How an Association of Persons will be taxed

Introduction

An association of persons (AOP) , whether incorporated or not, is treated as a ‘person’ under section 2(31)​ of the Income-tax Act, 1961. Hence, AOP  is treated as a separate entity for the purpose of assessment under the Income-tax Act.

Here it is important to note that an AOP  shall be deemed to be a person, whether or not, they were formed or established or incorporated with the object of deriving income, profits or gains.

Taxation of Association of Persons:-

The imposition of tax on Association of Persons (AOP) occurs in majorly in two phases.

One at the AOP level and the other at the members’ level. At the first level, taxation of income depends on whether the share of income is determinate or not. When the shares are confirmed, and the income of the AOP is assessed concerning every members’ share at their applicable rate, then the income of the member will be taxed on their respective share with the credit of taxes paid by the AOP.

The provisions of Section 167B and Section 86 has been condensed into the table given below.

Share Determined – Income assessment

AOP – assessed	Member – assessed
Income of AOP is assessed at Maximum Marginal Rate	Exempt from the hands of the members
NIL rate/ other than Maximum Marginal Rate – when individuals are members	Chargeable in the hands of the assessee with credit of taxes if any.

Share Undetermined – Income assessment

Income is assessed at Maximum Marginal Rate. Any member is assessed at higher than Maximum Marginal Rate, Income is assessed at such a higher rate.

The share of Income is exempt in the hands of the member.

The total income of an AOP is taxable, either at the rates applicable:

1. To an individual.

2. At the maximum marginal rate.

3. At the rate that is higher than the applicable maximum marginal rate.

Computation of Taxable Income of AOP

1. Computation of total income in the case of an association of persons  will be done in the same manner as in the case of any other assessee.

2. In computing the total income, interest, salary, bonus, commission, remuneration, by whatever name called, paid to members will not be allowed [Section 40 (ba)]

However, in the case of payment of interest the following provisions will apply:

Explanation 1: If interest is paid by an AOP to any member who has also paid interest to the AOPs then only that amount of interest paid by the AOPs will be disallowed in its assessment which is in excess of the interest paid by the member to the AOPs i.e., net interest shall be disallowed.

Explanation 2: If an individual is a member of an AOPs in a representative capacity, on behalf of or for the benefit of another person, then interest paid by the AOPs to such individual in his personal capacity will not be taken into account for the purpose of disallowance.

However, interest paid by the AOPs to such individual or vice-versa as representative member or interest paid by the AOPs directly to the beneficiary will be taken into account for the purpose of disallowance.

Explanation 3: If interest is paid to a member who is not a member in a representative capacity, but such interest is received by him on behalf of or for the benefit of another person the interest payment will be allowed.

Tax calculation of AOP

There are two situations where the tax can be calculated in two different ways. They are listed below.

Section 167B(1): Where the Shares of the Members are unknown.

Where the individual shares of the members of the AOP in the whole or part of its income are indeterminate or unknown, tax shall be charged on the Total Income of the AOP at the maximum marginal rate for example a 30 per cent tax plus  25% surcharge (FY 2023-24) plus Health and Education Cess at a rate of 4 per cent 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 per cent, the tax will be charged on the Total Income of the AOP also at such a higher rate.

Section 167B(2): Where the Share of the Members are known

In a case where one of the members has a total income exceeding the maximum exemption limit.

Where the total income of any of the members of an AOP, without including his income from AOP exceeds the Maximum Exemption Limit, then such an AOP will be charged to tax at a rate higher than 30 per cent plus surcharge, plus Education Cess plus Secondary and Higher Education Cess as applicable on its total income.

However, in this case, if the income of one or more member of the AOP is chargeable at a rate higher than 30 per cent plus surcharge and Education Cess plus Secondary and Higher Education Cess as applicable, tax shall be charged on that portion or on the part of income of AOP which is relatable to the share of such a member(s) at such a higher rate and the balance of the revenue is taxable at the maximum marginal rate of tax.

In a case where none of the members has a total income exceeding maximum exemption limit.

There are two situations that may emerge from a case such as this. They are listed in the table below for a reference.

Serial Number	Situation	Liability of Tax
1	None of the members has a total income exceeding the maximum exemption limit, and none of the members is taxable at a rate more than the maximum marginal rate.	The AOP, in this case, will pay income tax on its total income at the rates which apply to an individual and the benefit of basic exemption shall be available to such AOP.
2	Although none of the members has a total income exceeding the maximum exemption limit, one or more members is/ are liable to tax at the rate of more than the maximum limit (i.e. taxable at a rate higher than 30 per cent) which is possible only if the foreign company is also a member.	On that portion of the income of AOP which is relatable to the member, i.e. foreign company, the tax rate applicable shall be the rate of income tax which applies to such member and the total balance income of the AOP shall be charged at the maximum marginal rate.

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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.