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Membership of AOP/ BOI.

Section 67Aof Income Tax act 1961 deals with method of computing members share in income of AOP / BOI.

As per the Sec67(A). (1) In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known [other than a company or a cooperative 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]…………..

a) Company or

b) a co-operative society or

c) 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.

Share of income from such AOP / BOI shall not be governed by sec. 67A.

Since while determining the category of AOP/BOI covered under sec 67A no person (u/s 2(31)) is restricted to be a member of AOP / BOI, so and Company, Firm, HUF can be a member of AOP / BOI.

Taxation of AOP / BOI. (Sec 167B)

As per the sub section (1) of sec 167B, where individual shares of the members of AOP / BOI is unknown (indeterminate)

a. Total income computed shall be taxable at the rate maximum marginal rate (33.99 % for the A.Y. 2015-16 and 34.608% for A.Y. 2015-16).and

b. 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.

As per the sub section (2) of sec 167B, where individual shares of the members of AOP / BOI is known (determinate),

a. 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.

b. 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.

As per the Circular No.551, dt. 23.1.1990, para 11, where the shares of the members are determinate and none of the members has taxable income or none of the members is taxable at a rate higher than the maximum marginal rate, in such a case Tax would be levied at normal rate as applicable to the Assessment year.

Taxation of share of Income from AOP / BOI in the hands of member. (Sec 86).& (Sec 110)

A) Sec 86 deals with the taxation aspect of Income from AOP/BOI in the hands of recipient of income. So as per the provision where total income of assessee includes share in income from AOP / BOI, no tax shall be payable on such portion of Income. Sec 86 has 2 exceptions that are as follows

(a)  where the association or body is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any of the provisions of this Act, the share of a member computed as aforesaid shall not be included in his total income;

(b)  in any other case, the share of a member computed as aforesaid shall form part of his total income.

Provided further that where no income-tax is chargeable on the total income of the association or body, the share of a member computed as aforesaid shall be chargeable to tax as part of his total income and nothing contained in this section shall apply to the case.

B) combine reading of Sec 110 and sec 86 we can conclude that in respect of incomes on which no tax is payable under the provisions of the Act, first tax is calculated on the total income inclusive of such exempt income and thereafter, income-tax calculated at the average rate on the amount of such exempt income, is allowed as a deduction from the tax payable on the total income. In other words, such incomes are included in the assessment only for rate purposes.

It may also be stated here that an AOP is entitled to carry forward and set off its loss. In this regard, reliance may be placed on the following legal precedents :

i. Mahindra Holdings & Finance Ltd. Vs Dy.CIT [2009] 311 ITR (AT) 1 (Mum) [2008] 11 DTR (Trib) 481 (Mum)(TM)

ii. CIT Vs Smt. Lalita M. Bhat [1998] 234 ITR 319 (Bom).

In the present context, it will be appropriate to examine the provisions of section 86 vis-à-vis the provisions of section 66 of the Act. As per section 66, in computing the total income of an assessee, there shall be included all income on which no income-tax is  payable under Chapter VII. Further, as per section 86 of the Act, where the assessee is a member of an AOP or BOI, income-tax shall not be payable by the assessee in respect of

his share in the income of an AOP or BOI computed in the manner provided under section 67A. Therefore, on a conjoint reading of section 66 and the main part of section 86, no income-tax shall be payable in respect of share of a member in the income of an AOP or BOI, but the same will be included in the total income of the member for rate purposes.

Tax-treatment of the share of a company in an AOP, in the computation of its total income

As per section 86 of the Act, where the assessee is a member of an AOP or BOI, income-tax shall not be payable by the assessee in respect of his share in the income of the AOP or BOI computed in the manner provided in section 67A of the Act. In this regard it may also be pointed out that section 67A falls under Chapter VI which relates to ‘Aggregation of income and set off or carry forward of loss’. Besides, section 66 which clearly lays down that all the income on which no income-tax is payable under Chapter VII shall be included in the total income of the assessee; also falls under Chapter VI of the Act.

In the light of the aforesaid reasons, clause (a) of the first proviso to section 86 of the Act, will have to be ignored and therefore, notwithstanding the provisions of the aforesaid clause (a), share of a member of an AOP shall be included in his / its total income, irrespective of the fact, whether or not the AOP is chargeable to tax at the maximum marginal rate or any higher rate of tax.

In other words, the total income of a member of an AOP will include his share of income in the AOP, though such member will be entitled to get a rebate of income-tax in respect of the aforesaid share of income, as per the provisions of section 110 of the Act.

Applicability of the provisions of section 115JB, in case of income from AOP in the hands of Company.

Till the A.Y. 2015-16, while calculation of Book profit for the purpose of sec 115JB, income from AOP was not deductable from Book Profit of the company, so MAT @ 18.5 was payable on such income (Share from AOP).

However amendment made in finance bill 2015, w.e.f. 1 April 2015, amended provision is as follows’

115 JB (2) (iic) the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any, such amount is credited to the profit and loss account;

The amendment made to section 115JB amply makes it very clear that the share of profit of AOP is not taxable in the hand of recipient company and henceforth from A.Y. 2016-17 same shall be deducted from book profit for arriving the MAT.  

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Category Income Tax, Other Articles by - CA Santosh Dhumal 



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