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Tax implication on distribution of profit by an AOP/BOI
When the individual shares of the members of Association of Person/ Body of individuals AOP/BOI in the whole or part of its income are intermediate or unknown, tax shall be charged on the Total Income (exclusive of income taxable at special rate) of the AOP/BOI at the maximum marginal rate. If the income of any member of AOP is chargeable at a rate which is higher than the marginal rate, the former will apply i.e. higher rate will be charged on the total income of the AOP. In case the AOP/ BOI has paid tax on the maximum marginal rate or at a higher rate, then the amount shall not be included in the total income of the member and will be exempt i.e. this amount is not to be considered while computing income u/s 67A of the Income Tax Act, 1961. Section 67A is about method of computing a member’s share in income of association of persons or body of individuals.
In case AOP/ BOI has paid the income tax at the rate applicable to an individual i.e. the basic slab rate the respective share income of the member in AOP/BOI should be computed as per Section 66 read with Section 67A and the same will be included in the total income of each member as pert Section 86 although NO INCOME TAX is payable on such income by the member.
Section 86 reads as under:
Where the assessee is a member of an association of persons or body of individuals (other than a company or a co-operative 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), income-tax shall not be payable by the assessee in respect of his share in the income of the association or body computed in the manner provided in section 67A :
(a) where the association or body is chargeable to tax on its total income at the maximum marginal rate or any higher rate under any of the provisions of this Act, the share of a member computed as aforesaid shall not be included in his total income;
(b) in any other case, the share of a member computed as aforesaid shall form part of his total income :
Provided further that where no income-tax is chargeable on the total income of the association or body, the share of a member computed as aforesaid shall be chargeable to tax as part of his total income and nothing contained in this section shall apply to the case.
In this case as per Section 110 of the Income Tax Act, 1961 the assessee shall be entitled to a deduction from the amount of the income tax with which he is chargeable on his total income, of an amount equal to the income tax calculated at the average rate of income-tax on the amount on which no income-tax is payable.
Section 110 of the the Income Tax Act, 1961reads as under:
Determination of tax where total income includes income on which no tax is payable.
- Where there is included in the total income of an assessee any income on which no income-tax is payable under the provisions of this Act, the assessee shall be entitled to a deduction, from the amount of income-tax with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average rate of income-tax on the amount on which no income-tax is payable.