CA RAMESH KUMAR AHUJA
( Expert )
25 November 2008
AOP/BOI AND TAXATION
An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not.
An association of persons (AOP) under the Income Tax Act is an entity or unit of assessment. It means two or more persons who join for a common purpose with a view to earn an income. The term Person includes any company or association or body of individuals, whether incorporated or not. The association need not be on the basis of a contract. Therefore, if two or more persons join hands to carry on a business but do not constitute a partnership they may be assessed as an AOP. But, an AOP does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons.
Body of individuals (BOI) means a conglomeration of individuals who carry on some activity with the objective of earning some income. It would consist only of individuals. Entities like companies or firms cannot be members of a body of individuals. Income tax shall not be payable by an assessee in respect of the receipt of share of income by him from BOI and on which the tax has already been paid by such BOI.
There ia distinction between an AOP and BOI :-
An AOP may consist of non-invidividuals but a BOI has to consist of individuals only. If two or more persons (like firm, company, HUF, individual etc) join together, it is called an AOP. But if only individuals join together then it is called a BOI.
An AOP implies a voluntary getting together for a common design or combined will to engage in an income producing activity, whereas a BOI may or may not have common design or will.
Compute the total income under the different heads i.e. income from house property, profits or gains of business or profession, capital gains, and income from other sources, ignoring the prescribed incomes exemptions. Thus, "gross total income" is obtained.
From the gross total income, prescribed deductions under Section 80A of Chapter VIA are made. The balance amount is the taxable income.
• Interest paid by the AOP/BOI to a member is not allowed as deduction from the income of the AOP/BOI [Section 40(ba) of the Act].
• Any salary, bonus, commission or remuneration (by whatever name called), paid by the AOP/BOI to a member is not allowed as deduction from the income of the AOP/BOI.
The total income of the AOP/BOI 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. The tax incidence on AOP/BOI depends upon whether or not the individual shares of members in the whole or in any part of the income of the AOP/BOI are determinate:-
• Where shares of the members are determinate (under Section 67A)
The total income of an AOP/BOI wherein the shares of the members are determinate and known shall be computed as follows :
o Any interest,salary,bonus or remuneration paid to any member of AOP shall be deducted from their total income.
o The balance income(either profit or loss) shall be apportioned to the members,to which salary,interest,etc. shall be added.This income shall be treated as member's share in income of AOP.
o The member's share so ascertained shall be apportioned under various heads of income in the same manner as it is done for AOP.
o Any interest paid by member on capital borrowings for investment purposes in AOP shall be deducted from member's share while computing his income under the head profits and gains of business/profession.
The tax is chargeable on the total income of an AOP/BOI at the same rate as is applicable in the case of an individual.
But, when the total income of any member of the AOP/BOI for the previous year (excluding his share from the AOP/BOI) 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 is charged on the total income of the AOP/BOI at the maximum marginal rate (i.e. the highest slab applicable to an individual).
And, where, the total income of any member of the AOB/BOI (whether or not it exceeds the maximum amount not chargeable to tax in the case of an individual) is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged on that portion of the total income of the AOP/BOI which is relatable to such member at a higher rate and the balance of the total income of the AOP/BOI shall be taxed at the maximum marginal rate.
• Where shares of members are indeterminate(under Section 167B)
The tax is charged on the total income of the AOP/BOI at the maximum marginal rate, which is the rate of tax (including surcharge, if any) applicable in relation to the highest slab of income in the case of an individual as specified in the Finance Act of the relevant year. However when any member is charged at a higher rate than maximum marginal rate,the income shall be taxed at a higher rate.