TAX ASSESSMENT OF ASSOCIATION OF PERSONSB(AOP)/BODY OF IDIVIDUALS (BOI)

Mahesh MT, Asst.professor,KNM
Govt.College,Kanjiramkulam
I V S E M E S T E R B . C O M K E R A L A U N I V E R S I T Y
I N C O M E T A X A S S E S S M E N T - 1
ASSOCIATION OF
PERSONS (AOP)
BODY OF INDIVIDUALS
(BOI)

MODULE 5
• Assessment of AOP/BOI
• Meaning of AOP and BOI –
• Computation of share of a member of AOP/BOI –
• Computation of Tax liability where share of members
of AOP/BOI are known-determinate
• Computation of Tax liability where share of members
of AOP/BOI are unknown- indeterminate
• Concept of Maximum Marginal Rate
Mahesh MT, Asst.professor,KNM Govt.College,Kanjiramkulam

CONCEPT OF AOP & BOI
UNDER INDIAN LAW:
• Section 4 of the Income Tax Act, 1961 is the
charging section for the tax on income in India and
it states that
• ” where any central act enacts that income tax shall
be charged for any assessment year at any rate or
rates shall be charged for that year in accordance
with, and subject to the provisions of Income tax act
in respect of the total income of the Previous year
of every person.”

CONCEPT OF AOP/BOI
• ‘Person’ as defined under section 2(31) of the Income Tax act,
1961 states that the term ‘Person’ includes:
•  An Individual
•  A Hindu undivided family
•  A Company
•  A Firm
•  An Association of persons or a Body of Individuals, whether
incorporated or not.
•  A Local Authority
•  Every artificial juridical person not falling within the above
categories.

MEANING OF AOP AND BOI
• As per the Income Tax Act 1961, an AOP/BOI is a
Separate Assessee.
• AOP- When two or more than two persons or
individuals join together to do some activity to
produce income by their efforts in common without
forming a Partnership firm or Private/Public Limited
Company then we call it AOP
• BOI- when two or more individuals (natural)
associate themselves to earn income, it is called
BOI

Differences between AOP-BOI
AOP
• Created voluntarily
• Two or more persons
joining together to earn
income without the
intention to form a
partnership
• Co-heirs, co legatees
BOI
• Created by operation of
law
• Two or more individuals
Joins together with a
common purpose to earn
income
• Co-executors, co-trustees

Computation of share of a member of AOP/BOI
Computation of Tax liability where
share of members of AOP/BOI are
known-determinate
Computation of Tax liability where
share of members of AOP/BOI are
unknown- indeterminate

Computation of tax liability where share of
members of AOP/BOI are known-determinate
1) Any interest, salary, commission or other remuneration
paid to any member in respect of the previous year shall
be deducted from the total income of the AOP/BOI and
the balance ascertained and apportioned among the
members.
(2) If the amount apportioned to a member under
clause(1) is a profit, any salary, interest, commission or
other remuneration paid to the member by the AOP/BOI
in respect of the previous year shall be added to the
amount, and the result shall be treated as the member's
share in the income of the AOP/BOI.

Computation of tax liability where share of members
of AOP/BOI are known-determinate
• (3) If the amount apportioned to a member under clause (1) is
a loss, any salary, interest, commission or the remuneration
paid to the member by the AOP/B0I in respect of the previous
year shall be adjusted against that amount and the result be
treated as member's share in the income or loss of AOP/BOI.
• 4) The share of a member in the income or loss of AOP/BOI,
as computed in the manner described in the above clauses (1)
to (3) shall, for the purpose of assessment, be
apportioned under the various heads of income in the same
manner in which the income or loss of the AOP/BOI has been
determined under each head of income.

EXEMPTION OF SHARE OF A MEMBER
• An AOP or BOI is assessed separately. The share of income received
by its members from the association shall be dealt with as given
ahead
• (1) If AOP or BOI is taxed at the maximum marginal rate or any
higher rate, the share of a member shall not be included in his total
income at all.
• (2) If no income tax is chargeable on the total income of the
association or body the share of a member therein shall be
chargeable to tax as part of his total income, and no rebate will be
allowed.
• (3) If tax has been paid by the association or body at normal rates,
income tax shall not be payable in respect of such share, although it
shall form part of the total income of the member. It means on such
share income tax relief shall be allowed at the average rate of tax.

Computation of tax liability where share of members of AOP/BOI
are UNKNOWN /INDETERMINATE
(1) If the individual shares of the members of an AOP or BOI in the
income of such AOP or BOI are indeterminate or unknown, the tax
shall be charged on its total income at the maximummarginal rate.
(2) If the total income of any member of such AOP or BOI is
chargeable to tax at a rate which is higher than the maximum
marginal rate, the tax shall be charged on its total income at such
higher rate. For example, where a non-domestic company is a
member of an AOP, the tax on total income of the AOP shall be
charged at the rate applicable to the company.
Explanation : The individual shares of the members of AOP or BOI
shall be deemed to be indeterminate or unknown if such shares (in
relation to the whole or any part of income) are indeterminate on the
date of the formation of AOP or BOI or at any time thereafter.

Charge of tax where shares of members in the
AOP or BOI are unknown
(1) None of the members is liable to tax: Where none of the members of an
AOP or BOI has income in excess of the maximum amount which is not
chargeable to tax, the AOP or BOI shall pay tax on its income at the same
rates as are applicable to an individual or normal rates.
(2) Members liable to tax: The total income of any member of the AOP or
BOI for the previous year (excluding his share from AOP or BOI) exceeds
the minimum taxable limit, the tax shall be charged on its total income at
the maximum marginal rate.
(3) Members liable to tax at a rate higher than maximum marginal rate:
Where any member of such Association or Body is chargeable to tax for
the previous year at a rate or rates which is higher than the maximum
marginal rate, the tax shall be charged on that portion or portions of the
total income of the Association or Body which is relatable to the share of
such member at such higher rate as the case may be, and the balance of the
total income of the Association or the Body shall be taxed at the maximum
marginal rate.

Maximum Marginal Rate Sec. 2(29C)
• It means the rate of income tax (including a surcharge on
income tax, if any) applicable in relation to the highest
slab of income in the case of AOP or BOI as specified in
the Finance Act of the relevant year.
• Note: The rate of income tax for the highest slab of
income for the Assessment Year 2020-21 is 30%.
Surcharge at applicable rate. Further, on the amount of
income tax and surcharge, Health and Education Cess is
leviable @ 4%.

Income tax rates –AY 2020-21/2021-22
Individual /Association of Person or Body of Individuals
• Taxable Income Tax Rate
• Up to Rs. 2,50,000 Nil
• Rs. 2,50,000 to Rs 5,00,000 5%
• Rs. 5,00,000 to Rs. 10,00,000 20%
• Above Rs. 10,00,000 30%
• Surcharge:
• Total income exceeds INR 50 lakh up to INR 1 crore. – 10%
Total income exceeds INR 1 crore up to INR 2 crore. - 15%
• Total income exceeds Rs 2 crore upto Rs 5 crore - 25%
• Total income exceeds Rs 5 crore. - - 37%
• Health and Education Cess: 4% of Income Tax plus Surcharge.

TREATMENT OF SHARE OF INCOME IN THE HANDS OF A
MEMBER OF AOP/BOI {SECTION 86}:
1. If any member has income (excluding share of AOP/BOI)
above the exemption limit, then AOP/BOI has to pay tax at
maximum marginal rate.
2. Where none of the members has total income exceeding the
maximum exemption limit: In such case, AOP will pay Income tax
on its total income at the slab rates which are the same as applicable
to an individual and the benefit of basic exemption of Rs 250000
shall be available to such AOP/BOI.
3. If an AOP/BOI has paid tax at the maximum marginal rate, or a
higher rate, the member’s share in the total income of the firm will
not be included in his total income.

COMPUTATION OF TAX OF MEMBERS OF AOP / BOI
1
• AOP/BOI is chargeable to tax at the
maximum marginal rate
2
• AOP/BOI is chargeable to tax at the
normal rate
3
• AOP/BOI is not chargeable to tax at
all.

COMPUTATION OF TAX OF MEMBERS OF AOP / BOI
1. Where the AOP/BOI is chargeable to tax at the maximum
marginal rate or at a rate higher than the maximum marginal
rate, the share of a member therein shall not be included in
his total income at all.
2. Where the AOP/BOI is chargeable to tax at the normal rate
applicable to individuals, etc., the share of a member, therein
shall be included in his total income, but a rebate shall be
given on the same under section 86.

COMPUTATION OF TAX OF MEMBERS OF
AOP / BOI
3. Where no income-tax is chargeable on the total income of the
AOP/BOI, the shares of a member therein shall be fully
chargeable to tax as part of his total income and no rebate shall
be given thereon.
If no Income tax is chargeable on total income of
AOP / BOI: Share of members shall be fully
charged to tax & NO REBATE u/s 86.

POINTS TO REMEMBER
• Section 40(ba)
• In the case of Association of persons or body of
individuals, the following amounts shall not be deducted
in computing the business income
• Any payment of interest, salary, commission, bonus,
or remuneration made by an association of persons or
body of individuals to its members will also not be
allowed as a deduction in computing the income of the
association or body.
• Note – Rent is not covered by 40(ba). Therefore Rent
paid is allowed subject to section 40A(2).

Illustration 1
1. A, B and C are members of an association of persons. They
share profit or loss equally during the previous year the
income of AOP is 2,20,000 and the income of A, B and C is
40,000, 5,10,000 and 5,20,000 respectively. Compute tax
liability of AOP and A, B and C for the assessment year
2020-21.
SOLUTION :
Note:1. The members of the AOP(B and C) are liable to pay tax
on their personal income. Hence, AOP will pay tax at the
maximum marginal rate of tax i.e. 30%.

SOLUTION TO ILLUSTRATION 1
• Computation of Tax Liability of AOP
(for the Assessment Year 2020-21)
Tax on 2,20,000 on@ 30% 66,000
• Add Health & Education Cess @4% 2,640
• Tax Liability 68,640

SOLUTION TO ILLUSTRATION 1
Computation of Tax Liability of A, B and C
(for the Assessment Year 2020-21)
A B C
• x on Total Income Nil 16,500
• 14,500
• Add : Health & Education Cess@ 4% 580 660 Tax Liability
15,080 17,160
Particulars A B C
Personal income 40,000 5,10,000 5,20,000
Add: income from AOP - - -
Taxable income 40,000 5,10,000 5,20,000
Tax on total income nil 14,500 16,500
Surcahrge - - -
Health&edn cess@4% nil 580 660
Tax liability nil 15,080 17,160

ILLUSTRATION 2
• The total income of an association of persons in which A, B & C are
members, sharing profits and losses in the ratio of 1:2:2 was assessed at
16,000. In computing the total income of 16,000 the assessing officer has
made the necessary adjustments in respect of the following sums
(a) Salaries of 6,000 and 4,000 to A and B respectively.
(b) Interest on Capital 7,000, 10,000, 25,000 to A, B and C respectively.
(c) Commission of 1,000, 3,500 and 4,500 to A, B and C respectively.
(d) Bonus of 1,000, 1,500 and 2,500 to A, B and C respectively.
C has borrowed capital for investment in the A.0.P. and had paid interest of
15,000 separately to the lender. Members do not have any other income.

SOLUTION –ILLUSTRATION 2
A B C
1. Salary 6,000 4,000 -
2. Interest 7,000 10,000 25,000
3. Commission 1,000 3,500 4500
4. Bonus 1,000 1,500 2,500
5. - Loss (66,000- 16,000)@1:2:2 -10,000 -20,000 -20,000
5,000 -1,000 12,000
6. less: Interest paid - - -15,000
Net income/loss 5,000 -1,000 -3,000
Allocation of Income amongst the Members of AOP

ILLUSTRATION 3
An association of persons has 3 members who share profits
and losses equally. The profit of the A.O.P. as per its P & LA/c
is 3,90,000 after debiting the following to its P & LA/c
(1)Remuneration to members of A.O.P. 62,000
(2) Interest on Capital to members 70,000
(3) Depreciation on Assets 60,000
• Depreciation allowable is only 50,000. Compute the tax
payable by A.O.P., if none of the members of A.O.P. has
income exceeding the non-taxable limits.

SOLUTION –ILLUSTRATION 3
• Computation of Tax Payable by AOP
Particulars Amount
Profit
Add: disallowed expenses
Remuneration to members
Interest to members
Depreciation (60,000-50,000)
3,90,000
62,000
70,000
10,000
Total inc0me 5,32,000
Tax liability on 5,32,000
Tax on income upto 5,32,000
2,50,001 -5,00,000 @ 5%
5,00,001- 5,32,000 @20%
Nil (exempted)
12,500
6,400
Tax payable
add: cess @4% of 18,900
Tax liability
18,900
756
19,656 Rounded off to 19,660

ILLUSTRATION 7
A(a women aged 70), B (aged 45) and C (aged 35) are members
of an Association of persons sharing profits equally. During the
financial year 2019-20. The taxable income of the AOP was
9,00,000 while the personal incomes of A, B and C were 90,000,
1,00,000 and 1,50,000 respectively.
Compute the tax liability of the AOP and the members A, B and
C for the Assessment Year 2020-21
• Solution
• No member is liable to pay tax, hence, AOP is liable to pay tax
at the rates applicable to individuals

SOLUTION -ILLUSTRATION 7
• Computation of Tax Payable by AOP ( AY 2020-21)
• Total Income of AOP 9,00,000
• On 2,50,000 NIL nil
• On 2,50,001 to 5,00,000 5% 12,500
• On 5,00,001 to 9,00,000 20% 80,000
92,500
Add: surcharge nil -
Add Health & Education Cess 4% (of 92,500)- 3,700
• Tax Payable 96,200

SOLUTION -ILLUSTRATION 7
• Computation of Total Income and Tax Payable by Members for the
Assessment Year 2020-21)
Particulars A B C
Personal income 90,000 1,00,000 1,50,000
Share from AOP 3,00,000 3,00,000 3,00,000
Total income 3,90,000 4,00,000 4,50,000
Tax on total income 4500 7500 10,000
Less: rebate 4500 7500 10,000
Tax payable nil nil nil

TAX ASSESSMENT OF ASSOCIATION OF PERSONSB(AOP)/BODY OF IDIVIDUALS (BOI)

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