Principle of mutuality applies where surplus is shared only among contributors to the common fund, keeping the surplus non-taxable.

A Nidhi was treated as a mutual concern because its deposits came from members, interest was paid on those deposits, and dividends were payable only to shareholders who transacted with the Nidhi during the year. Non-contributors had no right to share in the surplus, so the common fund and its benefits were confined to participants who contributed to it. On that basis, the arrangement satisfied the mutuality test, as the contributors and participants were identical in substance and the concern did not operate like an ordinary bank. The surplus was therefore not taxable as income, and the departmental appeals were dismissed.

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Issues: Whether the assessee Nidhi was a mutual concern whose surplus was not liable to income-tax on the principle of mutuality.

Analysis: The Nidhi received deposits from members and paid interest thereon. Under its articles, dividends were payable only to shareholders who had dealings with the Nidhi during the year, and non-contributors had no right to share in the dividend. The surplus was thus confined to participants who contributed to the common fund. The arrangement satisfied the test of mutuality as explained by the Supreme Court in Kumbakonam Mutual Benefit Fund Ltd., because the contributors and participants were identical in substance and the concern was not in the position of an ordinary bank.

Conclusion: The assessee was held to be a mutual concern, and its surplus was not taxable; the departmental appeals were dismissed.

Ratio Decidendi: Where participation in the surplus is restricted to contributors of the common fund and there is no participation by outsiders, the principle of mutuality applies and the surplus is not taxable as income.

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