Can a private trust claim the principle of mutuality for tax purposes

A private trust may claim the principle of mutuality for tax purposes, but only in rare & specific circumstances.

Understanding Mutuality: The principle of mutuality is based on the idea that “No person can make a profit out of himself.” If a group of persons contribute funds for a common purpose & share the surplus among themselves, with no outsider involved, any surplus is not income liable to tax.

Conditions for Mutuality to apply

To successfully claim mutuality, the private trust must satisfy three key tests:

1. Identity of contributors & participants: The contributors of the fund & the beneficiaries who participate in the surplus must be the same.

2. Surplus distributed only among contributors: No part of the surplus should go to outsiders or non-members.

3. Common purpose: Activities must be for the common benefit of all contributors, not for commercial or profit motives.

Most private trusts do not satisfy mutuality, especially if:

• There is a specific settlor & fixed beneficiaries;
• The trust invests funds & distributes income (e.g., from rent, dividends);
• The income arises from third-party dealings, not from members themselves.

Such cases are treated as income of the trust & taxed u/s 161–164 of the Income Tax Act.

Rare cases where mutuality might apply:

• If the contributors to the trust are also the exclusive beneficiaries;
• There is no third-party income or transactions;
• The trust operates like a members’ club or association;
• There is complete identity between contributors & beneficiaries & no scope for personal profit.

Example: A trust formed by a group of flat owners to manage a common clubhouse exclusively among themselves, where no outsider is charged or allowed, might claim mutuality.

A private trust can rarely claim mutuality because

• Mutuality requires complete identity between contributors & beneficiaries.
• Most private trusts have specific, named beneficiaries & income often comes from external sources – both of which break mutuality.

Posted on: August 5th, 2025