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How to compute Income of Association of Persons (AOP) or Body of Individuals (BOI)

In this blog, we are going to discuss provisions in relation to the computation of income of Association of Persons (AOP) or Body of Individuals (BOI).

how to compute income of AOP BOI

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).

Explanation 1

Where interest is paid by an AOP or BOI to a member who has paid interest to the AOP/BOI, the amount of interest to be disallowed under clause (ba) shall be limited to the net amount of interest paid by AOP/BOI to the partner.

For example:

Case 1: If an AOP/BOI pays interest of Rs.50,000/- to a member X and receives Rs.17,000/- from the same member as interest on withdrawals, the amount which is to be disallowed as a deduction under section 40(ba) is Rs. 33,000/-.

Case 2: If AOP/BOI pays interest of Rs.8,000/- to a member X and X pays interest of Rs.11,000/- to the AOP/BOI in the same previous year, then NO disallowance of interest is required u/s 40(ba).

Explanation 2

Where an individual is a member in an AOP/BOI in a representative capacity, interest paid by AOP/BOI to such individual or by such individual to AOP/ BOI otherwise than as member in a representative capacity shall not be taken into account for the purposes of clause (ba).

For example:

A is a member of AOP/BOI on behalf of his HUF. The AOP/BOI pays interest on the deposit and capital Rs.19,000/- to A (otherwise than as member in a representative capacity) and Rs. 7,000/- to A (for HUF).

Now as per section 40(ba) will not be applicable in respect of payment of Rs.19,000/- [It will be deductible]. However, the payment of Rs.7,000/- will be subject to section 40(ba) & consequently, it will not be deducted.

Explanation 3

Where an individual is a member in his individual capacity, interest paid to him in his representative capacity shall not be taken into account.

For example:

A, a member, receives Rs.5,000/- from the AOP/BOI as interest on a deposit made by his minor son, Rs.5,000/- will be allowed subject to the provisions of sections 36(a)(iii), 40(a)(i) and 40A(2) while computing the income of the AOP/BOI.

Section 167B – Tax Rate Applicable to AOP/BOI

    Shares of Members are known

  • All Members Income <= BEL (Below basic exemption limit)

Maximum amount not chargeable to tax [exemption limit for the AY 2020-21 is Rs.2,50,000/-, in case of senior citizen it is Rs.3,00,000/- and in case of very senior citizen it is Rs.5,00,000]

+ No Foreign Company

Tax is chargeable on the income at the same rates as is applicable to an Individual.

  • Any one members income > BEL + No Foreign Company

Tax is chargeable at the (MMR) Maximum marginal rate i.e. 35.88% for the AY 2020-21.

  • One member is a Foreign Company

Where the total income of any member of the AOP/BOI is chargeable to tax at a rate higher than MMR, the tax will be charged on that portion of the total income of the AOP/BOI which is relatable to the share of such member at such higher rate and balance of the total income shall be taxed at (MMR).

    Shares of Members are Indeterminate or unknown on the date of formation or at any time thereafter.

  • There is no Foreign Company,

Tax will be charged on the total income at the (MMR).

  • There is Foreign Company

Where the income of any member of the AOP/BOI is taxable at a rate higher than the (MMR), the tax will be chargeable at such higher rate.

Note:

(a) Higher Rate – 43.684%

(b) Special rate income will be taxed at special rate

Computation of Taxable Income of an Association of Person/ Body of Individuals.

ParticularsMr. AMr. B
Income from House PropertyXXXX
Profits and gains of business or professionXXXX
Capital GainXXXX
Income from Other SourceXXXX
Ignoring incomes exempted under sections 10 to 13A.  
Gross Total IncomeXXXX
Less:  
Deductions  
Under Section 80GXXXX
Under Section 80GGAXXXX
Under Section 80GGCXXXX
Under Section 80-IXXXX
Under Section 80-IAXXXX
Under Section 80-IBXXXX
Under Section 80-ICXXXX
Under Section 80-JJAXXXX
Taxable IncomeXXXX

Taxation of Member’s Share

  • If AOP / BOI is taxed at MMR / higher rate: Share of the member shall not be included in his total income.
  • If AOP / BOI is taxed at rates applicable to an Individual. (i.e. normal tax rates): Share of members shall be included in his total income but subject to rebate u/s 86.
  • 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.

Rebate u/s 86

Calculate Total Tax Payable (after giving the effect of rebate u/s 87A, surcharge, health & education cess)XX
Less: Rebate u/s 86 Tax payable by member * Members share in AOP / BOI u/s 67A / Total income of member (including share from AOP / BOI)(XX)
Total Tax payableXX

Section 67A: Method of Computing Share of a Member of Association of Persons / Body of Individuals

ParticularsMr. AMr. B
Total Income/ Taxable of AOP/BOI                                 XX  
Less: (If paid to the members)                                          
–          Any Interest                                                         (XX)  
–          Salary                                                                    (XX)  
–          Bonus                                                                    (XX)  
–          Commission                                                         (XX)  
–          Remuneration                                                     (XX)  
Balance                                                                             XX  
   
This amount is to apportioned between the members in their profit-sharing ratio.XXXX
If the Shared amount is “PROFIT” then,XXXX
Add  
–          Any Interest                                                         XX  
–          Salary                                                                    XX  
–          Bonus                                                                    XX  
–          Commission                                                         XX  
–          Remuneration                                                     XXXXXX
Member’s Share in the Income of the Association of Persons/ Body of Individuals.XXXX
If the Shared amount is “LOSS” then adjust this with:(XX)(XX)
Add  
–          Any Interest                                                         XX  
–          Salary                                                                    XX  
–          Bonus                                                                    XX  
–          Commission                                                         XX  
–          Remuneration                                                     XXXXXX
Member’s Share in the Income of the Association of Persons/ Body of Individuals.XXXX


Section 80A(3) – Certain restriction on availing deduction under Chapter VI-A

If any deduction is admissible:

  • Under Section 80G, 80GGA, 80GGC, 80HHA, 80-I, 80-IA, 80-IB, 80-IC, 80-ID or 80IE

then no deduction under that section can be claimed by any member of the Association of Persons/ Body of Individuals in computing its total income in relation to the share of that member.

Example:

1. Shares of members are determined.

2.  None of the member is a foreign company

3. None of the members has taxable income exceeding Rs.2,50,000 (in case of senior citizen Rs.3,00,000)

4. Income of AOP will be taxable at the rates applicable to an individual.

Computation of Rebate u/s 86

ParticularsABC
Share of profit from AOP [Business Income] …….(1)65,3501,91,2502,51,750
Net Income……………..(2)3,45,5005,10,3005,31,650
Income Tax [after rebate U/s 87A, Surcharge (if any) & HEC]…………………..(3)10,50011,37514,314
Less: *Rebate U/s 86 Compute rebate u/s 86 in respect of share of profit from the AOP : (3) divide by (2) and multiply by (1) [(3) / (2) * (1)]  10,500/3,45,500 * 65,350   = 198611,375/ 5,10,300 * 1,91,250 = 426314,314/ 5,31,650 * 2,51,750 = 6778
Tax Liability of members8,5147,1127,536

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CA Devesh Thakur

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