Mutuality principle excludes taxability where contributors and beneficiaries are identical and surplus remains with members.

Where an association is formed to promote members' interests, and both contributors to the fund and beneficiaries of the surplus are confined to members, the principle of mutuality applies and excludes taxability of the receipts. The rules providing for distribution of surplus among members on dissolution reinforced that the common fund was for member benefit only, with no indication of dealings with outsiders. On that basis, the receipts were not assessable as business income under section 28(iii) either, because mutuality attached to the income and surplus. The taxability of the association's receipts was therefore negatived on mutuality grounds.

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Issues: (i) Whether the assessee-association's income was exempt from tax on the principle of mutuality. (ii) Whether the assessee-association's income was assessable as business income under section 28(iii) of the Income-tax Act, 1961.

Issue (i): Whether the assessee-association's income was exempt from tax on the principle of mutuality.

Analysis: The association was formed to promote and protect the interests of its members. Its rules showed that the contributors to the fund and the beneficiaries of the fund were confined to members, and that on dissolution the surplus was to be distributed among members according to their contribution. No finding indicated any catering to outsiders. The settled conditions for mutuality were therefore satisfied.

Conclusion: The income was exempt from tax on the principle of mutuality, in favour of the assessee.

Issue (ii): Whether the assessee-association's income was assessable as business income under section 28(iii) of the Income-tax Act, 1961.

Analysis: Since the association operated for the common benefit of its members, with mutuality attaching to the receipts and surplus, the receipts could not be treated as taxable business income under the cited provision.

Conclusion: The income was not assessable as business income under section 28(iii), in favour of the assessee.

Final Conclusion: The reference was answered in favour of the assessee and against the Revenue, and the taxability of the association's receipts was negatived on mutuality grounds.

Ratio Decidendi: Where contributors and beneficiaries are identical, and the surplus is confined to members even on dissolution, the principle of mutuality excludes taxability of the receipts.

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