If you are planning to set-up a Association of Person (AOP), Body of Individuals (BOI), firm or LLP, read all the tax related compliances here that you should follow during the existence of such AOP, BOI, firm or LLP.
Section 40(ba)- Any payment of salary, remuneration, bonus, commission paid by AOP/BOI to its members is disallowed.
Rent paid to members is allowed.
Interest paid by AOP/BOI to its member is disallowed to the extent of amount exceeding the interest paid by member to AOP/BOI (means if member has not paid any interest to AOP/BOI then interest paid by AOP/BOI its member is fully disallowed).
If individual is a member on behalf of other person then interest paid by AOP/BOI to such individual being in the representative capacity is disallowed but interest paid to such member in personal capacity is allowed u.s. 36(1)(iii) subject to 40A(2) (means interest paid to member directly or indirectly is disallowed, here indirectly means through representative but it is going for the member only).
If individual is member in own capacity and also represents other person then interest paid by AOP/BOI for such other person will be allowed but interest paid to individual member in personal capacity is disallowed (means interest paid to member directly or indirectly is disallowed, here indirectly means through representative but it is going for the member only).
Few case law judgements
Rashik Lal (SC)– Remuneration paid to any member being in representative or other capacity will be disallowed as the conditions are for interest and not remuneration.
Govindbhai Mamaiya (SC)– Capital gain on sale of property is taxed in individual hands if the property is obtained by virtue of any will or formation of AOP on non-volition of members and not in the hands of AOP.
Section 167B
Tax rates for income of AOP/BOI
Here, MMR means Maximum Marginal Rate
|
Pre-condition |
Criteria |
Tax rates |
| Share of member is determinate | No member is chargeable at > MMR + No member has income exceeding maximum amount not chargeable to tax | Rates applicable to individual |
| >= 1 member have income exceeding maximum amount not chargeable to tax + No member is chargeable at > MMR | MMR | |
| >= 1 member is chargeable at > MMR | Total of tax at higher rate on such member share + tax at MMR for balance | |
| Share of member is not determinate | No member is chargeable at > MMR | MMR |
| >= 1 member is chargeable at > MMR | Such higher rate | |
| Loss of AOP/BOI is to be carried forward by AOP/BOI and not allocated to members | ||
| Capital gain to be taxed at their respective rates and not as per 167B and slab of Rs.2,50,000 is applicable in the first case where income of AOP/BOI is taxed at rate applicable to individual | ||
Section 67A
Steps to calculate member’s share in income of AOP/BOI
Step 1– Compute taxable income of AOP/BOI disallowing interest u.s. 40(ba).
Step 2– Reduce taxable income by salary and interest paid to members.
Step 3– Allocate the difference as profit amongst the members.
Step 4– In the profit allocated above, add salary and interest paid to members in their respective share.
The allocated income of the members should be in the same head as income of the AOP/BOI.
Section 86
Where AOP/BOI is taxed at MMR or higher, the share of member in income of AOP/BOI shall not be included in his total income.
Where AOP/BOI is taxed at normal rate applicable to individual, the share of member in income of AOP/BOI to include in his total income and rebate at average rate of tax is allowed in computing his income.
Where tax is not payable by AOP/BOI, then share of income in AOP/BOI to be included in the income of member and no rebate is allowed.
Section 184
A firm is assessed as firm if there is a deed and share of partners are stated therein.
If a firm fails to fulfil the conditions u.s. 144 then deduction in respect of remuneration, interest, bonus, commission paid by firm to partner would not be allowed as deduction and the same would not be taxable in the hands of the partner u.s. 28(v). Salary and interest are disallowed even if conditions of 40(b) are satisfied.
Section 185
If sec 184 is not complied with then the assessment of the firm would be made applying provisions of 184.
Section 187
Any firm should be assessed at its constitution which is prevailing at the time of assessment.
Change in constitution– if all partners continue with change in PSR, any partner cease to be partner or new partner is added but atleast 1 old partner should continue and this condition does not apply in case of death of partner.
Section 188
If a firm is succeeded by other firm for conditions other than 187 then separate assessment to be done for both predecessor and successor firms
Predecessor firm is assessed upto the date of succession.
Section 188A
If any person was a partner at any time during that PY then he would be jointly and severely liable for that PY along with his legal heir as the case may be.
Section 189
If a firm has been dissolved or business discontinued then also assessment should be done as if the firm has not dissolved and all provisions including penalty may be levied and liability u.s. 188A is also applicable in the case of such dissolution.
If dissolution happens after any proceeding against the firm then the proceedings will be continued on person liable as per sec 188A.
Other points– Loss of the firm is not allowed to be carried forward by the partners and no TDS is required on payment of interest and salary to resident partners but in case of NR partners it is required as per sec 195.
Section 40(b)
Interest and remuneration paid to partners are generally disallowed.
Salary, bonus, commission, remuneration is allowed if paid only to working partner.
Cir 739– Remuneration to the partner is admissible only if the amount is specified in the deed or lays down the manner of quantifying the remuneration payable.
Novel Distributing Enterprises (Ker)– If any interest payment to any partner is not authorized by the deed then the same would be disallowed.
Remuneration is allowed to the limit.
|
Book profit |
Amount allowed |
| On loss or first Rs.6,00,000 of book profit | Higher of Rs.3,00,000 or 90% of the book profit |
| Balance book profits | 60% |
Book profit– Profit calculated as per sec 28 to 44D increased by remuneration paid to all partners if it was reduced in computing profit.
Treatment of items in book profit
|
Transaction |
Treatment |
| Income | Only Income from Business or Profession |
| Current year and brought forward depreciation | Deducted |
| Brought forward losses | Not deducted |
| Chapter VI-A | Not deducted |
| Interest paid to partner | To the extent deductible should not be added back |
Allowability of remuneration and interest
| Remuneration | Interest |
| To a working partner | To working/ non- working partner |
| To individual only | To any partner |
| Should be authorized by deed | Should be authorized by deed |
| Either amount or manner specified in the deed | Rate should be specified in deed |
| Should not be retrospective | Should not be retrospective |
Exp 1– If individual is a partner in representational capacity then interest paid by firm to such partner in personal capacity is allowed u.s. 36(1)(iii) subject to 40A(2) but interest paid in representational capacity is not allowed as per 40(b).
Exp 2– If individual is partner in personal capacity then interest paid by firm to such partner in personal capacity is disallowed as per 40(b) but interest paid in representational capacity is allowed u.s. 36(1)(iii) subject to 40A(2).
Kishori Lal & Sons– Salary paid to partner as per Exp 1 and Exp 2 is to be allowed as those explanations are for interest and not remuneration.
Section 28(v)
Any interest, remuneration, bonus or commission received by partner is taxable as PGBP in the hands of partner as reduced by the amount of such payments disallowed in the hands of the firm.
Great City Manufacturing Co.– If remuneration paid to partner is as per limits laid u.s. 40(b)(v) then the AO cannot invoke sec 40A(2) for disallowance.
Section 10(2A)
Share from firm is exempt in the hands of the partner.
Share of profit = Total income of firm x Share in profit of firm as per deed / Profit of firm as per deed.
Section 78(1)
The firm should not carry forward losses related to share of retiring or deceased partner.
Section 167C
Partners are jointly and severally liable if the any tax liability of the LLP is not recoverable from the LLP unless he proves that non-recovery cannot attribute to any gross neglect, misfeasance or breach by such partner.
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