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CMA Final · Direct Tax Laws and International Taxation · Assessment of Mutual Associations

A social club collects subscriptions only from its members and uses them to provide facilities only to those same members. Which principle explains why the surplus from this activity is generally not taxed in the club's hands?

The principle of mutuality applies: the contributors to the fund and the participants in its surplus are the same persons, so a person cannot make a profit from oneself. The surplus from dealings with members alone is therefore not taxable income of the club.

  1. APrinciple of mutuality: contributors to the common fund and participants in its surplus are the same persons, so no one earns a profit from oneselfCorrect
  2. BPrinciple of source rule: income arises only where the club's premises are located
  3. CPrinciple of constructive receipt: the surplus is treated as received by members and taxed there
  4. DPrinciple of diversion by overriding title: members have a prior charge on the club's receipts

Explanation

A mutual body cannot make taxable profit out of its own members because the contributors and the participants are identical. The surplus is therefore not income. Constructive receipt and overriding title do not describe this reasoning.

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