The income tax Act prescribes a specific mode for calculation of income and taxability in the case of
Association of Persons.
Let’s first discuss what is an Association of Persons and Body of Individuals.
An association of persons means an association in which two or more persons join in a common purpose or
common action. The term person includes any company or association or body of individuals, whether
incorporated or not. An association of persons may have companies, firms, joint families as its members –
M.M Ipoh v CIT  67 ITR 106(SC).
Now let’s see how income of Association of Persons (AoP)/ Body of Individuals (BoI) is determined.
Computation of Income of AoP
The total income under the different heads i.e. Income from house property, Profits or gains of business or
profession, Capital gains, and income from other sources shall be worked out ignoring incomes exempt
under Sections 10 to 13A.
From this make adjustments for the following:
If salary, commission, bonus or remuneration is paid by AoP/BoI to members, it will be added
back. It may be noted that remuneration paid for actual services is also disallowed. This is due to
the express provision in Section 40(ba).
If interest is paid by AoP/BoI to members, it will be added back. But the following should be kept
Additional points to be kept in mind while disallowing interest:
Where interest is paid by an AoP/BoI to any member who has also paid interest to the AoP/BoI, the
amount of interest to be disallowed shall be limited to the amount by which the payment of interest by the
AoP/BoI to the member exceeds the payment of interest by the member to AoP/BoI.
If individual is member in representative capacity:
(a) Interest paid by the AoP/BoI to such individual or by such individual to AoP/BoI except as member in
a representative capacity, shall not be taken into account;
(b) Interest paid by the AoP/BoI to such individual or by such individual to the AoP/BoI as member in a
representative capacity and interest paid by the AoP/BoI to the person(s) so represented to the AoP/BoI,
shall be taken into account.
Let me elucidate with an example:
Mr. William is a member of an AoP on behalf of his HUF i.e. in representative capacity. AoP pays
interest on capital Rs. 1,50,000 to Mr. William in individual capacity. This amount will be deductible for
the AoP as Mr. William is member in representative capacity but payment is made in individual capacity.
Had Mr. William received interest on behalf of his HUF, such payment would’ve been disallowed in the
hands of AoP.
If individual is member in individual capacity:
Interest paid by the AoP/BoI to such individual shall not be taken into account, if such interest is received
by him on behalf, or for the benefit, of any other person.
Example: Mr. Varun is a member of an AoP i.e. in individual capacity. He receives interest on capital
Rs. 1,50,000 made by his wife. This means he has received interest in representative capacity. Hence it
will be allowed in the hands of AoP. Had Mr. Varun been a member on behalf of his wife, such interest
received would have been disallowed by virtue of Section 40(ba).
Also, deductions under Sections 80G, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE and
80JJA are to be adjusted (if any).
Total income thus obtained is taxed either at rates applicable to individual or at the maximum marginal
rate, or a rate higher than maximum marginal rate.
Calculation of Tax of AoP
Tax of AoP/BoI shall depend on whether shares of members are determinable or not.
A. Shares of members are determinable:
a) If no member of AoP/BoI has income exceeding maximum amount not chargeable to tax:
The tax is chargeable on the total income of an AoP/BoI at the same rate as is applicable in the
case of an individual.
b) If any member of AoP/BoI has income exceeding maximum amount not chargeable to tax:
In this case, AoP is taxed at maximum marginal rate.
c) And finally, if the total income of any member of the AOB/BOI (whether or not it exceeds the
maximum amount not chargeable to tax in the case of an individual) is chargeable to tax at a rate
higher than the maximum marginal rate, tax shall be charged
– on that portion of the total income of the AOP/BOI which is relatable to such member at
such higher rate
– and the balance of the total income of the AOP/BOI shall be taxed at the maximum
marginal rate, 33.99%.
Let me illustrate the third point above with an example:
RAY Ltd (a foreign Company taxed at 40% + cess), Mr. Mark and Ms.Vidya are members of an
AoP sharing profits in 9:5:6. Personal incomes of the members are as follows:
RAY Ltd- Nil
Mr. Mark – Rs. 30,000
Ms. Vidya – Rs. 13,000.
Taxable income of AoP is Rs. Rs. 2,30,000( including Rs. 70,000 long term capital gains)
Here, tax of AoP is determined as under:
Particulars Amount Share of Members
RAY Ltd Mr. Mark Ms. Vidya
Long term capital
70,000 31,500 17,500 21,000
Other Income 1,60,000 72,000 40,000 48,000
Total 2,30,000 1,03,500 57,500 69,000
Here, Rs. 72,000 being share in ‘other income’ of RAY Ltd is taxed at maximum marginal rate.
Tax liability of AoP:
A On Rs. 72,000 at 40% + cess (RAY Ltd being a foreign company) Rs. 29,664
On balance Rs. 1,58,000 (Rs.2,30,000- Rs.72,000)
B At 20% + cess on LTCG, Rs. 70,000 Rs. 14,420
C At max marginal rate on balance Rs. 88,000 Rs. 29,911
Total tax Rs. 73,995 (A+B+C)
B. Shares of members are indeterminable:
Tax is charged on the total income of the AOP/BOI at the maximum marginal rate. However if
any member is charged at a higher rate than maximum marginal rate, the income shall be taxed at
such higher rate.
Calculation of Tax of members:
The assessment of the members of AOP or BOI depends on whether the AOP or BOI is chargeable
to tax at the maximum marginal rate or rates applicable to individual or is not chargeable to tax at all.
Lets discuss it here below:
(i) Where AOP or BOI is chargeable to tax at a maximum marginal rate or any higher rate, the share of
profit of a member is not included in his total income.
(ii) Where AOP or BOI is taxed at rates applicable to individual, the share of profit of a member from AOP
or BOI is to be included in the total income of the member. But, the member is entitled to a rebate of tax
on the entire share of profit at the average rate of tax applicable to total income.
(iii) Where AOP or BOI is not chargeable to tax at all, the share of profit of a member from AOP or BOI is
included in his total income and he will pay tax on it. He is not entitled to any rebate of tax on such profits.