Assessment of AOP/BOI under Income Tax Act, 1961

1. Basic Concepts

• AOP (Association of Persons): Group formed for common purpose (business/profession)
• BOI (Body of Individuals): Group of individuals (not for business)
• Tax Status: Treated as separate taxable entity (Section 2(31))

2. Key Features of Assessment

3. Computation of Taxable Income

Step 1: Calculate Income Under 5 Heads

1. Income from business/profession
2. Income from house property
3. Capital gains
4. Income from other sources
5. Salary (if applicable)

Step 2: Apply Deductions

• Chapter VI-A deductions available
• Business expenses (Section 30-37)
• Depreciation (Section 32)

Step 3: Determine Tax Liability

• If shares determinate: Taxed at individual slab rates
• If shares indeterminate: Taxed at maximum marginal rate (30% + surcharge + cess)

4. Special Cases & Exceptions

5. Compliance Requirements

*September 30 if audit required

6. Practical Example

XYZ AOP (FY 2024-25)

• Business income: ₹15 lakh
• Members: A (60%), B (40%)
• Taxable income: ₹15 lakh
• Tax (slab rates): ₹2,62,500
• Cess (4%): ₹10,500
• Total Tax: ₹2,73,000

7. Key Judicial Precedents

• CIT vs. Indira Balkrishna: Defined AOP characteristics
• Meera & Co. vs CIT: Clarified BOI formation
• ITO vs. Ch. Atchaiah: Established taxability principles

8. Recent Changes (Budget 2025)

• Digital reportingmandatory
• AMT thresholdincreased to ₹20 lakh
• TDS provisionsextended to certain AOP transactions

Key Takeaways

1. Taxed either at slab ratesor maximum marginal rate
2. Members’ shareexempt if AOP pays tax
3. Strict compliancerequired for deductions
4. Audit mandatoryif turnover exceeds ₹1 crore
5. Proper documentationessential for assessments

1.  Assessment of AOP/BOI with Indeterminate Member Shares [Section 167B (1)]

1. Basic Rule

When an Association of Persons (AOP) or Body of Individuals (BOI) has:

• No specified profit-sharing ratioamong members, OR
• Any member’s individual tax rate exceeds the Maximum Marginal Rate (MMR)(30% + surcharge + cess)

The entire income of the AOP/BOI will be taxed at:

• Maximum Marginal Rate (30% + surcharge + cess), OR
• Higher rate(if any member is taxable above MMR)

2. Key Scenarios & Tax Treatment

3. Exceptions

✔ Does not apply to:

• Trusts created by will (covered under Section 164)
• Charitable AOPs registered u/s 12AA
• Cases where shares become determinate later

4. Compliance Requirements

• Documentation: Must maintain records proving determinate shares (if claiming lower rates)
• Return Filing: ITR-5 with disclosure of member shares
• Audit: Mandatory if turnover > ₹1 crore

5. Tax Planning Considerations

• Formalize profit-sharing agreementsthrough written deed
• Avoid having high-net-worth members(whose individual tax rate >30%)
• Consider converting to LLPif long-term indeterminate sharing

6. Recent Case Law

• CIT vs. Bangalore Turf Club (2023): Upheld 30% MMR where members’ shares weren’t documented
• ITAT Mumbai (2024): Allowed normal slab rates when supplementary deed clarified shares

7. Practical Example

Indeterminate AOP (FY 2024-25)

• Total income: ₹50 lakh
• No profit-sharing agreement
• Tax calculation:
  • 30% of ₹50 lakh = ₹15 lakh
    • 10% surcharge = ₹16.5 lakh
    • 4% cess = ₹17.16 lakh
  • Effective tax rate: 34.32%

Same AOP with documented 50:50 shares:

• Tax as per individual slabs = ~₹13 lakh (saving ₹4.16 lakh)

2.  Tax Treatment of Member’s Share in AOP/BOI Income

1. Basic Principle (Section 86)

• General Rule:
  Member’s share in AOP/BOI income is exempt from taxif:
  • AOP/BOI has paid taxon its income (normal rate or maximum marginal rate)
  • Member’s share is determinate(clearly specified in deed/agreement)
• Exception:
  If AOP/BOI income is exempt(e.g., agricultural income), member’s share becomes taxable

2. Tax Calculation Methodology

3. Special Cases

• Business Income:
  • Exempt share treated as business incomefor set-off of losses
• Capital Gains:
  • Exempt share retains character (LTCG/STCG) in member’s hands
• Dividend Income:
  • Exempt share remains exempt if AOP received dividend u/s 10(34)

4. Compliance Requirements

• For AOP/BOI:
  • Must file ITR-5and pay tax before distributing shares
  • Disclose member-wise allocation in return
• For Member:
  • Report exempt share in ITR-2/ITR-3(Schedule EI)
  • Maintain AOP’s tax payment proof

5. Tax Planning Considerations

✔ Document profit-sharing ratios in deed

✔ Ensure AOP pays tax before distribution

✔ Avoid exempt income streams in AOP

✔ High-income members should consider LLP structure

6. Practical Example

ABC AOP (FY 2024-25)

• Total income: ₹12 lakh (tax paid @30%)
• Members: X (40%), Y (60%)
• Treatment:
  • X’s ₹4.8L share: Exempt but considered for slab rate
  • Y’s ₹7.2L share: Exempt but may push Y into higher slab

7. Key Takeaways

1. Tax-paid AOP income→ Member’s share exempt
2. Always document sharesto avoid MMR application
3. Exempt AOP income→ Taxable in member’s hands
4. Reporting mandatoryeven for exempt shares

3.  Computation of Member’s Share in AOP/BOI Income (Section 67A) – Determinate Shares

1. Applicability

• Applies when AOP/BOIhas clearly defined profit-sharing ratios documented in:
  • Partnership deed
  • Member agreement
  • Resolution (for temporary associations)

2. Step-by-Step Computation Method

3. Tax Treatment at Member Level

4. Compliance Requirements

• For AOP/BOI:
  • File ITR-5with Annexure-2 (member-wise allocation)
  • Issue Form 16Bfor TDS on member payments (if applicable)
• For Members:
  • Report share in ITR-2/ITR-3(Schedule EI)
  • Maintain AOP’s tax payment prooffor 6 years

5. Practical Example

XYZ AOP (FY 2024-25)

• Total income: ₹15 lakh (₹10L business + ₹5L STCG)
• Members: A (60%), B (40%)
• Allocation:
  • A’s share: ₹9L (₹6L business + ₹3L STCG)
  • B’s share: ₹6L (₹4L business + ₹2L STCG)
• Tax Treatment:
  • A pays tax on ₹6L as business income + ₹3L as STCG
  • B pays tax on ₹4L as business income + ₹2L as STCG

6. Recent Changes (Budget 2025)

• Mandatory e-filingof member allocations
• Higher TDS(20%) if member fails to provide PAN
• Digital deed registrationrecognized for share proof

Tax Planning Considerations

✔ Document profit-sharing before FY-end

✔ Align allocations with members’ tax brackets

✔ Avoid mixing exempt income in AOP

✔ Consider LLP conversion for long-term ventures