter of fact, in the instant case the parent company, i.e. H which had also contributed to the
brand fund, was under no obligation to do so under the agreement. The contributions by H were at
 its own discretion. Thus, looking at the facts, it was quite clear that the principle of mutuality
would not be applicable to the instant case. In those circumstances, the impugned judgment of the
Tribunal did not call for interference. The authorities below had returned pure findings of fact
which were not perverse. Therefore, no substantial question of law did arise out of order of the
Tribunal and the appeal filed by the assessee was to be dismissed."

The assessee filed the present appeal before the Supreme Court.

The Supreme Court listed out the facts of the case including the relevant clauses of the tripartite
agreement, extracts from the (i) Assessment order, (ii) Appeal order of the Commissioner of Income-tax
(Appeals), (iii) Order passed by the Tribunal and (iv) Judgment of the Delhi High Court and framed the
following questions of law to be decided by it-

(i)   Whether the assessee-company would qualify as a mutual concern in the eyes of law,
thereby exempting subject transactions from tax liability?
(ii)   Whether the excess of income over expenditure in the hands of the assessee company
is not taxable?

The contentions raised on behalf of the assessee were on these lines-

(i)   The sole objective of the assessee-company S was to carry on the earmarked
activities on no profit basis and strictly only for the benefit of the contributors to the
mutual concern with no charges on the franchisees for carrying out their operations.
(ii)   H is the holding company and H and P who had contributed to the funds of the
company though not part of the tripartite agreement were not the beneficiaries as H
was the parent company of the assessee-company S and earned fixed percentage
from the franchisees by way of royalty. With regard to contribution of P to the
common fund it was argued that the products of P were advertised by the franchisees
in their advertising and promotional material along with products of other
companies.
(iii)   It was also stated that under a marketing arrangement the franchisees were bound to
supply drinks manufactured by P in their outlets.
(iv)   With regard to concept of mutuality it was argued on behalf of the assessee-company
that the doctrine would merely require an identity between the contributors and
beneficiaries and that each member need not contribute to the common fund or that
the benefits must be derived by the beneficiaries in the same manner or to the same
extent.

Reliance was placed on number of authorities on behalf of the assessee to buttress its point.

The Revenue countered the arguments put forth on behalf of the assessee as under-

(i)   The taint of commerciality would start immediately in the event of a non- member
joining the common pool of funds created for the benefit of the contributors and
mutuality would cease to exist in the eyes of law.
(ii)   By taking contributions from a non-member the condition on which registration was
granted by SIA that the organisation should function on no profit motive was lost.
(iii)   Once the basic purpose of benefiting the actual contributors was lost, mutuality
would stand wiped out.

The Supreme Court referred to the decision of the Privy Council in the case of The English and Scottish
Joint Co-Operative Wholesale Society Ltd.(supra) in order to undertake the examination of mutuality
and noted that this decision of the Privy Council was quoted with approval by the Supreme Court in CIT
v. Royal Western India Turf Club Ltd. [1953] 24 ITR 557 (S.C.) and Bangalore Club v. CIT [2013] 29
taxmann.com 29 (S.C.) and laid down 3 parameters as listed out in para. 2 above. (of this article
-highlighted)

The Supreme Court extracted the following principles from Simon's Taxes, Volume B, 3rd Edition, Pgs.
159, 167 at para.15 of its order-

"… it is settled law that if the persons carrying on a trade do so in such a way that they and the
customers are the same persons, no profits or gains are yielded by the trade for tax purposes and
therefore no assessment in respect of the trade can be made. Any surplus resulting from this form
of trading represents only the extent to which the contributions of the participators have proved to
be in excess of requirements. Such a surplus is regarded as their own money and returnable to
them. In order that this exempting element of mutuality should exist it is essential that the profits
should be capable of coming back at some time and in some form to the persons to whom the
goods were sold or the services rendered..."

The Supreme Court, in this case, also observed that the earlier Benches of the Supreme Court in the
cases of CIT v. Bankipur Club [1997] 92 Taxman 78 (S.C.) and Bangalore Club(supra) had followed
these principles in deciding cases relating to mutuality.

The Supreme Court, in this case, made the important observations-

(i)   There is a fine line of distinction between absence of obligation and presence of
overriding discretion and that what was being exercised by H was overriding
discretion both in matters of contribution and management to the detriment of
franchisees of this arrangement.
(ii)   Though the obligation to pay may or may not be there, discretion of one member
over others was not to be sustained, in order to preserve the real essence of mutuality
wherein members contribute for the mutual benefit of all and not of one at the cost
of others.
(iii)   From clause 8.4 of the agreement, the franchisees did not enjoy any right or
entitlement as the discretion rested with the Board of Directors of the assessee-
company S
(iv)   The liability to contribute was fixed @ 5% and so there was no chance of any carry
forward surplus being adjusted out of next year's contribution (payment) to the fund.
(v)   As per the terms of the agreement though H might not contribute, still it would be
entitled to get royalty out of the purported mutual operations, created from the fixed
5 per cent contribution made by the franchisees.
(vi)   Clause 8.1 of the Tripartite Agreement relieved the assessee company S from any
specific obligation of spending the amounts received by way of contributions for the
benefit of the contributors. It explicated that the assessee company did not hold such
amount under any implied trust for the franchisees which was obviously against the
principles of a mutual concern.
(vii)   The SIA approval or Government approval was not only a binding document but
also a conditional document with a defined set of preconditions for the functioning
of the assessee company as a mutual concern and the same had been violated.
(viii)   When the franchisees could be obligated with a fixed percentage of contribution, 5
per cent in the present case, it was unfathomable as to why the same obligation was
not applied in the case of H when it was sought to be argued that no fixed percentage
of contribution could be imputed upon H as it did not operate any restaurant directly
and thus, the actual volume of sales could not be determined.
 (ix)   Clause C of the agreement stated that the assessee-company S was formed as a
wholly owned step-down subsidiary of H to manage the retail restaurant business,
the advertising medial and promotion at regional level and national level of brands
owned as on date or to be acquired in future by H and its parents and its associate
company which obviously did not meet the requirements of a mutual concern. In its
true form, it was not contemplated as a non-business concern because operations
integral to the functioning of a business were entrusted to it.

The Supreme Court based on these indicators, that there was lack of Common Identity, lack of
Completeness of Identity and absence of Non-profiteering and Obedience to Mandate, held at para.34
that "the appellant having failed to fulfil the stipulations and to prove the existence of mutuality, the
question of extending exemption from tax liability to the appellant, that too at the cost of public
exchequer, does not arise."

With regard to the assessee's alternate claim of diversion of income by overriding title which was sought
to be argued, the Supreme Court kept that issue open as "the assessee company has made an
application under section 254(2) of the 1961 Act for rectification of the Tribunal's order citing an error
apparent on the face of the record." The Supreme Court also noted that the said application was stated
to be pending.

However it is to be stated that the Tribunal vide its order dated 9th September,2019 had disposed of
such an application by holding that "where in case of assessee, obligation to spend on AMP arose after
receipt of income and there was no obligation on assessee to spend any definite amount every year,
income of assessee was not diverted by overriding title but was merely an application of income of
assessee and therefore chargeable to income tax."

It is further to be stated that the caption-title- for the appeals refers to assessment year 2001-02 also-
the same assessment year as in that of the case decided by the Supreme Court on 24th April,2020.

The order passed by the ITAT Delhi Bench has been reported as Yum! Restaurants Marketing (P.) Ltd.
v. ITO [2019] 109 taxmann.com 130 (Delhi - Trib.)

5. Other important cases decided by the Supreme Court

5.1 The Supreme Court in the case of Chelmsford Club v. CIT [2000] 109 Taxman 215 (SC) held that
"tax levied under section 22 of the Act is on income from house property and not on house property
itself" and principles of mutuality would apply to such income from house property. It was also held
that the profit earned out of providing recreational and refreshment facilities exclusively to its members
utilised for maintenance and development of the club would not be subject to tax as the Club was run on
'no profit no loss' basis

The Supreme Court referred to its earlier decision in the case of Bankipur Club Ltd. (supra) wherein it
was held as under-

"'Under the Income-tax Act, what is taxed is the income, 'profits or gains' earned or 'arising',
'accruing' to a 'person'. Where a number of persons combine 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 those persons cannot be regarded in any sense
 as profit. There must be complete identity between the contributors and the participators. If these
requirements are fulfilled, it is immaterial what particular form the association takes. Trading
between persons associating together in this way does not give rise to profits which are chargeable
to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain
members only of the association take advantage of the facilities which it offers does not affect the
mutuality of the enterprise." (p. 97)

Following this decision, the later Bench of the Supreme Court in the case of ITO v. Venkatesh Premises
Co-operative Society Ltd. [2018] 91 taxmann.com 137 (SC) held that "non-occupancy charges received
by assessee-cooperative society from its members utilised for mutual benefits towards maintenance of
premises, repairs, infrastructure and provision of common amenities, would be governed by doctrine of
mutuality and, thus, receipts were not exigible to tax."

5.2 In the case which arose before the Supreme Court in CIT v. Kumbakonam Mutual Benefit Fund
Ltd. [1964] 53 ITR 241 (SC) the assessee-company was carrying on banking business restricting it to its
shareholders and out of interest realised by the assessee on loans which constituted its main income,
interest on recurring deposits were paid as also all other outgoings and expenses of management and
balance was divided among members pro rata according to their shareholdings after making provision
for reserves, etc., as required by memorandum or articles. The Assessing Officer on noticing that, there
was no requirement for the shareholders who were thus entitled to participate in profits either to take
loans or make recurring deposits, assessed the entire profits derived from these transactions on ground
that there was no common fund. The Supreme Court, on appeal from the Revenue, held that it lent
money to and received deposits from its shareholders which did not by itself make its income any
income other than income from business within section 10 of 1922 Act (akin to section 28(1) of the Act)
and thus it was not entitled to exemption from tax in regard to said profits

5.3.The Supreme Court in the case of State of West Bengal v. Calcutta Club [2019] 110 taxmann.com
47(S.C) (a Bench consisting of 3 Hon'ble Judges) on a reference made by a Division Bench (consisting of
2 Hon'ble Judges) raising the questions "whether doctrine of mutuality has been done away with by
article 366(29-A), and whether ratio of Young Men's Indian Association CTO v. Young Men's Indian
Assn. [1970] 1 SCC 462 would continue to operate even after 46th Amendment?" answered as under-

(i)   The doctrine of mutuality continues to be applicable to incorporated and

unincorporated members' club after the 46th Amendment to article 366(29-A) to the
Constitution of India.
(ii)   Young Men's Indian Association (supra) and other judgments which applied this
doctrine continue to hold the field even after the 46th Amendment.
(iii)   Sub-clauses (e) or (f) of article 366 (29-A) have no application to members' clubs.

Extracts from para.20. of the judgment wherein the decision in the case of Young Men's Indian
Association (supra) has been digested-

"In the judgment in Young Men's Indian Association (supra), three separate appeals were heard
and decided by a Six Judge Bench of this Court in this case. The first considered the Cosmopolitan
Club, Madras, which was registered under section 26 of the Companies Act, 1913, as a non-profit
earning institution. Young Men's Indian Association was also considered, being a Society
registered under the Societies Registration Act, 1860. The third case involved the Lawley Institute
which came into existence by a deed of trust. In all these cases, food preparations were supplied to
members at prices fixed by the club. In the Cosmopolitan Club case, a member is allowed to bring
 guests with him, but if any article of food is consumed by the guest, it is the member who has to pay
for the same, which was similar to the position in the Young Men's Indian Association. The Madras
Sales Tax Act, 1959, came up for consideration in the aforesaid judgment. This Court referring to
two English cases held that the supply of liquor to a member at a fixed price by the club cannot be
regarded to be a sale. If, however, liquor is supplied to and paid for by a person who is not a
bonafide member of the club or his duly authorised agent there would be a sale. In the various
cases which came to be decided by the High Courts in India the view which had prevailed in
England was accepted and applied and it was held that a purely members' club which makes
purchases through a Secretary or Manager and supplies the requirements to members at a fixed
rate did not in law sell those goods to the members. [Para 20]"

After incorporation of clause (29A) to Article 366 of the Constitution vide 46th amendment, 1982, it
reads as follows: - only clauses (e) and (f)

'(29A) "tax on the sale or purchase of goods" includes -

(e)   a tax on the supply of goods by any unincorporated association or body of persons to
a member thereof for cash, deferred payment or other valuable consideration;
(f)   a tax on the supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human consumption or any
drink (whether or not intoxicating), where such supply or service, is for cash,
deferred payment or other valuable consideration, and such transfer, delivery or
supply of any goods shall be deemed to be a sale of those goods by the person
making the transfer, delivery or supply and a purchase of those goods by the person
to whom such transfer, delivery or supply is made;'

The Supreme Court made the following pertinent observations at para 48 of its decision when the
Revenue wanted to tax sale under the "deemed" concept.

"Also, section 45(2) of the Income-tax Act, 1961, is an example of a provision by which a deemed
transfer by a person to himself gets taxed. It can be seen from this provision that profits or gains
arising from a transfer by way of conversion by the owner of a capital asset into, or its treatment by
him as stock-in-trade of a business, is by a deeming fiction brought to tax, despite the fact that
there is no transfer in law by the owner of a capital asset to another person. Modalities such as
these to bring to tax amounts that would do away with any doctrine of mutuality are conspicuous
by their absence in the language of article 366(29-A)(e). [Para 48]"

5.4 The Supreme Court of India in the case of Bangalore Club(supra) held that interest earned by the
assessee-club on fixed deposits from its member banks would not be exempt from tax on basis of
doctrine of mutuality.

In this case the assessee-club sought an exemption from payment of tax on interest earned on fixed
deposits kept with certain banks, which were corporate members of the assessee, on the basis of
doctrine of mutuality and its claim was rejected on the ground that there was a lack of identity between
the contributors and the participators to the fund and, thus, the interest income was taxable as business
income. On appeal to the Supreme Court it was noted that in course of banking business, member
banks used such deposits to advance loans to their clients and thereby violated one to one identity
between contributors and participators. It was also found that surplus funds were not used for any
specific service, infrastructure, maintenance or for any other direct benefit for members of club. It was
therefore held by the Supreme Court that loaning out of funds of club by member banks to outsiders for
commercial reasons, snapped link of mutuality and the amount of interest earned by assessee from
member banks would not fall within ambit of mutuality principle and would therefore, be exigible to
tax.

5.5 The Supreme Court in the case of Citizen Co-operative Society Ltd. v. Asstt. CIT [2017] 84
taxmann.com 114 (SC) held that where the assessee society was engaged in activity of finance business
and was also engaged in activity of granting loans to general public as well, it could not be termed as a
co-operative society meant only for its members and providing credit facilities to its members and
therefore it would not be entitled to deduction under section 80P of the Act.

The Supreme Court noted that conditions which must exist before an activity could be brought under
the concept of mutuality was missing in the instant case.

A petition presented before the Supreme Court seeking review of this judgment [in Citizen Co-operative
Society Ltd(supra)] was rejected by the Supreme Court on 21st November,2017 and this earlier view
was confirmed and the case has been reported as Citizen Co-operative Society Ltd. v. Asstt. CIT [2017]
88 taxmann.com 279 (SC)

6. Cases where concept of mutuality was accepted

6.1 The Kerala High Court in the case of CIT v. Bus Operators Association [2013] 33 taxmann.com 568
(Kerala), following the decision of the Supreme Court in the case of Chelmsford Ltd.(supra), held that
where the assessee, an association of bus operators, was engaged in purchase and distribution of tyres,
automobile spares, etc., to its own members and profit, if any, arising in such transactions went to its
members, principle of mutuality applied to that case.

6.2 The facts obtaining in the case which arose before ITAT Mumbai in Deputy CIT v. KPMG [2017] 81
taxmann.com 118 (Mumbai - Trib.) were that the assessee was an Indian member firm of KPMG
International and the assessee made payment to KPMG International in nature of reimbursement of
cost and this was made to enable them in discharging its function within terms of Membership
Agreement between the assessee and KPMG International. The Assessing Officer concluded that the
total expenditure incurred by the assessee on account of alleged reimbursement of cost was in nature of
royalty and, therefore, such remittance constituted income of foreign company for the purpose of
section 195 of the Act and the Commissioner of Income-tax (Appeals) concurred with this view of the
Assessing Officer. The Tribunal remanded the matter and on second round, the Commissioner of
Income-tax (Appeals) held that KPMG International was a mutual association of assessee and its
receipt would not constitute income chargeable to tax and assessee was not obliged to withhold any tax
on such receipt and that there was a complete identity between the assessee contributor and
participators, actions of participators and contributors were in furtherance of mandate of association
with no element of profit by assessee contributor from a fund made by them which could only be
expended or returned to themselves. The Tribunal, on appeal by the Revenue, held that the amounts
paid by the assessee to its member concerns would fall within ambit of principle of mutuality and
therefore the assessee would not be subjected to TDS.

6.3 In the case which arose before the Gujarat High Court in Junagadh Gymkhana v. ITO [2015] 56
taxmann.com 281 (Gujarat) the assessee-club received 'guest charge' from its members and utilized it
for benefit and development of club members and based on these facts and distinguishing the decision
of the Supreme Court in the case of Bangalore Club (supra), the Gujarat High Court held that since
principal of mutuality would apply to transaction with member, guest charge received by the assessee
club from its members would not be liable to tax.

It is to be noted that the Supreme Court in the case of Bangalore Club (supra) held that interest earned
by the assessee-club on fixed deposits from its member banks would not be exempt from tax on basis of
doctrine of mutuality.

6.4 In the case which arose before the Bombay High Court in CIT v. Common Effluent Treatment Plant
(Thane Belapur) Association [2010] 192 Taxman 238 (Bombay) the assessee was an association formed
with an object of setting up an effluent treatment plant for its members, who ran industrial units in
certain areas and the income of the assessee consisted of contributions by its members. The High Court,
on appreciation of these facts, held that since entire contribution originated from the members of the
assessee-association and was expended only in furtherance of objects of the association for benefit of its
members, surplus generated by it representing excess of its income over expenditure would fall within
purview of doctrine of mutuality and, therefore, was not exigible to tax. However, the High Court held
that interest income earned by assessee on money invested in fixed deposits of banks would not possess
same character of mutuality as surplus fund derived by assessee from contribution of its members and
the same would be exigible to tax as income from other sources.

It is to be stated that this decision was rendered prior to rendering of judgment by the Supreme Court in
the case of Bangalore Club (supra) wherein similar view was expressed by the Supreme Court with
regard to taxing of such interest received.

6.5 The ITAT Kolkata Bench in the case of Calcutta Cricket & Football Club vs.ITO (Exemption) [2017]
88 taxmann.com 384 (Kolkata - Trib.) held that where assessee-association was established for playing
and encouraging games of Cricket, Hockey, Football, Tennis, Golf, Cycle Polo, Rugby and other forms of
sport for recreation and its activities were restricted only amongst its members, principle of mutuality
would apply and its surplus could not be regarded as income.

The Tribunal also held that though the second category of income is income from investments in the
form of interest etc and that this would not be exempt on the principle of mutuality as laid down by the
Supreme Court in the case of Bangalore Club (supra),yet the assessee would still be entitled to claim
that income as not chargeable to tax because the income was applied for charitable purpose within the
meaning of Section11 of the Act.

The Tribunal observed at para.22 of its order that "it cannot therefore be said that principle of
mutuality and benefit of Section11 of the Act cannot simultaneously be claimed by an assessee."

7. Cases where concept of mutuality was denied

7.1. The ITAT Chennai Bench in the case of Employers' Federation of Southern India v. Assistant
Director of Income-tax (Exemption) [2017] 88 taxmann.com 751 (Chennai - Trib.) held that where
assessee-trust was earning substantial income from conducting seminars and through advertisement in
souvenir which was not incidental to the main object of the trust, being maintaining good relationship
between employers and employees in Southern India and promoting good feeling between them, but
conducting seminars, etc., was a pre-dominant activity in the relevant assessment year, the assessee
could not be considered to be performing charitable activities under section 2(15) of the Act and,
therefore, could not be allowed exemption under section 11 of the Act.

7.2 The Karnataka High Court in the case of Prabhashankar Plaza v. ITO [2010] 191 Taxman 249
(Karnataka), distinguishing the decision of the Supreme Court in the case of Bankipur Club Ltd.
(supra.) held that when there was no doctrine of mutuality, surplus arising in the case of the entity
would not be exempt and would be subject to tax as per provisions of section 4 of the Act. In this case
the assessee was a partnership firm carrying on business as property developers, traders in general
merchandise and as commission agents. It owned a building which had been rented out to two of its
partners on certain monthly rent and it claimed exemption of income on ground of principle of
mutuality. It was held by the High Court that since nature of the assessee's business was such that it was
enabled to enter into business transaction with third parties and not only amongst the various partners,
as such, doctrine of mutuality did not apply and assessee's income was assessable to tax.

7.3. One of the issues which arose before the ITAT Chennai Bench in the case of Tiruchirapalli District
Bus Operators Association v. Deputy CIT [2013] 36 taxmann.com 550 (Chennai - Trib.) for the
assessment years 2000-01 and 2003-04 was whether concept of mutuality would be vitiated when the
assessee departed common good fund to others, i.e., non-members. In this case donation was made to
Prime Minister relief fund, Kargil funds etc by the Association as a mutual concern. The Tribunal based
on these facts held that the assessee could not be treated as a mutual concern for that relevant year.

However, the Tribunal held that the assessee would be entitled for deductions under Chapter VI A of
the Act on the donations made by it as the Assessing Officer had considered the assessee as an
association of persons.

Relying on the earlier order of the co-ordinate Bench of the Tribunal in the case of Lodge of Universal
Charity 273 EC Charitable Trust v. DIT (Exemptions) [2013] 35 taxmann.com 429 (Chennai - Trib) the
Tribunal observed that "the concept of charity and mutuality cannot go together."

8. Concluding remarks

It is apt to conclude this article by referring to the observations of Rowlatt.J which were referred to by
the Calcutta High Court in the case of The English & Scottish Joint Co-operative Wholesale Society Ltd.
(supra) and the observations made by Rowlatt.J Liverpool Corn Trade Association v. Monks [1926] 2
K.B. 110 were followed and relied upon while deciding the issue of "mutuality" and that this decision
was affirmed by the Privy Council in. The English & Scottish Joint Co-operative Wholesale Society Ltd.
(supra)

These observations ran as under-

"Para20.The observations of Rowlatt, J., in two cases in the Courts in England can now be given. In
Thomas v. Richard Evans Co., Ltd. [1927] 1 KB 33, at pp. 46, 47, the learned Judge explains the
position when a company transacts business with its members. He said "a company can make a
profit out of its members as customers, although its range of customers is limited to its
shareholders. If a railway company makes a profit by carrying its shareholders, or if any other
trading company, by trading with its shareholders, even if it is limited to trading with them, makes
a profit, that profit belongs to the shareholders, in a sense, but it belongs to them qua
shareholders. It does not come back to them as purchasers or customers; it comes back to them as
shareholders upon their shares. Where all that a company does is to collect money from a certain
number of people-it matters not whether they are called members of the company, or participating
policy holders-and apply it for the benefit of those same people, not as shareholders in the
company, but as the people who subscribed it, then, as I understand Styles' case [1889] 14 App.
Cas. 381 there is no profit." In Liverpool Corn Trade Association v. Monks [1926] 2 KB 110 the
same learned Judge observed, at pages 121 and 122 that "if there were a railway company which
only carried its own shareholders, one would say that, when it afforded the advantage to a
shareholder of performing an act of transit for him being paid by the shareholder therefore, that
the profit thereby made was a profit of the company just as much as if the shareholder was a
stranger." In that case a company was formed with the object of promoting the interests of the corn
trade ; its members were confined to persons engaged in that trade; the company provided various
facilities for carrying on business of the trade; fees were charged to members and others making
use of the facilities ; the bulk of the receipts were received from entrance fees and subscriptions
paid by the members. Rowlatt, J., at p. 121, pointed out that the question was whether the profit
which the company made out of what the members paid to it was taxable income of the business
which the company undoubtedly carried on. It was held that the company was not a mutual
association whose transactions with its members were incapable of producing a profit; it carried on
a trade, the profits of which were assessable to income-tax."
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