Taxation of AOPs & BOIs


1. Introduction:-

  • The income of an Association of Persons (AOP) and Body of Individuals (BOI) shall be computed normally 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 section 28 to 44D.
  • However, Section 40(ba) is specific to AOP/BOI and this section disallows the salary and interest paid by AOP/BOI to its members

 2. Section 40(ba)-

  • In the case of an AOP/BOI, any payment of Interest, salary, Bonus, Commission or Remuneration made by such AOP/BOI to its members shall be disallowed in the hands of AOP/BOI for computing income under the head PGBP.
  • Rent paid by AOP/BOI to its members for use of member’s premises for its business, is allowed subject to section 40A(2)
  • Where interest is paid by the AOP/BOI to any of its members who has also paid interest to AOP/BOI, the amount of interest to be disallowed shall be limited to the amount by which the payment of interest by AOP/BOI to the member exceeds the payment of interest by the member to AOP/BOI (Explanation 1)
  • Where an individual is a member in an AOP/BOI on behalf or for the benefit of any other person; then the interest paid by the AOP/BOI to such individual or by such individual to the AOP/BOI otherwise than as member in a representative capacity shall not be considered for disallowance. (Explanation 2)
  • Where an individual is a member in an AOP/BOI otherwise than as member in a representative capacity, interest paid by the AOP/BOI to such individual shall not be considered for disallowance, if such interest is received by him on behalf of, or for the benefit of any other person. (Explanation 3)

 3. section 167B -Tax rates on AOP/BOI

Where the shares of members are known and determinative Where the shares of members are unknown
(1)
None of the members have total income* which exceeds the maximum amount not chargeable to tax AND None of the members is assessable at a rate higher than Maximum Marginal Rate. Tax the income of AOP/BOI at the normal rates applicable to an individual
(2)
One or more members have total income* which exceeds the maximum amount not chargeable to tax AND None of the members is assessable at a rate higher than Maximum Marginal Rate. Tax the entire income of AOP/BOI at the Maximum Marginal Rate.
(3)
one or more of the members are assessable at a rate higher than Maximum Marginal Rate. Tax on AOP/BOI shall be aggregate of:
  • (i)Tax at such higher rate on such members’ share in the total income
  • (ii)Tax at Maximum Marginal Rate on the balance income.
(4)
None of the members are assessable at a rate higher than Maximum Marginal Rate. Tax the entire income of AOP/BOI at the Maximum Marginal Rate.
(5)
one or more of the members are assessable at a rate higher than Maximum Marginal Rate. Tax the entire income of AOP/BOI at the higher Rate.

  * In computing the total income of members his share of income from this AOP/BOI shall be excluded.

  • Maximum Marginal Rate means the rate of income tax (including surcharge and education cess) applicable in relation to the highest slab of income in case of an individual i.e. 30% plus 15% surcharge plus 3% education cess = 35.535%.
  • The share of members in AOP/BOI shall be deemed to be unknown if such share is indeterminate or unknown at the time of formation of AOP/BOI or at any time thereafter.
  • Loss of AOP/BOI shall be carried forward by AOP/BOI and shall not be allocated to the members.
  • Long Term Capital Gain and Short Term Capital Gain shall be taxed under section 112 and 111A respectively