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AOP vs BOI from Income-Tax Perspective

Association of Persons (AOP) vs Body of Individuals (BOI)

The Income-tax Act, 1961 defines the term “person” in section 2(31). Terms such as individual, HUF, company or firm are easily understandable but the terms ‘association of persons’ or ‘body of individuals’ listed in the definition, could not be understood by laymen. These terms are also not defined elsewhere in the statute. Only, the courts have come to the rescue and have explained the true meaning of these terms.

Since the explanation of the courts have stood the test of time, it is logical to presume that the Legislature has tacitly accepted those court rendered explanations. This is justified by the precedents of enacting clarificatory amendment with or without retrospective effect, whenever the decision of the court is not acceptable to the Legislature. This article discusses on the taxation of an AOP/BOI from income-tax perspective.

Meaning of an AOP/BOI

2. When two or more persons voluntarily come together for a common purpose or action for the purpose of earning income, profits or gains, such an association is known as an association of persons (an AOP). However, the Apex Court in CIT v. Indira Balakrishna [1960] 39 ITR 546 has cautioned that the conclusion of treating the joining together of two or more persons as an AOP must be with due emphasis on facts and circumstances of each case.

While distinguishing between an AOP from body of individuals (BOI), it has been consistently held that an in the case of an AOP, the members could be a mix of non-individuals also. Example: Companies. In the case of BOI, the members would necessarily be natural human beings.

In the case of an AOP, there is voluntary combination or coming together of persons.In the case of BOI, it could be by operation of law and not necessarily a voluntary one.This aspect was confirmed by the Apex Court in the case of Meera & Co v. CIT.

The taxation of an AOP and BOI as regards the rate of tax and method of computation of total income are the same.

Income computation

3. The computation of income of an AOP/BOI is in the normal manner. Prominent difference with partnership firm taxation is that, in the case of an AOP/BOI, no deduction by way of working partners salary or interest on capital would be allowable. Section 40(ba) specifically says that any payment of interest, salary, bonus, commission or remuneration paid or incurred by an AOP/BOI to its members is not deductible.

The amount of interest to be disallowed under section 40(ba) shall be limited to the amount by which the payment of interest by an AOP or BOI exceeds the amount of interest paid by the member to an AOP or BOI. For example, if an AOP/BOI pays interest of Rs. 30,000 to a member and the member also pays interest of Rs. 24,000 to an AOP/BOI, the excess interest paid by an AOP/BOI (Rs. 6,000) to the members is not allowable (Explanation 1 to section 40(ba)).

The above said embargo, however, will not apply where the interest is paid to a member who is in representative capacity and such interest is paid by an AOP/BOI in its capacity not being in the capacity in which he is a member. Example: Mr. A is a member of an AOP with 25% share who advances Rs. 5 lakhs from his HUF to the AOP as loan. Interest on the advance say Rs. 1 lakh (@ 20%) is paid by the AOP to him. The interest so paid to the HUF will not be liable for disallowance under section 40(ba). (Refer Explanation 2 to section 40(ba)).

Section 67A deals with computation of members’ share in the income of an AOP or BOI. It provides for allocating any interest, salary, commission or remuneration paid to the member and the balance, if any, is to be allocated in the proportion in which the members are entitled to as per the agreement made between them.

The following illustration of ABC & Co. (AOP) having total income of Rs. 5,20,000 before deducting members interest on capital and members salary would explain the methodology of ascertaining member’s share income from an AOP/BOI.



Interest @ 24%

Share of profit

Share of Income of Members from AOP

Mr. A (25%)





Mr. B (50%)





Ms. C (25%)










The amount of salary and interest received by members is chargeable to tax as an income under the head profits and gains of business or profession.

Rate of tax on income from an AOP/BOI

4. Section 86 provides the rate of tax applicable on share of a member’s income from an AOP/BOI. Where an AOP or BOI is taxed on its total income at the maximum marginal rate or any higher rate, the share of a member shall not be included in his total income. (For Assessment Year 2018-19 the maximum marginal rate is 35.535%).

Where an AOP/BOI is not taxed at maximum marginal rate, the share of a member computed under section 67A shall be included in the total income of the member.

Also, where no income-tax is chargeable on the total income of an AOP/BOI, the share of a member computed under section 67A shall be included and shall form part of his total income.

Charge of tax on an AOP/BOI

5. Section 167B provides the rate of tax applicable in the hands of an AOP/BOI. The following table explains the applicable tax rate for an AOP/BOI:

5.1 Where the shares of members are determinate:

Where none of the members have total income (excluding the share of income from an AOP/BOI) exceeding the taxable limit.

An AOP/BOI would be taxable at the rate of tax applicable for individual taxpayers.

Where any member of an AOP/BOI has total income exceeding the basic exemption limit (before the inclusion of share of income from AOP/BOI).

An AOP is taxable at the maximum marginal rate.

Where any member of an AOP/BOI is taxable at a rate higher than maximum marginal rate (Example: Foreign companies being a member of an AOP/BOI)

The income of an AOP/BOI to the extent of the share of such member is taxable at such higher rate and the balance of its income at the maximum marginal rate.

5.2 Where the shares of members are indeterminate:

Where none of members are taxable at a rate higher than the maximum marginal rate

The entire income of an AOP/BOI is taxable at the maximum marginal rate.

Where any member is taxable at a rate higher than maximum marginal rate.

The entire income of an AOP/BOI shall be taxable at such a higher rate.

Note: There is no basic exemption limit for an AOP/BOI. Hence, the income above Rs. 10 is chargeable to tax.

Rebate under section 110

6. Section 110 states that where the total income of an assessee includes income on which no income-tax is payable under the provisions of the Act, he can claim rebate by way of deduction from the amount of income-tax. The amount shall be determined by computing the average rate of income-tax on the amount on which no income-tax is payable.

For example, if an AOP/BOI given in the earlier example has paid tax on Rs. 5,20,000 at the individual rate for the assessment year 2018-19, being Rs. 17,000 (including cess @ 3%), the member A or B or C when it includes their share of income in their total income, they are eligible to claim rebate under section 110.

The following table explains this concept of rebate under section 110:





Total income* (other than share of income from an AOP)




Share of income* from an AOP (includes interest, salary and share of profit)




Total Income*




Tax thereon




Average rate of tax

7500X100/ 400000

9500X100/ 440000

4000X100/ 330000


= 1.875%

= 2.159%

= 1.212%

Rebate under section 110 on share of income at the average rate of tax.




Tax after rebate (before cess)




*Figures in Rs.

Joint venture whether taxable as an AOP?

7. The CBDT in Circular No. 7/2016 dated 7-3-2016 clarified that a consortium of contractors to implement large infrastructure projects, particularly Engineering, Procurement and Construction (EPC) Contracts and turnkey projects need not be treated as AOPs when the following attributes are present:

  1. Each member of the consortium is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work. In other words, there is a clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work.
  2. Each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract rights at gross level to facilitate convenience in billing.
  3. The men and materials used for any area of work are under the risk and control of respective consortium members.
  4. The control and management of the consortium is not unified and common management is only for inter se co-ordination between the consortium members for administrative convenience.

It gave a note of caution by stating that there could be additional factors which may also justify that the consortium is not an AOP and the specific facts and circumstances of the case have to be taken into consideration while taking a view of the matter.

It very clearly specified that the circular is not applicable where some of the members of the consortium are Associated Enterprises (AEs) in terms of section 92A of the Act.Thus, in such cases the Assessing Officer must decide whether an AOP is formed or not, keeping in view the relevant provisions and judicial jurisprudence on this issue.

The above said circular was prompted by the decision rendered in the case of Linde AG. Linde Engg. Division v. Dy. CIT.

Inherited property or business, whether an AOP?

8. The apex court in Meera & Co. (Supra) dealt with a case where an individual carrying on business died intestate and was survived by his mother, wife and 3 minor children. The mother of the deceased relinquished her rights in consideration for the lump sum payment received by her. The business was continued by the widow of the deceased on her behalf and on behalf of 3 minor children. The issue before the apex court was whether it was to be assessed as body of individuals?

The apex court held that the business was inherited and it was carried on as before. It was a clear case of a joint business venture of a few individuals consisting of the widowed mother and three minor children. Accordingly, it was held that the assessment must be made in the status of body of individuals.

Again, the Apex Court in CIT v. Govindbhai Mamaiya dealt with a case where the father died leaving the land to the assessee and his two brothers. The two brothers relinquished their rights in favour of the assessee. A part of this land was acquired by the State Government and the compensation was paid to the assessee and two brothers.The assessee admitted the receipt of compensation and additional compensation as an income in individual status. The Assessing Officer brought the compensation to tax in the hands of assessee and two brothers in the status of an AOP. The court held that the lands were compulsorily acquired by the Government and compensation so received was not by volition of the parties. The parties being brothers did not come together for the purpose of generating income. The basic requirement of coming together for the purpose of producing income was absent and, thus, it was held that they could be assessed only as individuals and not as an AOP.

The above two contrasting decisions show that a voluntary association of persons for producing income is the acid test to be satisfied for assessing the income under the status of an AOP. Where the voluntariness is absent, to emphasize, if it is by operation of law, then it cannot be assessed as an AOP/BOI.


9. The status of an AOP is not liberally used by persons engaged in regular income producing activity, viz., business. Even in the case of private trusts not engaged in business and where the shares of beneficiaries are definite and known, it is taxed in the status of an AOP by applying the individual rate of tax.

The task force engaged in redrafting the Income-tax law may take note of the judicial precedents and insert a definition in the statute itself to avoid confusion/controversy in the new legislation.

In cases where two or more persons are engaged in business with turnover of less than Rs. 50 lakhs may think of claiming the status of an AOP and pay tax at the individual rate on the presumptive income of Rs. 4 lakhs.The tax liability would be less than Rs. 8,000. However, one note of caution is that none of the persons have income (excluding the income of an AOP) exceeding the basic exemption limit. Adequate publicity is required to make the status of an AOP/BOI among the taxpayers to use the same in the case of small business entities.

However, change of status from firm to an AOP or vice versa becomes difficult as the status of the assessee is presently incorporated in PAN cards and obtaining PAN card based on the status now and then or holding more than one PAN card, being a punishable offence, act as dampeners.

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