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Income of Mutual Concern and Taxability under Income tax

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                                                                                                  What is Mutual Concern

In short,  a mutual concern is an association of group of people who agree to contribute funds for some common purpose that is to gain mutual benefits.

Examples 

  • Resident Welfare Associations
  • Bar association
  • Shop owner association
  • Social clubs
  • Sports clubs 

                                                                   

                                                                                    Principle of Mutuality

Income of mutual concern is not taxable if following conditions are satisfied :
(a) There is a complete identity between the contributors and beneficiaries.
(b) The association is formed with objective of mutual benefits.


Exceptions:  

(i) Profits and gains of any insurance business carried on by mutual insurance company or a co- operative society ( even it is a mutual concern)[ sec 2(24)(vii)]

(ii) Income of trade , professional or similar Association from specific services performed for its member [sec 28(iii)]

(iii) The profit and gains of any business of banking ( including providing credit facilities ) carried on by co-operative society with its member [sec 2(24)]  

Note : Section 44A provides for deduction of deficiency from mutual activities in case of trade professional or other similar associations as follows:

Deduction is allowed to the extent of lower of the followings:-

1.     Amount of deficiency ( receipt from mutual activity less than expenditure on mutual activities)

2.     50% of total income ( all head before deficiency )

Note: if cannot be set off from BP income then It can be set off from other income also

Steps:

Calculate B.P income ( specific services + service rendered to outsider only because mutual activity  not to be taxed )                                                                                       

 ++++

Less: B/F loss( not b/f deficiency which will lapse not c/f)

++++

                                                                                        B.P income after B/F loss

++++

Less: Deficiency ( calculated above)

++++

                                                                                                  Income from PGBP

++++

                                                                                                  Add: other income

++++

                                                                                                             Total income

++++

 

Illustration-1 Compute the total income of a trade association on the basis of the information furnished below :

(a)  Receipt by way of Entrance fees and Annual membership fees from members-Rs. 4,60,000

(b)  Expenditure on members- Rs. 4,90,000

(c)  Receipt  from members for specific services- Rs. 2,30,000

(d)  Expenditure incurred on providing Specific services- Rs. 1,80,000

(e)  Income from other sources(Taxable and Computed)- Rs. 20,000

Other information:

1.     Annual value of the building of the Association, as provision of section 22 to 27, is Rs. 2, 00, 000.

2.     The brought forward business loss of 20021-22 from rendering specific services is Rs. 25,000

3.     Amount of Deficiency in the year 2021-22, which could not be adjusted against income of that year amounts to Rs. 10,000.

Solution:                                                                                                                  Amount(Rs)

1.        Profit and Gains from Business and Profession(2,30,000-1,80,000)

   50,000

    Less: B/F business Loss of 2021-22

   25,000

                          Profit after adjustment of B/F Losses

   25,000

   Less: Deficiency Loss( i. e lower of (a) 4,90,000-4,60,000 or (b) 50% of 45000(25000+20000)

   22,500

    Profit After deficiency

      2,500

2.     income from other sources

     20,000

   Taxable total income of Association

     22,500

Notes: Annual value of the building of the association is not taxable being income from mutual Activities.

 

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