Procedure for determination of income of AOP under Income Tax Act, 1961

The Government of India levied the tax on the income of every person as per provision of Income Tax Act.  The term ‘person’ as defined under the Income-tax Act under section 2(31)of the Income Tax Act, 1961, it covers in ambit natural as well as artificial persons, out this one has  an association of persons (AOP), whether incorporated or not, it has major role under collection of revenue, it have separate entity for the purpose of assessment under the Income-tax Act.

The meaning of Association of Persons (AOP) is a group of persons who come together for achieving a common objective and within the same group of person / persons who are called as Members of AOP, it may be natural or artificial persons. It need not necessarily be on the basis of a written contract; consent and understanding may be presumed by way of conduct. It must be joining together in a common purpose or in a common action, the object of which is to produce income, profits and gains.

Procedure for determination of income of AOP

The procedure for determination of income of AOP, the following steps shall follow

Step 1

Total income is computed under different heads such as income from house property, profits or gains of business or professions, capital gains, and income from other sources, ignoring the prescribed income exemptions. Therefore, the total gross income is obtained.

Step 2

The prescribed deductions under Section 80A of the Chapter VIA are made from the total gross income. The balance amount is the taxable income.

• Interest paid by the AOP to a member is not permitted as a deduction from the income of the AOP under Section 40 (BA) of the Act.
• Any salary, bonus, commission or remuneration paid by the AOP or the BOI to a member is not permitted as a deduction from the income of the AOP.

The income of the AOP is taxable either at the rates applicable to an individual, or at the Maximum Marginal Rate or at a Rate Higher than Maximum Marginal Rate, it depends on whether or not share of members of AOP are known.

There are two situations where the tax can be calculated in two different ways. They are listed below depending upon the share of income of members are determinate or not as per provision of Section 167B and Section 86 of the Income Tax Act, 1961.

Section 167B says:

“167B. (1) Where the individual shares of the members of an association of persons or body of individuals (other than a company or a co-operative 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) in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate :

Provided that, 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.

(2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under sub-section (1)],—

(i)  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;

(ii) 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.

Explanation.—For the purposes of this section, the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) are indeterminate or unknown on the date of formation of such association or body or at any time thereafter.”

And Section 86 says:

“86. Where the assessee is a member of an association of persons or body of individuals (other than a company or a co-operative 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), income-tax shall not be payable by the assessee in respect of his share in the income of the association or body computed in the manner provided in section 67A :

Provided that,—

(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.”

Where share of members is determinate

If, share of members are ascertain then tax liability of AOPI shall be determined as under:

a. Where income of none of the members exceeds the maximum amount which is not chargeable to income-tax (i.e., basic exemption limit) In this case income of AOP shall be taxable at a rate applicable to an individual. But if total income of any member of AOP is taxable at a rate higher than maximum marginal rate then income of AOP shall be chargeable to tax as follows:

Portion of income attributable to such member shall be taxable at such high rate as applicable to that member.

Balance portion of income shall be taxable at the maximum marginal rate of tax (i.e., 30% plus surcharge and Education Cess as applicable).

b. Where income of any member of AOP exceeds the maximum amount which is not chargeable to income-tax (i.e., basic exemption limit) In this case income of AOP shall be taxable at maximum marginal rate of tax (i.e., 30% plus surcharge and Education Cess as applicable). But if total income of any member of AOP is taxable at a rate higher than maximum marginal rate then income of AOP shall be chargeable to tax as follows:

• • – Portion of income attributable to such member shall be taxable at such high rate as applicable to that member.
  • – Balance portion of income shall be taxable at the maximum marginal rate of tax (i.e., 30% plus surcharge and HEC as applicable).

Where share of members is not determinate

In this case income of the AOP shall be taxable at maximum marginal rate (i.e., 30% plus surcharge and Education Cess as applicable). But if income of any member of AOP is taxable at a rate higher than maximum marginal rate then total income of AOP shall be chargeable to tax at such higher rate of tax.

For the purposes of this matter, the individual shares of the members of an AOP in the income of AOP shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of such AOP or at any time thereafter.

Nature of AOP	AOP – assessed	Member – assessed
Share Determined – Income assessment	Income of AOP is assessed at Maximum Marginal Rate	Exempt from the hands of the members
Share Determined – Income assessment	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 Alternate Minimum Tax may be payable by AOP cannot be less than 18.5 per cent (increased by Surcharge and Education Cess) of “adjusted total income” as per section 115JC of the Income Tax Act, 1961 . However, provisions related to alternate minimum tax shall not apply to an AOP whose adjusted total income does not exceed twenty lakh rupees. ​

AOP does not include the following for determination of tax liability (taxation).

1. Company

2. Cooperative Society (as specific rates of tax have been prescribed for it)

3. Societies formed under the Societies Registration Act, 1860 or under any other law corresponding to that Act in force in part of India.

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.