Deduction for deficiency in case of trade, professional or similar association
Introduction
A trade, professional or similar association are allowed to claim deduction in respect of the deficiency. Such deduction is restricted to the extent of 50% of the income before allowing such deduction. No carry forward shall be allowed in respect of the unutilised portion of such deficiency.
1. Doctrine of Mutuality
No one can trade with himself to make an assessable profit. If an association of persons trade in a manner that they themselves contribute to the profits of the association as buyers and sellers, then the mere fact that they may be a registered entity enjoying a separate and distinct corporate status will have to be disregarded in favour of their real status and the income so derived by the association cannot be taxed. The veil of corporate personality in such cases is lifted for taxation purpose to recognise the substance of the transactions. This, in essence, is the doctrine of mutuality.
For the application of the principle of mutuality, there should be complete identity of character between the persons who contribute and the persons who participate in the surplus, that is, the persons must participate in the surplus in the same capacity in which they contributed to it. Example, where a person buys the product of a company of which he is a shareholder, the resultant profit comes back to him in his capacity as a shareholder and not in the capacity as an ordinary buyer. On the other hand, if a person is a member of a club, the resultant benefit to him from using the facilities of the club as a member will also accrue to him in his capacity as a member of the club, thereby resulting in a complete identity of character between the person contributing to the surplus and the person participating in the surplus.
As a general rule, any income earned by it a mutual concern from rendering general service to its members is exempt from tax on ground of mutuality. However, the following two exceptions have been made in the Act where the surplus of mutual concerns have been made taxable:
(a) Income derived by trade, professional or similar association from specific service performed for its members is chargeable to tax as business income;
(b) Profit of insurance business, life or non-life, carried on by a company or a cooperative society computed in accordance with Section 55.
As income earned by a mutual concern by rendering general service to its members is exempt from tax on ground of mutuality, any loss incurred in the course can’t be allowed to be set off as the source itself is exempt from tax. To give relief to trade or professional association, an exception is available in Section 50.
2. Deduction for deficiency
2.1. Who can claim deduction?
This provision applies to any trade, professional or similar association [not covered in Schedule III (Table S. No. 24)] receiving any amount during a previous year from its members, whether by way of subscription or otherwise (not being remuneration received for rendering any specific services to such members).
A trade, professional or similar association is eligible to claim deduction under this provision only if its income or any part of it is not distributed to the members. However, deduction can also be claimed if the income or any part of it is distributed to its members as grants to any association or institutions affiliated to it.
2.2. Who cannot claim deduction?
No relief is available under this provision to an association or institution as referred to in Schedule III (Table S. No. 24)], i.e., association or institutions established in India with an object to control, supervise, regulate or encourage the profession of law, medicine, accounting, engineering or architecture or other notified profession. The Central government has notified the following profession in this behalf:
(a) Company Secretary
(b) Chemistry
(c) Materials Management
(d) Town Planning
2.3. When relief is allowed?
The relief is allowed under this provision if during the year any trade, professional or similar association incurs any deficiency on account of excess expenditure incurred for protection or advancement of common interest of its members.
2.4. How much relief is allowed?
The amount of deficiency shall be computed in the following manner:
| Particulars | Amount |
Amount received during a previous year from members by way of subscription or otherwise (not being remuneration for rendering any specific services to such members) Less: Expenditure incurred during that previous year for the purposes of protection or advancement of the common interests of its members (not being capital expenditure or expenditure deductible under any other provision) |
xxx (xxx) |
| Deficiency allowable under this provision | xxx |
The amount of deficiency shall be allowed as deduction while computing the income chargeable under the head ‘Profits and gains from business or profession (PGBP)’ of such association. Where it has no income chargeable under the head PGBP or income is less than the deficiency, such deficiency shall be allowed during the same year from the income taxable under the other heads. In other words, the deficiency is allowed to set-off first against any income from business or profession and thereafter against the income taxable under any other head.
However, in the matter of set-off, carried forward losses and allowances get priority over such deficiency. Further no carry forward shall be allowed if such deficiency is not fully set off during the year.
Example, XYZ, a trade association incurred Rs. 2,00,000 during the year on protection or advancement of its member’s common interest. Total expenditure includes Rs. 50,000 spent on the purchase of capital assets and Rs. 10,000 towards interest on borrowings, both of which are allowable under Section 32(b). The sum received from members is as follows:
| Nature of receipt | Amount |
| Subscription | 40,000 |
| Remuneration for specific services | 45,000 |
| Others | 15,000 |
| Total receipt | 1,00,000 |
| Particulars | Amount |
(a) Remuneration for specific services (b) Others |
40,000 15,000 |
| Eligible Receipts (a) | 55,000 |
Total expenditure Less: (a) Capital expenditure eligible for depreciation (b) Interest on borrowings |
2,00,000 (50,000) (10,000) |
| Eligible expenditure (b) | 1,40,000 |
| Deficiency allowable as deduction under Section 50 | 85,000 |
2.5. Ceiling on set off
Maximum deficiency to allowed under this provision cannot exceed 50% of total income of the association as computed before making any deduction under this provision.
Example: ABC, a trade association has income chargeable under the head PGBP of Rs. 70,000 and Rs. 1,10,000 under the head income from other sources. Total deficiency incurred by it is Rs. 4,00,000.
| Particulars | Amount (in Rs.) |
Deduction for deficiency to the extent of lower of following: (a) Amount of deficiency (b) 50% of total income of association (50% of Rs. 1,80,000) |
4,00,000 90,000 |
| Deduction allowable under Section 50 (a) | 90,000 |
Business Income (b) Less: deduction under Section 50 [(c) = lower of (a) or (b)] |
70,000 (70,000) |
| Net business income [d = (b) less (c)] | Nil |
Income from other sources (e) Less: deduction under Section 50 [(f) = (a) less (c)] |
1,10,000 (20,000) |
| Net other income [g = (e) less (f)] | 90,000 |
| Total Income [(h) = (d) + (g)] | 90,000 |
References
Notification No. S.O. 2458, dated 25-04-1972
Notification No. S.O. 3881, dated 31-07-1976
Notification No. S.O. 3081, dated 04-08-1978
Notification No. S.O. 2567, dated 14-05-1981
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.