Mazars Tax Update | Edition 17.20

Doctrine of Mutuality

In India, Social meets, social clubs and places of mutual interest are widespread. The members of such clubs or concerns are a group of people who come forward to pool their funds, to form an association, and the funds so collected are then utilized for the benefit of their members. This is commonly known as “Doctrine of Mutuality”, designed with a common objective having a non-profit initiative.

It is a settled proposition that one cannot earn income from himself, likewise, mutual concerns represent their members and any surplus in a particular Financial Year arising out of contribution less expenses  is not liable to be taxed in view of various decisions of Hon'ble Supreme Court . 

In the given article we have tried to explain the principle of mutuality, and its taxability  under Income Tax Act.
The Supreme Court in its judgment dated 24/04/2020 in the case of Yum! Restaurants (Marketing) Private Limited (‘YRMPL’) explained what activities fall under the definition of “Doctrine of Mutuality”.

The judgment is a complete analysis and commentary on the Doctrine of Mutuality for the purpose of taxability of excess of income over expenditure under the provisions of the Income Tax Act, 1961. The Court in the judgement did a complete examination of the agreement/ arrangement between the parties so as to ascertain whether the said agreement/arrangement fulfils various pre-requisites of the concept of mutuality or not. The Court categorically held that the exemptions available in the Act are to be strictly interpreted and should not be resorted as a measure of tax avoidance.