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).
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.
| Particulars | Mr. A | Mr. B |
| Income from House Property | XX | XX |
| Profits and gains of business or profession | XX | XX |
| Capital Gain | XX | XX |
| Income from Other Source | XX | XX |
| Ignoring incomes exempted under sections 10 to 13A. | ||
| Gross Total Income | XX | XX |
| Less: | ||
| Deductions | ||
| Under Section 80G | XX | XX |
| Under Section 80GGA | XX | XX |
| Under Section 80GGC | XX | XX |
| Under Section 80-I | XX | XX |
| Under Section 80-IA | XX | XX |
| Under Section 80-IB | XX | XX |
| Under Section 80-IC | XX | XX |
| Under Section 80-JJA | XX | XX |
| Taxable Income | XX | XX |
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 payable | XX |
Section 67A: Method of Computing Share of a Member of Association of Persons / Body of Individuals
| Particulars | Mr. A | Mr. 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. | XX | XX |
| If the Shared amount is “PROFIT” then, | XX | XX |
| Add | ||
| – Any Interest XX | ||
| – Salary XX | ||
| – Bonus XX | ||
| – Commission XX | ||
| – Remuneration XX | XX | XX |
| Member’s Share in the Income of the Association of Persons/ Body of Individuals. | XX | XX |
| If the Shared amount is “LOSS” then adjust this with: | (XX) | (XX) |
| Add | ||
| – Any Interest XX | ||
| – Salary XX | ||
| – Bonus XX | ||
| – Commission XX | ||
| – Remuneration XX | XX | XX |
| Member’s Share in the Income of the Association of Persons/ Body of Individuals. | XX | XX |
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
| Particulars | A | B | C |
| Share of profit from AOP [Business Income] …….(1) | 65,350 | 1,91,250 | 2,51,750 |
| Net Income……………..(2) | 3,45,500 | 5,10,300 | 5,31,650 |
| Income Tax [after rebate U/s 87A, Surcharge (if any) & HEC]…………………..(3) | 10,500 | 11,375 | 14,314 |
| 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 = 1986 | 11,375/ 5,10,300 * 1,91,250 = 4263 | 14,314/ 5,31,650 * 2,51,750 = 6778 |
| Tax Liability of members | 8,514 | 7,112 | 7,536 |
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CA Devesh Thakur
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Hi , if the income of the AOP is from
Capital gains incurred from selling listed / unlisted shares .. what will be the tax implications on (1) the AOP and (2) the partners when the proceeds are upstreamed