Expert verified Written By – PKC Desk, Edited By – Deepa, Reviewed By – Balaji Prasath
Exploring the income tax implications of an Association of Persons (AOP) distinct from a trust, which has been established by two individuals with the objective of receiving donations primarily from non-members for the pursuit of religious or charitable activities,
Taxation of Income for an AOP
If the income is in nature of Revenue :
Computation of Income for an AOP :
Computation of total income in the case of an association of persons will be done in the same manner as in the case of any other assesse.
Adjustments to be made from the above :
1. Provision :
- As per Section 40(ba), in the case 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], any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body. If interest is paid by AoP/BoI to members, it will be added back to Income.
- Exemption to the provision includes where interest is paid by AOP/BOI to a member who has also paid interest to the AOP/ BOI, the amount of interest to be disallowed under section 40(ba) is limited to the net amount of interest paid by the AOP/BOI to the member (i.e.) interest paid on capital and received on drawings.
- Let’s say AOP/BOI pays interest of Rs. 40,000 to a member A as interest on capital and receives Rs.13,000 from the same member as interest on withdrawals, the amount which is to be disallowed as is Rs. 27,000.
2. Deductions :
While filing income tax returns, the AOP can claim the deduction for the donation made towards the renovation of the village temple under Section 80G provided the temple is registered as a charitable trust or institution eligible for deductions under Section 80G.
If the income is in nature of Capital :
Contrast : The Taxable income for this AOP is charged under PGBP by subtracting the total expenses from the gross donation collection to determine the net income generated by the AOP from temple renovation activities considering adjustments and deductions specified under specified sections stated above.
Hence, to conclude Total Taxable Income = Gross Total Income (Income Under PGBP) + Adjustments under Section 40(ba) [excess paid by the AOP] – Deductions under 80G
Tax Rates Applicable for an AOP
If the share of members is determined/known :
Where income of none of the members exceeds the maximum amount, which is not chargeable to income tax (i.e., basic exemption limit), income of AOP / BOI shall be taxable at a rate applicable to an individual.
Income of AOP is assessed at Maximum Marginal Rate where income of any member of AOP / BOI exceeds the maximum amount which is not chargeable to income tax (i.e., basic exemption limit).
But if total income of any member of AOP / BOI is taxable at a rate higher than Maximum Marginal Rate, then income of AOP / BOI shall be chargeable to tax as follows:
- Portion of income attributable to such member shall be taxable at such high rate as applicable to that member
- Balance portion of income shall be taxable at the Maximum Marginal Rate of tax (i.e., 30% plus surcharge and HEC as applicable)
If the share indeterminable or unknown :
Income is assessed at Maximum Marginal Rate. However, if total income of any member is assessed at a rate higher than Maximum Marginal Rate, income of AOP / BOI is assessed at that higher rate.
However, in either of the cases share of profits received by members is exempt in the hands of the members as per Section 10(32).
An AOP / BOI who’s adjusted total income exceeds Rs.20 lakhs shall be liable to pay Alternate Minimum Tax (AMT) at 18.5% of adjusted total income (plus surcharge and Health and Education cess as applicable), where the normal tax liability is less than 18.5% of adjusted total income.
Adjusted Total Income = Total Income (+) Deductions under section 80H to 80RRB except 80P (+) Deduction under 10AA (+) Deduction under 35AD reduced by depreciation
Contrast :
The total income of an AOP is taxable, either at the rates applicable (assuming the share of members are determined):
1. To an individual
2. At the maximum marginal rate.
3. At the rate that is higher than the applicable maximum marginal rate.
4.At Alternative Minimum Tax + Surcharge + Cess *
* Option 4 is not applicable to the client based on the facts provided as
1.Temple renovation work is not covered under specified business under section 35AD.
2.The AOP is not a registered trust and hence exemption under 10AA is also not applicable and
3.80H to 80RRB deduction are provided in respect of profits and gains of specific industries such as hotel business, small scale industrial undertaking, housing projects, export business, infrastructure development etc. and hence so this also has no effect in computation
So, ultimately Gross Total Income and Adjusted Total Income will be same triggering no essence of applicability of AMT provision.
Let’s consider an example :
Let’s consider an AOP with two members, A and B, with their respective incomes (share of members) as follows:
Member A: ₹1,00,000
Member B: ₹5,50,000
Total income of the AOP = Rs. 3,00,000
The maximum amount not chargeable to tax is ₹2,50,000.
Since the income of Member B exceeds the maximum amount not chargeable to tax, the entire income of the AOP will be taxed at the maximum marginal rate.
After calculating the tax liability, surcharge and Health and Education cess will be added to determine the final tax payable by the AOP.
Tax Liability for the AOP = Tax at Marginal Maximum Rate @30% + Surcharge @25% + Cess @4%
= 3,00,000*39%
= Rs. 1,17,000
This will be adjusted either on account of TDS Receivable which reduces the tax liability or Interest under section 234 incase delay in remittance of advance tax or late filing.
Also Check: AOP Tax Implication
Note :
Author
Loshini
