AOP & BOI: COMPUTATION OF INCOME
“AOP means two or more person who join for a common purpose with a view to earn an income that is two or more persons come together to carry on a business but do not constitute a partnership, they may be assessed as an Association of persons. BOI means a conglomeration of individuals who carry on some activity with the objective of earning some income. It would consist only of individuals.
For further details you can refer to our previous article on association of persons and body of individuals https://thetaxtalk.com/2019/01/28/association-of-persons-body-of-individuals/
This article throws a light on how to compute income of an AOP/BOI
Assessment of Association of persons/Body of Individuals
An AOP is a separate assessee. The income of AOP or BOI shall be computed under the heads of income by applying the normal provisions of Income Tax Act.
The business income of AOP/BOI shall be computed after allowing all expenses referred to in section 28 to 44D. However, as per section 40(ba)
- If any salary, bonus, commission or remuneration is paid by the AOP/BOI to its members, it will not be deductible
- Similarly, any interest paid by AOP /BOI to its members ( on loan, capital, or borrowing) by whatever name called is not allowed as deduction.
- However, while disallowing such interest paid, if any interest is also paid by the member to the association or body, the net of interest shall only be disallowed.
Example A: Suppose AOP pays interest of Rs. 40,000 to member ‘T’
On his capital/loan whereas ‘T’ pays Rs. 31,000 as interest on his drawings to AOP.
In this case, Rs.9000 (Rs. 40,000 – Rs. 31,000) shall be disallowed u/s 40(ba) to the AOP.
Example B: Suppose AOP pays Rs.24, 000 as interest to member ‘R’ on his capital/loan whereas AOP charges Rs.35, 000 as interest from member ‘S’ on his drawings.
In this case, Rs24, 000 paid to ‘R’ shall be disallowed under section 40(ba) and Rs. 35,000 interest charged from S shall be treated as income taxable in the hands of AOP.
- Where the individual who is a member in a representative capacity is paid interest otherwise than as a member in a representative capacity i.e. in personal capacity such interest shall not be disallowed.
Example C: ‘X’ is a member in an AOP on behalf of his HUF. The AOP pays to ‘X’ interest on deposit and capital- Rs.23, 000 to ’X’(otherwise than as a member in a representative capacity) and Rs.15,000 to ‘X’ ( for HUF)
In this case, section 40(ba) will not be applicable in respect of payment of Rs.23, 000, it will be deductible. However, payment of Rs.15, 000 will be subject to application of section 40(ba) and, consequently, it will not be deducted.
- If salary is paid by AOP/BOI to its member who is a member on behalf of HUF i.e in representative capacity, still such salary shall not be allowed as deduction while computing income of AOP/BOI.
- Rent paid by AOP/BOI for use of the premises of its members for its business shall be allowed as deduction while computing the income of AOP/BOI.
- Where interest is paid by an AOP to the proprietary business of a member, it is covered by section 40(ba) and consequently it is not deductible.
For computation of tax of AOP/BOI you can refer our article on taxation of AOP and BOI https://thetaxtalk.com/2019/01/30/taxation-of-aop-and-boi/
( Article Assistant)