Determination of Income of Association of Person (AOP) under Income Tax Act

ASSOCIATION OF PERSON (AOP) UNDER INCOME TAX ACT

An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated is treated as a person u/s 2(31) of the Income Tax Act, 1961. It is important to note that an AOP or BOI shall be deemed to be a person, whether or not, it was formed or established or incorporated with the object of deriving income, profits or gains.

Trust created wholly for charitable or religious purposes are allowed various benefits under the Income Tax Act, inter-alia, exemption u/s 11.

Artificial Juridical Person

If an Assessee does not fall under any of the other categories that are included in the definition of Person then it is regarded as an Artificial Juridical Person. These entities are not natural persons but separate entities as per law.

As per the Income Tax Act 1961, an AOP/BOI is a Seperate Assessee. When two or more than two persons or individuals join together to do some activity to produce income by their efforts in common without forming a Partnership firm or Private/Public Limited Company then we call it AOP/BOI.

SECTION 167B: ASSESSMENT OF AOP

An AOP will be assessed in the following two manners:

Where the individual share of members are unknown or indeterminate;
Where the individual share of members is Known or determined.

PROCEDURE FOR DETERMINATION OF INCOME OF AOP:

Step 1: Total income is computed under different heads such as income from house property, profits or gains of business or professions, capital gains, and income from other sources, ignoring the prescribed income exemptions. Therefore, the total gross income is obtained.

Step 2: The prescribed deductions under Section 80A of the Chapter VIA are made from the total gross income. The balance amount is the taxable income.

Interest paid by the AOP to a member is not permitted as a deduction from the income of the AOP under Section 40 (BA) of the Act.

Any salary, bonus, commission or remuneration paid by the AOP or the BOI to a member is not permitted as a deduction from the income of the AOP.

The income of the AOP is taxable either at the rates applicable to an individual, or at the Maximum Marginal Rate or at a Rate Higher than Maximum Marginal Rate, it depends on whether or not share of members of AOP are known.

There are two situations where the tax can be calculated in two different ways. They are listed below depending upon the share of income of members are determinate or not as per provision of Section 167B and Section 86 of the Income Tax Act, 1961.

Section 167B states “167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate :

Provided that, where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.

(2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under sub-section (1)],—

(i) the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rate;

(ii) any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members at such higher rate or rates, as the case may be, and the balance of the total income of the association or body shall be taxed at the maximum marginal rate.

Where share of members is determinate

If, share of members are ascertain then tax liability of AOPI shall be determined as under:

a. Where income of none of the members exceeds the maximum amount which is not chargeable to income-tax (i.e., basic exemption limit) In this case income of AOP shall be taxable at a rate applicable to an individual. But if total income of any member of AOP is taxable at a rate higher than maximum marginal rate then income of AOP shall be chargeable to tax as follows:

Portion of income attributable to such member shall be taxable at such high rate as applicable to that member.

Balance portion of income shall be taxable at the maximum marginal rate of tax (i.e., 30% plus surcharge and Education Cess as applicable).

b. Where income of any member of AOP exceeds the maximum amount which is not chargeable to income-tax (i.e., basic exemption limit) In this case income of AOP shall be taxable at maximum marginal rate of tax (i.e., 30% plus surcharge and Education Cess as applicable).

But if total income of any member of AOP is taxable at a rate higher than maximum marginal rate then income of AOP shall be chargeable to tax as follows:

Portion of income attributable to such member shall be taxable at such high rate as applicable to that member.
Balance portion of income shall be taxable at the maximum marginal rate of tax (i.e., 30% plus surcharge and HEC as applicable). Where share of members is not determinate In this case income of the AOP shall be taxable at maximum marginal rate (i.e., 30% plus surcharge and Education Cess as applicable).

Where share of members is not determinate

In this case income of the AOP shall be taxable at maximum marginal rate (i.e., 30% plus surcharge and Education Cess as applicable). But if income of any member of AOP is taxable at a rate higher than maximum marginal rate then total income of AOP shall be chargeable to tax at such higher rate of tax.

For the purposes of this matter, the individual shares of the members of an AOP in the income of AOP shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of such AOP or at any time thereafter