Assessment of AOP/BOI with Computation of Tax Liability

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1.  Assessment of Association of Person (AOP) / Body of individual (BOI)

AOP or BOI does Not include—

  1. a company;
  2. a co-operative society;
  3. a society registered under the Societies Registration Act, 1860 or under any other law corresponding to that Act in force in any part of India.

An AOP 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.

Assessment of AOP/BOI
Assessment of AOP/BOI

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.

Example 1:

Suppose AOP pays interest of Rs. 40,000 to member ‘R’ on his capital/loan whereas ‘R’ pays Rs. 31,000 as interest on his drawings to AOP.

In this case Rs. 9,000 (Rs. 40,000 – 31,000) shall be disallowed under section 40(ba) to the AOP.

But suppose the interest on his drawings is Rs. 48,000 instead of Rs. 31,000.

In this case, nothing will be disallowed under section 40(ba). Further, Rs. 8,000 (Rs. 48,000 – 40,000) shall be taxable in the hands of AOP.

Example 2:

Suppose AOP pays Rs. 24,000 as interest to member R on his capital/loan whereas AOP charges Rs. 35,000 as interest from member S on his drawings.

In this case Rs. 24,000 paid to R shall be disallowed under section 40(ba) and Rs. 35,000 interest charged from S shall be treated as income taxable in the hands of AOP.

But where the individual who is a member in a representative capacity is paid interest otherwise than as member in a representative capacity, such interest shall not be disallowed.

If salary is paid by AOP/BOI to its member who is member on behalf of HUF, i.e. in representative capacity, still such salary shall not be allowed as deduction while computing the income of AOP/BOI.

Rent paid by AOP/BOI for the use of the premises of its member for its business shall be allowed as deduction while computing the income of AOP/BOI.

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 on determinate.

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

Where the individual share 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:

30% Plus Surcharge @ 10%/15%, as the case may be, if applicable and Health and Education Cess at a rate of 4% shall be levied on the amount of tax computed, inclusive of surcharge.

However, if the income of any member of AOP is chargeable at a rate higher than 30%, the tax will be charged on the Total Income of the AOP also at such a higher rate.

Thus, although the maximum tax rate in case of AOP is 30% plus surcharge @ 10/15%, as the case may be, if applicable plus cess @ 4%, but in case the foreign company is a member of AOP/BOI, the tax rate of the AOP shall be 40% plus cess @ 4% instead of maximum marginal rate.

(2). Where share 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 30% plus surcharge @ 10 / 15%, as the case may be, if applicable, plus cess @ 4% on its total income exclusive of income taxable at special rate.

However, as per section 167B(2)(ii) if the income of one or more member of AOP/BOI is chargeable to tax at a rate higher than the maximum marginal rate i.e. 30% tax shall be 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.

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

In this case two situations may emerge:

SituationLiability of Tax
1. None of the members have total income exceeding maximum exemption limit and none of the members is taxable at a rate more than maximum marginal rateThe AOP in this case will pay income tax on its total income at the slab rates which are same as applicable to an individual and the benefit of basic exemption of Rs. 2,50,000 shall be available to such AOP.
2. Although none of the member has total income exceeding the maximum exemption limit, but one or more member is liable to tax rate of more than the maximum limit (i.e. taxable at a rate higher than 30%) which is possible only if the foreign company is also a member.On that portion of income of AOP which is relatable to the member i.e. foreign company, the tax rate applicable shall be rate of income-tax which is applicable to such member and the balance total income of AOP shall be charged at the maximum marginal rate. [See Section 167B(2)(ii)] above.

Long-term capital gain of AOP or BOI shall be taxable at the special rate of 20%/ 10% as the case may be as per section 112. 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%.

2. Treatment of Share of Income in the hands of a Member of AOP/BOI:

(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 member 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.

A company shall also be entitled to benefit of exemption under section 86 read with section 67A and section 110 as member of AOP can be a company. The exclusion provided under section 86 that other than company or the co-operative society or a society registered under the Societies Registration Act, would be made applicable only to AOP or BOI and not to the member.

3. 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 share of the members are determinate, the share 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)]

4. Income Tax Slab Rate for ‘AOP/ BOI for Financial Year 2020-21 (AY 2021-22) opting for OLD Tax Regime:

Net Income RangeIncome-Tax RatesSurchargeHealth and Education Cess (HEC)
Up to Rs. 2,50,000NilNilNil
Rs. 2,50,001 — Rs. 5,00,0005% of (total income minus Rs. 2,50,000)Nil4%
Rs. 5,00,001— Rs. 10,00,00020% of (total income minus Rs. 5,00,000)Nil4%
Above 
Rs. 10,00,000
30% of (total income minus Rs. 10,00,000)Nil4%

Plus:

Surcharge: – 

10% of income tax where total income exceeds Rs. 50 Lakh.

15% of income tax where total income exceeds Rs. 1 Crore.

25% of income tax where total income exceeds Rs. 2 Crore.

37% of income tax where total income exceeds Rs. 5 Crore.

Health and Education Cess (HEC): – 

4% of Income Tax and Surcharge.

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