Common Fund
“The essence of mutuality lies in the return for what one has contributed to a common fund. In order to claim exemption based on the doctrine, the fund has to fulfill a number of conditions.
Members Entitlement to Surplus.
The First and foremost requirement is that that all its contributors must be entitled to participate in the surplus and that all the participants in the surplus should be contributors to the common fund.
Register of Contributers And Participants Essential
In addition there has to be complete identity between the contributors to the fund and the participators in the surplus.
Example : Members Club
In the case of clubs, their profits are exempted from tax liability because of the underlying notion that they operate for the common benefit of the members wishing to enter into a social exchange with no commercial intent. Furthermore, all the members of the club generally not only have a common identity in the concern but also stand on an equal footing in terms of their rights”, they added.
Case Law
Parkistan The following are brief facts and findings in this case:
Commissioner of Income Tax, Lahore v. The Lyallpur Central Co-operative Bank Ltd., Lyallpur [1959]
The assessee was registered under the Co-operative Societies Act 1912. Up to 1948, income of all co-operative societies and banks was exempt from payment of tax, but on the 20th August 1948, the exemption was withdrawn. Shortly after this, the Central Board of Revenue issued a circular that profits earned by co-operative credit societies registered under the Co-operative Societies’ Act 1912 from dealing with their own members would continue to be exempt under the doctrine of mutuality. The Income Tax Officer while making assessment for the charge year 1950-51 declined to exclude such profits from the income of the assessee on the ground that it was not derived on the basis of mutuality. The Appellate Assistant Commissioner upheld the Income Tax Officers’ order on the ground that since the assessee’s business consisted of financing Co-operative Societies and other parties and loans were not restricted exclusively to members, the income in question had arisen not because of the relationship between the assessee and its members but because of the loans advanced to them. The Appellate Tribunal accepted the assessee’s contention that doctrine of mutuality was applicable in case of inc
