Assessment of Association Of Person (AOP) / Body Of Individuals (BOI)

This Page discusses Assessment of AOP and BOI which is Association of Person and Body of Individual by applying the normal provisions of the Income Tax Act.

An AOP other than mentioned above is a separate assessee. The income of AOP or BOI shall be computed under the heads of income by applying the normal provisions of the Income-tax Act.

The business income of AOP/BOI shall be computed after allowing all expenses referred to in sections 28 to 44D.

However, as per section 40(ba), while computing the income of AOP/BOI under the head ‘profits and gains of business and profession’ any interest (whether on capital or loan), salary, bonus, commission or remuneration by whatever name called paid by such association or body to a member thereof shall not be allowed as deduction.

However, while disallowing such interest paid, if any interest is also paid by the member to the association or body, the net interest (after deducting the interest paid by the member) shall only be disallowed.

An AOP/BOI will be assessed in the following two manners:

(1)        where in case of AOP/BOI, the individual share of members are unknown or indeterminate;

(2)        where in case of AOP/BOI, the individual share of members are known or determinate.

1. Where Shares of Members are Unknown or Indeterminate [Section 167B (1)]

Where the individual shares of the members of AOP/BOI in the whole or part of its income are indeterminate or unknown, tax shall be charged on the Total Income (exclusive of income taxable at special rate) of the AOP/BOI at the maximum marginal rate which will be as under:

For Assessment Years 2021-22 and 2022-23—

30% plus surcharge @ 37% and health and education cess @ 4% amounting to 42.744%.

However, if the income of any member of AOP is chargeable to tax at a rate higher than maximum marginal rate, the tax will be charged on the Total income of the AOP also at such higher rate.

For assessment years 2021-22 and 2022-23, the maximum marginal rate is 42.744%, which is more than rate of 40% applicable in case of foreign company. Hence, even if the foreign company is also a member, tax will be charged @ 42.744% in the assessment years 2021-22 and 2022-23.

2. Where Shares of Members are Known or Determinate

(a)  Where one of the members has total income exceeding maximum exemption limit [Section 167B(2)(i)]:

Where the total income of any member of AOP/BOI, without including his income from AOP/BOI exceeds the Maximum Exemption Limit, then such AOP/BOI will be charged to tax at maximum marginal rate of 42.744% for assessment years 2021-22 and 2022-23.

However, as per section 167B(2)(ii), if the income of one or more members of AOP/BOI is chargeable to tax at a rate higher than the maximum marginal rate, tax shall he charged on that portion or portions of income of AOP/BOI which is relatable to the share of such member(s) at such higher rate and the balance of the income is taxable at the maximum marginal rate of tax.

For assessment years 2021-22 and 2022-23, the maximum marginal rate is 42.744%, which is more than rate of 40% applicable in case of foreign company. Hence, even if the foreign company is also a member, tax will be charged @ 42.744% in the assessment years 2021-22 and 2022-23.

(b) Where none of the members has total income exceeding maximum exemption limit

In this case two situations may emerge:

Long-term capital gain of AOP or BOl shall be taxable at the special rate of 20% / 10%, as the case may be, as per section 112 and section 112A. It shall not be taxable at the above rate.

Similarly, short-term capital gain referred to in section 111A shall be taxable at the special rate of 15%.

Surcharge :

For assessment years 2021-22 and 2022-23, in case where the total income includes any income by way of dividend or income chargeable under section 111A and section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax computed in respect of that part of income (i.e., income by way of dividend or income chargeable under sections 111A and 112A) shall not exceed 15%.

3.  Treatment of share of income in the hands of a member of AOP/BOl:

(1) Where AOP/BOI has paid tax at maximum marginal rate or at higher rate [Proviso (a) to section 86]:

Where the AOP/ BOI has paid tax at maximum marginal rate or at the higher rate, as the case may be, the share of profit from the AOP/BOI will not be included in the Total Income of the members and will be exempt. Hence, in this case, member’s shares in the income of AOP/BOI shall not be computed under section 67A.

(2) Where the AOP/BOI has paid tax at the same rates as applicable to an individual:

Where the AOP/BOI has paid tax on its income at the same rates as applicable to individual (as none of the members had income exceeding maximum exemption limit and none of the members is taxable at a rate more than the maximum rate of tax), the respective share of income of the member in AOP/BOI shall be computed as per section 67A and the same will be included in the Total Income of each member as per section 66 read with section 86 although no income-tax is payable on such income.

In this case as per section 110, the assessee shall be entitled to a deduction from the amount of income-tax with which he is chargeable on his total income-tax of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable.

However, if the Total Income of AOP/BOI happens to be less than the Maximum Exemption Limit, i.e., Rs.2,50,000, the share of profit will be included in the Total Income of each member and taxed. No rebate in this case will be allowed. This is possible only when neither any member has income exceeding the maximum exemption limit nor any member is taxable at the rate exceeding the maximum marginal rate.

4.  Method of computing a member’s share in income of AOP/BOI where the shares of the members are determinate and known [Section 67A]

in case of such AOP or BOI, if the shares of the members are determinate, the shares of the member (whether a net profit or net loss) in the total income or loss of AOP or BOI shall be computed as under:

(a)        any interest, salary, bonus, commission or remuneration by whatever name called, paid to any member in respect of the previous year shall be deducted from the total income of the association or body and the balance ascertained and apportioned among the members in the proportions in which they are entitled to share in the income of the association or body.

It may be noted that such interest, salary, etc., has to be deducted from the total income without deducting any tax paid by AOP/BOI;

(b)        where the amount apportioned to a member under clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be added to that amount, and the result shall be treated as the member’s share in the income of the association or body.

In other words, member’s share in the income of association/body/firm shall be share of profits, as computed as per clause (a), plus interest, salary, etc. paid to him;

(c)        where the amount apportioned to a member under clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member’s share in the income of the association or body.

In other words, the share of loss shall be adjusted against interest, salary, etc. and the balance shall be his share in the income of association or body.

The share of a member in the income or loss of the association or body, as computed above shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income. This is done for the purpose of set off of current year and brought forward losses of the members. [Section 67A(2)]

5.  Alternate Minimum Tax (AMT) on all Persons other than Companies [Sections 115JC to 115JF]

Where the regular income-tax payable for a previous year by a person (other than a company) is less than the alternate minimum lax payable for such previous year, the Adjusted Total Income shall be deemed to be the total income of such person and he shall be liable to pay income-tax on such total income at the rate of 18.5%. [Section 115JC (1)]

However, in case of a unit located in an International Financial Service Center and which derives the income solely in convertible foreign exchange, the alternate minimum tax under section 115JC shall be charged @ 9% instead of 18.5% [Section 115JC (4)]