It is an established principle that what is not “income” under the income tax law cannot be taxed, and where there is no sale of “goods” or providing and rendering of services between two persons, natural or juridical, there cannot be any indirect taxes (General Sales Tax or Value Added Tax).
The doctrine of MUTUALITY
Trading with self
explicitly provides that for tax purposes a person cannot make a profit out of himself or trade with himself.
By extension, this applies where persons carry on any activity, trade or profession in such a way that they and those with whom they deal with are the same persons, the said transaction will not give rise to taxable profits and even for indirect taxes no chargeability will arise.
The principle is, thus the basis for exempting certain incorporated and unincorporated bodies, typically mutual insurance companies, societies and clubs.
The doctrine of mutuality
Taxes on income are taxes on moneys or profits generated by a person in their transactions with others. No assessee can generate real income out of himself, which can be taxed. The doctrine of mutuality postulates that when transactions are carried out between people in mutual association with each other, i.e. where they contribute to a common fund for the betterment of the contributors and generate returns therefrom, such returns are not taxable. The exemption granted to a mutual concern is premised on the assumption that the concern is being run for the mutual benefit of the contributors and the contributions made by the members ought to be directed in that direction. The contributions to the mutual concern are held in trust for the benefit of the contributors, and required to be spent accordingly.
“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.
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 
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
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me derived from members because one could not assess income arising to oneself.