assessment of aop and boi

ASSESSMENT OF ASSOCIATION OF PERSON & BODY OF INDIVIDUALS

INDEX OF THE

ASSIGNMENT

1. INTRODUCTION

2.ASSOCIATION OF PERSONS(AOPs) AND BODY OF INDIVIDUALS(BOIs)

3.IMPORTANT POINTS REGARDING AOPs & BOIs

4. DIFFERENCE BETWEEN AOP & BOI

5. TAXATION OF AOPs AND BOIs

6.COMPUTATION OF INCOME OF MEMBERS OF AOPs / BOIs

7. OTHER RELEVANT PROVISIONS FOR ASSESSMENT OF AOPs/BOIs

8.CONCLUSION

9.REFERENCE

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ROOM 32

INPUTS BY:

ROLL NO. NAME TOPICS

496 SAURABH MUNDHRA INTRODUCTION

499 NIKISH JAIN PPT PRESENTATION

500 ABHISHEK MURARKA TOTAL INCOME OF MEMBERS

502 MOHIT BHUTRA CASE LAWS

503 ANSHUMAN MOHTA CASE LAWS

504 VIVEK AGARWAL IMPORTANT POINTS OF AOP/BOI

505 HARSHIT GOHIL PPT PRESENTATION

506 VISHAL TANWAR TAXATION OF AOP/BOI & EDITING

509 AVINASH PANDEY OTHER PROVISIONS

511 SOUBIR DUTTA GUPTA TOTAL INCOME OF MEMBERS

512 SHIVA AGARWAL OTHER PROVISIONS

514 ARIJIT MALLIK TAX LIABILITY OF MEMBERS

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INTRODUCTION:

The Indian Income Tax law is a highly complicated and confusing piece of document. For the common man the task of understanding the procedure and provisions of law is daunting, to say the least. Not only is the process of tax calculation very difficult, its practical implementation is tedious and cumbersome. However, under the law, the tax payer is legitimately entitled to plan his taxes in such a manner that his tax liability is minimal. Tax planning can be defined as an arrangement of the financial affairs within the scope of law in a manner that derives maximum benefit of the exemptions, deductions, rebates and relief and reduces the tax liability to minimal.

Every business entity adopts some form of business organization to carry out business activities as success and growth of business depends a great deal on the choice of the form of business organization. These are also subjected to taxation under the Income Tax Act, 1961 or other Indian laws as prescribed to be suitable for the purpose of taxation. But there are certain variations in tax provisions relating to each of them due to differences in the form of their organization. Like the exemptions and deductions under the income tax act which is enjoyed by a partnership firm or a trust may not be applicable in case of association of person. Here in this assignment, the computation of income and the assessment of Associations of persons and Body of Individuals is focussed upon.

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ASSOCIATION OF PERSONS (AOP) AND BODY OF INDIVIDUALS (BOI):

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, income tax at that rates or those 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.”

Now, ‘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.

The word ‘associate’ means, according to the Oxford Dictionary, ‘to join in common purpose or to join in an action’. Therefore, an AOP must be one in which two or more persons join in a common purpose or common action [N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310 (SC)]

DIFFERENCE BETWEEN ASSOCIATION OF PERSON (AOP) AND BODY OF INDIVIDUALS (BOI):

As the legislative history bears, there has been an amendment in section 2(31) as prior as 1939, the phrase used in 1922 Act was “Association of individuals”. The amendment has tried to remove any doubt so as to the accessibility to tax of the unit of an association of which the members might be called Individuals. The phrase “association of person” is of comprehensive import. Under section 3(42) of the General Clauses Act, “person” includes any company or association or body of individuals, whether incorporated or not. Hence the bottom line is that both association of persons and body of individuals are group of people in layman’s dictionary but from legal point of view the former may have non individual as its member but the latter is not allowed to do so. The tax provisions of both these associations are exactly the same with minor differences.

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IMPORTANT POINTS REGARDING AOPs AND BOIs:

1. AOPs may come into existence for a single venture. When an income results from a joint venture or joint act, the assessment can be made in the status of AOPs. In order to constitute AOPs, they must join in a common purpose or common action and the object of the association must be to produce income.

Case law: Commissioner of Income Tax vs. Indira Balkrishna (1960) 39 ITR 546

(SC)

One Balkrishna Parushottam Purani died on November 11,1947. He left behind him three widows and two daughters. The three widows were named Indira, Ramluxmi and Prabhuluxmi. These widows as legal heirs inherited the estate of the deceased, which consisted of immovable properties situate in Ahmedabad, shares in joint stock companies, money lying in deposit, and share in a registered firm. For the two assessment years 1950-51 and 1951-52 (the corresponding account years being the Sambat years 2005 and 2006) the Income-tax Officer issued notices to the legal heirs of Balkrishna Purushottam Purani. Pursuant to those notices, returns were filed under the heading, "Legal heirs of Balkrishna Purushottam Purani", in one case and in the name of the estate of Balkrishna in the other; the status was shown as "individual" in one case and "association of persons" in the other. They were signed by Indira, one of the three widows. For the assessment year 1950-51 the total income was shown as under:

Property. ... Rs. 11,011Share from registered firm. ... Rs. 4,071Dividends. ... Rs. 51,796Interest. ... Rs. 22,343Ground rent. ... Rs. 125-------------------------Total Rs. 69,346-------------------------For the assessment year 1951-52, the total income was shown as ---Property. ... Rs. 10,879Share from registered firm. ... Rs. 460Dividends. ... Rs. 80,426Interest on deposits. ... Rs. 536Ground rent. ... Rs. 125-------------------------Total Rs. 92,426.-------------------------

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For both years the Income-tax Officer took the status of the assessee as an "association of persons" and on that footing made two assessment orders. There was an appeal to the Appellate Assistant Commissioner, and two of the points taken before him were: (a) that the three widows ought to have been assessed separately and not as an "association of persons", and (b) that, in any event, the income from property ought to have been assessed separately in the hands of the three widows by reason of the provisions in section 9(3) of the Income-tax Act, 1922. The Appellate Assistant Commissioner rejected point (a) but accepted point (b). Then, there was a further appeal to the Income-tax Appellate Tribunal, Bombay. The Tribunal held that the entire estate of deceased Balkrishna Purushottam Purani was inherited and possessed by the three widows as joint tenants and its income was liable to be assessed in their hands in the status of an association of persons. The Tribunal further held that the Appellate Assistant Commissioner was wrong in holding that the shares of the three widows were definite and determinable and section 9(3) was applicable. The assessee then moved the Tribunal to refer certain questions of law which arose out of its orders to the High Court of Bombay. The Tribunal referred four such questions, but we are now concerned with only one of them, viz., question No. 3 which was in the following terms:"(3) Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the assessment made on the three widows of Balkrishna Purushottam Purani in the status of an association of persons is legal and valid in law?”Two references were made to the High Court in respect of the orders passed for two assessment years and they gave rise to Income-tax References Nos. 52 and 53 of 1955. The leading judgment was given in Income-tax Reference No. 52 of 1955. The High Court held that the Tribunal was in error in coming to the conclusion that the three widows could be assessed in the status of an association of persons with regard to the income which they earned as heirs of their deceased husband. Therefore, it answered question No. 3 in the negative. The Department represented by the Commissioner of Income-tax, Bombay, then applied to this court and obtained special leave to appeal from the judgment and orders of the High Court of Bombay in the two references. These two appeals have been filed in pursuance of the special leave granted by this court. The appellant is the Commissioner of Income-tax, Bombay, and the assessee is the respondent.The argument on behalf of the appellant is that the High Court was in error when it said that "what is required before an association of persons can be liable to tax is not that they should receive income but that they should earn or help to earn income by reason of their association, and if the case of the Department stops short at mere receipt of income, then the Department must fail in bringing home the liability to tax of individuals as an association of persons." It is submitted that the High Court did not, in the statement quoted above, lay down the correct test

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for determining what an “association of persons” is for the purposes of the Income-tax Act.Before we go on to discuss the argument presented on behalf of the appellant, it is necessary to clear the ground by stating what is the position of co-widows in Mitakshara succession and what are the findings arrived at by the Tribunal. The position of co-widows is well-settled. They succeed as co-heirs to the estate of their deceased husband.

2. For forming an ‘AOP’ the members of the association must join together for the purpose of producing an income. An ‘AOP’ can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence, volition on the part of the members of the association is an essential ingredient. Even a minor can join an ‘AOP’ if his lawful guardian gives his consent. [Case law- Commissioner of Income Tax vs. Smt Vimla Lal MANU/UP/0355/1982].

3. In the case of receiving dividends from shares, where there is no question of any management, it is difficult to draw an inference that two or more shareholders function as an ‘AOP’ from the mere fact that they jointly own one or more shares, and jointly receive the dividends declared. Those circumstances do not by themselves go to show that they acted as an ‘AOP. [Case law- G. Murugesan & Bros. v. Commissioner of Income Tax [1973] 88 ITR 432 (SC).]

4. To ‘Associate’ is to join in a common purpose or action. ‘Association’ does necessitate the exercise of volition of those who form the association. The exercise of that volition can be by or on behalf of those who form the association. [Case law- Estate of Khan Sahib Mohd. Oomer Sahib v. Commissioner of Income Tax [1958] 33 ITR 767 (Mad)].

5. An AOP does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an AOP. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression ‘AOP’ flows from the meaning of the word ‘association. [Case law- Commissioner of Income Tax vs. T.V. Suresh Chandran [1980] 121 ITR 985 (Ker).]

6. Joining together by the members of the association for the purpose of producing income is requisite for formation of an association of persons.

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Such coming together or combining is a consensual act and depends upon the volition of the parties. Merely because certain persons are constituted joint owners, such as by inheriting the property of a person on his death, they do not become an association of persons, for; in that event, the jointness is the result of operation of law and not of volition of parties. Forced AOP because of inheriting joint property by a will or such other circumstances not being voluntary would not constitute such legatees as AOP. [Case law- Commissioner of Income Tax vs. Laxi Pd. and Sons.].

7. AOP is a combination of persons formed for the promotion of a joint enterprise, banded together as co-adventurers in common action with mutual rights and obligations, as joint ventures joint executors, joint managers or joint receivers. [Case law- New Horizons Limited and Anr. v. Union of India and Ors. Manu/SC/0564/1995 and Purnasree Cinema vs. Income-tax Officer [1983] 5I TD 592 (Kol).]

8. A partnership firm may be assessed either as a partnership firm or as an association of persons (AOP). If the firm satisfies the conditions of section 184, it will be assessed as a partnership firm; otherwise it will be assessed as an AOPHowever, it is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm can claim the following additional deductions which the AOP cannot claim :- Interest paid to partners, provided such interest is authorised by the

partnership deed.Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual. The remuneration paid to such a partner must be authorised by the partnership deed and the amount of remuneration must not exceed the given limits.

9. AOP or BOI for the purpose of levy of tax does not include: (A) a company (B) a company or co-operative society (C) a company or co-operative society or a society registered under theSocieties Registration Act, 1860 or under any other law computing to thatAct in force in any part of India

Thus, there is no hard and fast rule of universal application as to what facts, how many of them and of what nature, are necessary to come to the conclusion that there is an AOP. It must depend on the facts and circumstances of each case.

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TAXATION OF ASSOCIATION OF PERSONS AND BODY OF INDIVIDUALS

Sources of IncomeThe term “Income” in the Income Tax Act connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite sources. The definition of income [section 2(24)]under the Income Tax Act is inclusive in nature i.e. apart from the items listed in the definition, any receipt which satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly.

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The Income Tax Act provides that for the purpose of charge of income tax and for computation of total income all income shall be classified under following sources of income. It includes profits or gains from business or profession including any benefit, amenity, perquisite obtained in the course of such business or profession. Salary income including any benefit, allowance, amenity or perquisite obtained in addition to or in lieu of salary. Dividend income, Winnings from lotteries, crossword puzzles, races, games, gambling or betting. Capital Gains on sale of capital assets. Amounts received under a Key Man Insurance Policy i.e. a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. Voluntary contributions received by a religious or charitable trust or scientific research association or a sports promotion association. Income of a person from each of these sources is calculated to find out the gross total income of the person. The total income from all the above heads of income is calculated in accordance with the provisions of the Income Tax Act as they stand on the first day of April of any assessment year. Permissible deductions are reduced and then income-tax payable is calculated at the prescribed rates. If income of a person is derived from various heads, the person is entitled to claim deduction permissible under respective head whether or not computation under each head results in taxable income. Since the term person also includes AOPs AND BOIs, they would also be subjected to taxation similarly with certain variations.

Residential status of AOPs and BOIs: Having established the source of income of the AOPs, the next step is to define the residential status. Income tax liability depends on the residential status of a person. Section 6(2) of the Income Tax Act gives the test of residence for an association of persons. AOPs can be either resident or non-resident. AOPs will be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. If control and management of their affairs are situated wholly outside India, it will be non-resident in India.

Control and management does not mean the control and management of the day to day affairs of the business through agents, employees or servants. It may be that the supervision, direction and control of the daily affairs be entrusted to the local manager on the spot having wide discretion to conduct the operations of the business in his sound judgment. However this is not the control and management of affairs.

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Mere proof of power or capacity to control and manage was not enough but a de facto or actual control and management of the business was necessary in order to hold that the assessee to be assessed as a resident with reference to his business outside India [Case law- Commissioner of Income-tax vs. PL M.TT Firm (1973) 87 ITR 260 (Mad)]. Control and management refers to the head and brain which directs the affairs of policy, finance, disposal of profits, expansion and contraction of business (territories), or extension thereof and such other vital things concerning the general and corporate affairs of the company. It refers to a place where the central management and control actually abides, that is, where the supreme command over the company’s affairs rest. [Case law-Narottam and Periera Ltd. Vs Commissioner of Income Tax (1953) 23 ITR 454 (Bom)].

TAX COMPUTATION OF AOPs AND BOIs:

An AOP/BOI is a separate assessee. First, the total income under the different heads i.e. income from house property, profits or gains of business or profession, capital gains, and income from other sources, ignoring the prescribed incomes exemptions. Thus, “gross total income” is obtained. From the gross total income, prescribed deductions under Section 80A of the Income Tax Act of Chapter VI-A are made. The balance amount is the taxable income. In case of an AOP no deductions under section 80G, section 80GGA, section 80GGC, section 80HH, section 80HHA, section 80HHD, section 80-I, section 80-IA,80 I-B, 80I-C, 80I-D or section 80 I-E are allowed.

SECTION 40(ba):

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1. Interest, salary, bonus, commission, remuneration paid by an AOP/BOI to its members is not allowed as deduction in computation of income of AOP/BOI.

2. If the AOP/BOI receives as well as pays interest to its members during the previous year, then the excess interest paid over and above the interest received shall be disallowed.

Exception: The above conditions does not apply in the following situations-

1. Where an individual is a member on behalf of or for the benefit of any other person, and interest is paid by AOP/BOI to the individual otherwise than as partner in a representative capacity.

2. Where an individual is a member in his individual capacity and interest is received by such individual from AOP/BOI on behalf of or for the benefit of any other person.

An AOP is assessed in two manners: A) Where shares of the members are indeterminate or unknown [s-167B(1)] B)where shares of the members are determinate or known[s-167B(2)]

CASE-I:- SHARES OF THE MEMBERS ARE UNKNOWN:

The tax is charged on the total income of the AOP/BOI at the maximum marginal rate i.e. 30% plus surcharge @ 10% plus education cess @2% SHEC @1%, which is the rate of tax applicable in relation to the highest slab of income in the case where the individual share of the members of AOP in the whole or part of its income are indeterminate or unknown. However when any member is charged at a higher rate than maximum marginal rate, the income shall be taxed at a higher rate.In case where a foreign company is a member of AOP, the tax rate of the AOP would be 42.23% (40% plus surcharge 2.5% plus education cess 2% plus SHEC @ 1%). Long-term capital gain of AOP must be taxed at a special rate of 20% or 10% depending upon the case[S-112]. Similarly, short-term capital gain is taxable at 10%[S-111].

CASE-II:- SHARES OF THE MEMBER ARE KNOWN:

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The total income of an AOP wherein the shares of the members are determinate and known shall be computed as follows:-

1. Any interest, salary, bonus or remuneration paid to any member of AOP shall be deducted from their total income. The balance income (either profit or loss) shall be apportioned to the members, to which salary, interest, etc. shall be added. This income shall be treated as member’s share in income of AOP.2. The member’s share so ascertained shall be apportioned under various heads of income in the same manner as it is done for AOP.3. Any interest paid by member on capital borrowings for investment purposes in AOP shall be deducted from member’s share while computing his income under the head profits and gains of business/profession.4. The tax is chargeable on the total income of an AOP at the same rate as is applicable in the case of an individual.5. But, when the total income of any member of the AOP for the previous year (excluding his share from the AOP 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 is charged on the total income of the AOP at the maximum marginal rate (i.e. the highest slab applicable to an individual).6. Where, the total income of any member of the AOB (whether or not it exceeds the maximum amount not chargeable to tax in the case of an individual) is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged on that portion of the total income of the AOP which is relatable to such member at a higher rate and the balance of the total income of the AOP shall be taxed at the maximum marginal rate.

COMPUTATION OF INCOME OF THE MEMBERS OF AOPs AND BOIs:

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SECTION 67A:COMPUTATION OF TAXABLE INCOME OF THE MEMBERS OF AOP/BOI:

Method of computing a member' s share in income of association of persons or body of individuals:(1) In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known (other than a company or a cooperative 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), whether the net result of the computation of the total income of such association or body is a profit or a loss, his share (whether a net profit or net loss) shall be computed as follows, namely:-

(a) any interest, salary, bonus, commission or remuneration by whatever name called, paid to any member in respect of the previous year shall be deducted from the total income of the association or body and the balance ascertained and apportioned among the members in the- proportions in which they are entitled to share in the income of the association or body;

(b) where the amount apportioned to a member under clause (a) is a profit, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be added to that amount, and the result shall be treated as the member' s share in the income of the association or body;

(c) where the amount apportioned to a member under clause (a) is a loss, any interest, salary, bonus, commission or remuneration aforesaid paid to the member by the association or body in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the member' s share in the income of the association or body.

(2) The share of a member in the income or loss of the association or body, as computed under sub- section (1), shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income.

(3) Any interest paid by a member on capital borrowed by him for the purposes of investment in the association or body shall, in computing his share chargeable under the head" Profits and gains of business or profession" in respect of his share in the income of the association or body, be deducted from his shire. Explanation.- In this section," paid" has the same meaning as is assigned to it in clause (2) of section 43.]

Case Law:

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Birla Tyres vs Joint Commissioner Of Income-Tax on 28 May, 2003Equivalent citations: 2004 88 ITD 1 KolBench: M Bakhshi, Vice, G Chowdhury, N Saini, S S R.C.G. Chowdhury, Judicial Member

1. This is an appeal filed by the assessee for the assessment year 1985-86

against the order passed by the Commissioner of Income-tax under

Section 263 of the Act by which it was held that unabsorbed loss of the

AOP should be apportioned amongst the members of the AOP.

2. The assessee is an Association of Persons (AOP) constituted by four

members who are limited companies viz., M/s. Century Textiles &

Industries Ltd.; M/s. Kesoram Industries Ltd.; M/s. Jayashree Tea &

Industries Ltd.; and M/s. Bharat General & Textiles Industries Ltd. The

assessment was framed under Section 143(3) of the Act where the claim

of loss of Rs. 25,51,31,859 was set off in the hands of AOP.

3. Ld. CIT, by passing an order dated 31-3-2000, held that according to

Sections 67A and 167B(2) of the Act, the loss is not to be carried forward

in the hands of AOP. Further, it was directed that such loss be apportioned

amongst the members of AOP. Against the said finding, the assessee is in

appeal before the Tribunal.

4. Mr. Mitra, Ld. counsel appearing on behalf of the assessee, has

submitted that the finding of the Commissioner is against the law. He

brought to our notice the provisions of Sections 67A, 86 and 167B and

submitted that for the purpose of deciding the issue, ld. Commissioner

should have considered the cumulative effect of the aforesaid sections.

According to the counsel, an AOP is normally subjected to tax at the rates

which are applicable to an Individual, HUF as specified in the Finance Act

for the relevant assessment year. However, Section 167B is a departure

from such normal position. Under Section 167B(1), where the individual

shares of the members of an AOP are indeterminable, tax shall be charged

on the total income of the AOP at the maximum marginal rate of the AOP

exclusive of his shares of AOP exceeds the maximum amount which is not

chargeable to tax, the total income of the AOP is taxable at the maximum

marginal rate. Under Clause (ii) of Section 167B(2), where income of the

member of the AOP is chargeable to tax at a rate which is higher than the

maximum marginal rate, tax would be charged on the portion or portions

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of the total income of the assessee 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 AOP would be taxed at the maximum marginal rate.

5. According to the counsel, in the present case, the shares of the AOP are

very much determinable. Each of the members is limited company which

is taxable for the assessment year 1995-96 at the rate applicable for a

company i.e., 46% including surcharge which was higher than the

maximum marginal rate specified for this year i.e., 40%. Therefore, in

view of Section 167B(2)(ii) of the Act, the entire income of the AOP was

taxable for the assessment year 1995-96 at the rate of 46% which was

higher than the maximum marginal rate. According to, the counsel, the

provisions of Section 67A should not be considered alone for deciding the

taxability of the member-share in the income of AOP. For the purpose of

deciding the issue, Section 86 of the Act should have been considered by

ld. Commissioner. Section 86 of the Act envisages 3 different situations

which are as follows: (a) The first situation is envisaged by Clause (a) of

the first proviso to Section 86 of the Act, where the AOP is chargeable to

tax on its total income at the maximum marginal rate or any higher rate

under any of the provisions of the Act. It has been provided in the said

Clause (a) of the first proviso to Section 86 of the Act that in such event,

the share of the member as computed under the provisions of Section 67A

of the Act shall not be included in the total income of the member even

for "rate purposes"; (b) The second situation is envisaged by Clause (b) of

the first proviso to Section 86 of the Act, where the AOP is chargeable to

tax on its total income at the normal rates as may be applicable to an

individual, Hindu undivided family, body of individuals, etc. The said

clause provides that in such situation, the share of the member in the

income of an AOP as computed under the provisions of Section 67A of the

Act shall be included in the total income of the member for the purpose of

Section 86 of the Act, i.e., for "rate purposes"; (c) The third situation is

envisaged by the second proviso to Section 86 of the Act, where no

income-tax is chargeable on the total income of an AOP, obviously in a

case where the total income of the AOP, which is otherwise chargeable to

tax at the normal rates as may be applicable to an individual, Hindu

undivided family, body of individuals, etc. falls below the minimum

threshold of taxation specified in the Finance Act of the relevant

assessment year. The said clause provides that in such a situation, though

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the share of the member in the income of an AOP as computed under the

provisions of Section 67A of the Act shall be included in the total income

of the member, the rebate envisaged under Section 86 of the Act shall not

be available to the individual member.

6. According to the ld. counsel, the whole idea of Section 86 of the Act is

that an individual member does not pay income-tax on its share of income

in an AOP where the income of the AOP is otherwise chargeable to tax.

The said share of income in an AOP, however, is included in the income of

an individual member of the AOP only increasing the rate of tax in the

hands of the individual member.

7. In the present case, the AOP was otherwise chargeable to tax with

respect to its entire income at the rate of 46% which is higher than the

maximum marginal rate for this year. Therefore, its case is covered by

Clause (a) of Section 86 of the Act and accordingly the share of loss of the

members of the AOP from the income of Birla Tyres could not be included

in the total income of the said members. Therefore, the members were

not entitled to the benefit of set off and carry forward of the loss suffered

by the AOP but the entire loss suffered by the AOP had to be carried

forward and set off against the income of the AOP. Ld. counsel has placed

reliance on the Board Circular bearing No. 551 dated 23-1-1990 which was

reported in 183 ITR (St.) 7, 53, wherein it has been stated that there is no

provision in the Act for the set off or carry forward of the share of loss of a

member in an AOP in the assessment of the member. The Circular issued

by the CBDT is binding on the IT 'Department. Reliance was placed on the

decision of the Supreme Court in the cases of State of MP v. G.S. Dal &

Flour Mills [1991] 187 ITR 478 at 498; UCO Bank v. CIT[1999] 237 ITR 889'

at 896; and Paper Products Ltd. v. CCE[2001] 247 ITR 128 at 130).

According to the ld. counsel, there are two direct decisions, in favour of

the assessee, in such circumstances which are ITO v. Ch. Atchaiah [1996]

218 ITR 239 and CIT v. (Sic) Income-tax Act, 1961, loss suffered by an AOP

can be carried forward for set off only in the hands of the AOP and not its

members.

8. On the other hand, Mr. Ukil, ld. Departmental Representative, has

supported the order under Section 263 passed by the ld. Commissioner.

Our attention was drawn to the notice at page 1 of the paper book before

invoking the provisions of Section 263 by the Commissioner which goes to

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show that the Commissioner sought to revise the order for the purpose of

carry forward of loss. Our attention was also drawn to the provisions of

Sections 70, 71 and 72 of the Act and submitted that set-off of loss and

carry forward and set-off of business loss are two different things. Carry

forward and set-off of loss in the case of an AOP can be made only in the

hands of its members which is not permitted in the hands of AOP.

According to ld. Departmental Representative, there is no specific

provision for carry forward of earlier year's loss of an AOP. But on perusal

of Section 67 along with Section 167B(2), ld. Commissioner has rightly

directed to set off the loss in the hands of the members of the AOP. It was

submitted that if there is a lacuna under the Act, that cannot be fulfilled

by the Tribunal by passing an order which is not provided under law.

Reliance was placed on the decision of the Karnataka High Court in the

case of CWT v. G.E. Narayana [1992] 193 ITR 41. Ld. Departmental

Representative has further pointed out to page 2 of the written

submission filed by the assessee wherein it has been stated as follows :

The learned CIT was probably influenced by the provisions of Section

67A(2) of the Act in coming to the conclusion that the loss suffered by an

AOP has to be distributed among its members and the members

themselves are only allowed to carry forward such loss suffered by the

AOP.

and pointed out that the submission of the assessee is based on

presumption and probability which should not be accepted by the

Tribunal. According to the ld. Departmental Representative, there is no

infirmity in the order passed under Section 263 by the ld. Commissioner.

9. We have heard both the sides and perused the material on record. The

fact of the case is not in dispute that during this year the assessee-AOP

claimed to carry forward the loss suffered by it in the assessment year

1995-96. The claim of the assessee was allowed while framing the

assessment under Section 143(3) of the Act. Ld. Commissioner invoked

the power under Section 263 of the Act and held that the loss could not be

carried forward in the hands of the assessee and the same should be

apportioned amongst the members of the AOP, as per profit sharing ratio

of the members. There is no dispute that the shares of the members of

the AOP are determinate under Section 86 of the IT Act.

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10. The first situation, as provided in Clause (a) of the first proviso to

Section 86, is that where the AOP is chargeable to tax on its total income

at the maximum marginal rate or any higher rate, in such event the share

of the members, is computed under the provision of Section 67A of the

Act, shall not be included in the total income of the member even for rate

purposes. [Emphasis supplied]

11. Under Clause (b) of the first proviso to Section 86, an AOP is

chargeable to tax on its total income at the normal rates as applicable to

an individual, HUF, etc. In the said clause it has been provided that in such

a situation, the share of the member in the income of the AOP as

computed under Section 67A of the Act, shall be included in the total

income of the member for the purpose of Section 86 of the Act - that

means for rate purposes only.

12. The third situation envisages in the second proviso to Section 86 is

that where no income-tax is chargeable on the total income of an AOP,

which is otherwise chargeable to tax at the normal rates, falls below the

minimum threshold of taxation under the relevant Finance Act, in such a

situation though the share of the member in the income of an AOP, as

computed under Section 67A of the Act, shall be included in the total

income of the member.

13. On a careful consideration of the aforesaid provisions of Section 86 of

the Act, it emerges that where the AOP is chargeable to tax with respect

to its income at the maximum marginal rate, or at a higher rate, the share

of a member in such income of the AOP is not to be included in the total

income of such member even though for rate purpose. However, where

the AOP is chargeable to tax at the normal rate, as prescribed for

individual, HUF, etc. this share of member is to be included in the total

income of such member only for rate purpose, but such member shall not

pay income-tax on such share in the income of the AOP because the AOP

is otherwise chargeable to income-lax. The provision has been enacted

with a view to avoid double taxation. The only situation when the AOP is

not chargeable to tax where the income of the (sic).

14. In the present circumstances we have seen that the present AOP is

chargeable to tax with respect to its entire income at the rate of 46% i.e.,

higher than the maximum marginal rate for the present assessment year.

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Therefore, the situation is covered by Clause (a) of the first proviso to

Section 86 of the Act, according to which, the share of income of the

members of the AOP cannot be included in the total income of such

members. Consequently, the members are not entitled to the benefit of

set off and carry forward of the loss suffered by the AOP and the entire

loss suffered by the AOP is to be carried forward in the hands of the AOP

to be set off against income in subsequent assessment year.

15. While deciding the issue it is to be noticed that Section 3 of Indian

Income-tax Act, 1922 provided an option that total income of an AOP shall

be charged either on the AOP or members of the AOP individually. That

option is not available under the Act of 1961 and under Section 4 of the

Income-tax Act, 1961, if it is the income of the AOP, members cannot be

taxed individually and the AOP is to be taxed alone. As a natural corollary,

the loss of AOP also cannot be regarded as a loss of individuals because

now AOP and its members are different entities under the IT Act. Hence,

the loss claimed by the AOP cannot be directed to be set off against the

individual hands of members of the AOP. The aforesaid view was laid

down by the decision of Bombay High Court in the case of CIT v. Smt.

Lalita M. Bhat [1998] 234 ITR 319'. While deciding the said case, the

Hon'ble High Court placed reliance on the decision of the Supreme Court

in the case of Ch. Atchaiah (supra). In that Supreme Court decision it has

been specifically held that under the 1961 Act, there is no option to

assess either the AOP or its members individually. The contention of ld.

departmental representative appears to be not correct in view of the

aforesaid decisions.

16. With regard to the objection raised by the revenue, we do not find any

merits. Ld. Departmental Representative has pointed out that the

submission of the assessee is based on presumption is not correct only

because in one sentence it has been mentioned that ld. CIT was probably

influenced by the provision of Section 67A(2) of the Act. That does not

mean that the submissions of the assessee is based on probability. By the

aforesaid words, the assessee tried to point out the basis for compliance

under which ld. CIT passed that order under Section 263 of the Act.

Further, the decision of Karnataka High Court, which was relied upon by

the assessee, in G.E. Narayana's case (supra), is not applicable in the

present circumstances of the case because the Tribunal has not filled up

the lacuna as mentioned in the said judgment.

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17. On the basis of the discussion above, particularly in line of the Board

Circular, coupled with the decisions of Supreme Court and Bombay High

Court, we are constrained to hold that under the new Act, there is no

option to assess either the members or the AOP like the old Act. Once the

income is assessed in the hands of the AOP, the loss is to be carried

forward in the same hand and not against another assessee. In view of the

discussion above, the impugned order under Section 263 cannot be

sustained.

18. In the result, the appeal is allowed.

SECTION-86: COMPUTATION OF TAX LIABILITY OF THE MEMBERS OF AOP/BOI:

The share of a member in the income of an AOP is treated in three different ways: Where the association or body 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.

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Where the association or body is chargeable to tax at the normal rates 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.

Where no income tax is chargeable on the total income of the association or body, the share of a member therein shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon. Thus, where an AOP/BOI is taxable at the normal rates applicable to individuals, etc, but has income below taxable limit so that no income tax is chargeable on the total income of the AOP/BOI, the share of a member in such association or body shall be fully taxable in his own assessment.

OTHER RELEVANT PROVISIONS FOR ASSESSMENT OF AOP/BOI:

SECTION-164(2):-

In certain cases, income of a charitable/religious trust, which is not subject to exemption under section 11 or section 12, may be chargeable to tax as if it is the income of an A OP . The income of the trust includes the following: Income from property held under trust wholly for charitable or religious

purposes. Voluntary contributions without any direction that they shall form part

of corpus of trust or Income of trust or institution being profits and gains of business which

is incidental to the attainment of the objectives of trust and separate books of account are maintained.

Such income of the trust which is not exempt under section 11 should be assessed as the income of the AOPs. The AOPs are taxable at the same rate as applicable to an individual. However, if the whole or any part of the relevant income is not exempt under section 11 or 12 of the Income Tax Act, it should be charged at the maximum marginal rate.

SECTION-164(1):-However, the maximum marginal rate of tax is not applicable in the following cases, and the income will be chargeable to tax as if it were income of an AOP:-

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Where none of the beneficiaries has any other income chargeable to tax under the Income Tax Act and none of the beneficiaries is a beneficiary under any other trust or

Where the relevant income or part of relevant income is receivable under a trust declared by any person by will and such trust is the only trust so declared by him or Where the trust is a non-testamentary trust created before

March 1, 1970 for the exclusive benefit of relatives of the settler mainly dependent on him for their supporter maintenance or, where settler is a Hindu undivided family, for the exclusive benefit of its members so dependent upon it or

Where the trust is created on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.

SECTION-21AA of WEALTH TAX:Assessment of Wealth Tax when assets are held by certain AOPsAOPs other than a company or a co-operative society or a society registered under the Society Registration Act, 1986 or any law corresponding to that act may be of two types:

AOPs whose individual member’s share in income or assets or both in the said association are determinate or known: In this case wealth tax is levied upon and is included in the individual assessment of each member.

AOPs whose individual member’s share in income or assets or both in the said association are indeterminate or unknown: In this case, wealth tax is levied upon and recoverable from such AOP in a similar way as it is levied upon an individual who is a citizen of India and resident in India. However, if such an AOP has been dissolved or the business of such AOP has been discontinued then assessment is made on the net wealth of the AOP as if no such discontinuation or dissolution had taken place and all the provisions relating to levy of penalty or any other sum chargeable of the Wealth Tax Act would apply.

SECTION-177:-Liability of an AOP dissolved or business discontinued

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Where any business or profession carried on by an AOP has been discontinued or dissolved then the total income of the AOP is assessed as if no such discontinuation or dissolution has taken place and all the provisions of the Income Tax Act including the provisions relating to levy of penalty or any other sum chargeable would apply.If the AOP is found guilty of any acts specified in Chapter XXI of the Income Tax Act then it would be liable to pay penalty in accordance with that Chapter. Every person including the legal representative of any such person who is deceased and who was the member of the AOP at the time of its dissolution would be liable, jointly or severally, for the amount of tax, penalty or other sum payable and all the provisions of the Income Tax Act including the provisions relating to levy of penalty or any other sum chargeable would apply. Society registered under the Societies Registration Act is a legal entity. Its members are not personally liable for the tax levied on the society as an AOP so long as the society is not dissolved and its business is not discontinued.[Case law- Swami Satchitanand and Others vs. Second Addl. Income Tax Officer [1964] 53 ITR 533 (Ker)]

SECTION-174:-Assessment of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose.-

Notwithstanding anything contained in section 4, where it appears to the Assessing Officer that any association of persons or a body of individuals or an artificial juridical person, formed or established or incorporated for a particular event or purpose is likely to be dissolved in the assessment year in which such association of persons or a body of individuals or an artificial juridical person was formed or established or incorporated or immediately after such assessment year, the total income of such association or body or juridical person for the period from the expiry of the

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previous year for that assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year, and the provisions of sub-sections (2) to (6) of section 174 shall, so far as may be, apply to any proceedings in the case of any such person as they apply in the case of persons leaving India.

CONCLUSION:-

The term AOP has a legal connotation and refers to an entity having rights and duties. They are not to be understood literally. For example, if half a dozen people are travelling in a car or a boat, or standing in a bus stop, they may be a group of persons or a body of individuals in the literal sense. But they are not an AOP in the legal sense. When a calamity occurs or a disaster strikes, and a band of volunteers or doctors meet at the site and associate or co-operate with each other for providing relief to victims, and not doing anything for their own benefit, they may literally be an association of persons, but they are not an AOP in the legal sense.

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Thus, the AOP can be taxed either in the hands of the members or in the hand of the AOP itself. The tax liability would depend on whether the member’s share in the income of an AOP is known or unknown. AOP can be formed for both profit and non-profit purposes. If it is formed for non-profit purpose then it would be get exemption under section 11 of the Income Tax Act. If the member’s share of income is known then it is taxed in the hands of the member or if the member’s share of income is not known then it taxed in the hands of the AOP.

REFEREN CES:-

1. Income Tax Student’s Companion- V.K. Singhania2. All legal case references from ‘www.jurisonline.in’3.Income tax bare act4. HUF, AOP & BOI - Taxing Issues, Ideas and Assessment-V.S. Vadivel.

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assessment of aop and boi

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