Taxing matters

The taxation of an Association of Persons (AOP), alternatively called a Body of Individuals (BOI), is governed by peculiar provisions.

The two conditions for assessing income under the status of an AOP are -- there must be joint venture and secondly the object of the joint venture is to earn income. If both these conditions are satisfied, the ITO cannot tax the income in the status of an individual.

For instance, two individuals jointly buy a lottery ticket and win a prize of Rs 2 lakh. They have to be taxed as an AOP (CIT v Abdul Jaffar).

Partnership firms will be assessed as an AOP where:

There is no evidence by way of an instrument of partnership deed.
The individual shares of partners are not defined.
After dissolution of the firm or death of a partner or change in the constitution of partnership deed, the revised instrument is not submitted along with the return of income.

Where the shares of members are determinate and known Section 40(ba) prohibits deduction of salary, bonus, commission or remuneration by whatever name called, paid to any member from the total income of the AOP.

The same is the case related to interest paid by the AOP to a member but the interest charged to the member is netted out and only the difference is disallowed.

Under Section 167B(2), tax is chargeable on the income of an AOP at the same rate as is applicable to an individual. However, there are so many ifs and buts that it becomes difficult to interpret the provisions with clarity.

If any one of the members of the AOP is required to pay tax for the year, then if that member is chargeable to tax at a rate higher than the maximum marginal rate (for instance when a company or a firm is a member), tax shall be charged on that portion of the total income of the AOP which is relatable to the share of such member at such higher rate and the balance at the maximum marginal rate.

Where the total income of any member (excluding his share from the AOP) exceeds the income threshold for an individual under which tax is not chargeable (Rs 50,000 at present) the AOP shall be charged on its total income at the maximum marginal rate.

Under both these situations, the share of its member shall not be included in his total income at all.
Now, we come to the situations where none of the members have a total income (after claiming deductions under Sections 80CCC, 80L, 80D, etc.) of more than Rs 50,000.

Where the total income of the AOP is also under Rs 50,000, the share of each member therein shall be added to the other income of the member. The member shall be liable to pay tax at the normal rates if his income, after such addition, increases beyond Rs 50,000.

Where the total income of the AOP is higher than Rs 50,000, it will be charged to tax at the normal rates applicable to individuals. Here the share of its member shall be included in his total income for tax purpose, but a rebate shall be given to him on it under Section 86(b).

Section 67A has laid down the following method of computing the share of its members:

Subtract any interest, salary, etc., paid to any member from the total income of the AOP.
The balance shall be apportioned among the members in the proportions in which they are entitled to share in the income.
Add back the interest, salary, etc., paid to the member by the AOP.
The result shall be treated as the member's share in the income of the AOP.
Any interest paid by a member on capital borrowed by him for the purposes of investment in the AOP shall, in computing his share chargeable under the head 'Profits and gains of business or profession' be deducted from his share.
Where, in computing the total income of an AOP, any deduction is admissible under Sections 80G, 80GGA, 80HH, 80HHA, 80HHB, 80HHC, 80HHD, 80-I, 80-IA or 80-IB, no deduction under the same section can be claimed while computing the total income of a member of the AOP in relation to his share in the income of the AOP.
Compute the tax liability of individual members on their own income from all the sources inclusive of their respective shares in the income of the AOP arrived at as indicated above. Deduct the rebates under Section 88, and 88B/88C. Divide this liability by his total income (including his share from the AOP) to arrive at the average rate of tax. Multiply this rate by his share of income in the AOP to arrive at the AOP-related rebate that the member is entitled to. Subtract the rebate from the tax liability to arrive at the tax payable by the member.

Tax payable by AOP where the shares of members are not determinate.

Under Section 167B(1), where the individual shares of the members in the whole or any part of the income are indeterminate or unknown, tax shall be charged on the total income of the AOP at the maximum marginal rate.

However, where the total income of any member of the AOP is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged at such higher rate.

The individual shares of the members of an AOP shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of such association or body or at any time thereafter.

This essentially means that the shares of individual members have got to be well defined right from the formulation of the AOP. It cannot be defined later for getting the benefit of lower taxes commanded by AOPs where the shares of the members are determinate and known.