Income Tax 2025

Appearance

4.—Association of persons and body of individuals.

Method of computing a member’s share in income of association of persons or body of individuals. ​

309(1) ​

For the purposes of this section, sections 310 and 311, an association of persons or body of individuals shall not include a company or a co-operative society or a society registered under the Societies Registration Act, 1860, or under any law corresponding to that Act in force in any part of India.

309(2) ​

In computing the total income of an assessee who is a member of an association of persons or a body of individuals wherein the shares of the members are determinate and known, the share of a member in the income or loss of such association or body shall be computed in the following manner,––

  • (a) any interest, salary, bonus, commission or remuneration, by whatever name called, paid to any member in respect of the tax year shall be deducted from the total income of the association or body and the balance ascertained and apportioned among the members in the proportions in which they are entitled to share in the income of the association or body;
  • (b) the interest, salary, bonus, commission or remuneration referred to in clause (a), shall be,— (i) added to the apportioned amount referred to in clause (a), if such apportioned amount is a profit; or (ii) adjusted against the apportioned amount referred to in clause (a), if such apportioned amount is a loss, and the resultant amount shall be treated as the share of the member in the income of such association or body.

309(3) ​

The share of a member in the income or loss of the association or body, as computed under sub-section (2), shall, for the purposes of assessment, be apportioned under the various heads of income in the same manner in which the income or loss of the association or body has been determined under each head of income.

309(4) ​

Any interest paid by a member on capital borrowed by him for the purposes of investment in the association or body shall, in computing his share chargeable under the head “Profits and gains of business or profession” in respect of his share in the income of the association or body, be deducted from his share.

309(5) ​

For the purposes of this section, “paid” means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head “Profits and gains of business or profession”.

Explanation

Section Summary: ​

This section outlines how a member’s share in the income or loss of an Association of Persons (AOP) or Body of Individuals (BOI) is computed for tax purposes. It excludes companies, co-operative societies, and societies registered under the Societies Registration Act, 1860. The section provides a detailed method for calculating a member’s share in the income or loss of the AOP/BOI, including adjustments for payments like interest, salary, or remuneration made to members.

Key Changes: ​

  1. Exclusion of Specific Entities: The section explicitly excludes companies, co-operative societies, and registered societies from being treated as AOPs or BOIs, clarifying the scope of this provision.
  2. Detailed Computation Method: The section introduces a step-by-step method for computing a member’s share in the income or loss of an AOP/BOI, including adjustments for payments like interest, salary, or remuneration.
  3. Treatment of Borrowed Capital: It allows members to deduct interest paid on capital borrowed for investment in the AOP/BOI when computing their share under the head “Profits and gains of business or profession.”

Practical Implications: ​

  1. For Members of AOP/BOI: Members must ensure their share of income or loss is computed accurately, considering any payments (e.g., salary, interest) received from the AOP/BOI. This affects their taxable income.
  2. For AOP/BOI: The entity must maintain clear records of payments made to members and the apportionment of income or loss among members.
  3. Compliance Burden: Members and AOPs/BOIs need to ensure proper documentation and reporting of income, payments, and deductions to comply with this section.

Critical Concepts: ​

  1. Association of Persons (AOP) / Body of Individuals (BOI): These are groups of individuals or entities that come together for a common purpose, such as business or investment, but are not structured as companies or registered societies.
  2. Determinate and Known Shares: The shares of members in the income or loss of the AOP/BOI must be clearly defined and agreed upon.
  3. Apportionment: The process of dividing the income or loss of the AOP/BOI among members based on their agreed shares.
  4. Method of Accounting: The computation of payments (e.g., interest, salary) depends on whether the AOP/BOI follows a cash or accrual method of accounting.

Compliance Steps: ​

  1. Maintain Records: AOPs/BOIs must keep detailed records of income, expenses, and payments made to members.
  2. Compute Member’s Share:
    • Deduct payments like interest, salary, or remuneration from the total income of the AOP/BOI.
    • Apportion the remaining income or loss among members based on their shares.
    • Adjust the apportioned amount by adding or deducting the payments made to members.
  3. Report Income: Members must include their computed share of income or loss in their individual tax returns under the appropriate heads of income.
  4. Deduct Interest on Borrowed Capital: Members can deduct interest paid on capital borrowed for investment in the AOP/BOI when computing their share under “Profits and gains of business or profession.”

Examples: ​

Scenario 1: An AOP earns a total income of ₹10,00,000 in a year. It pays ₹2,00,000 as salary to its members and ₹1,00,000 as interest. The remaining ₹7,00,000 is apportioned among members based on their shares. If a member’s share is 20%, their apportioned income is ₹1,40,000. The salary and interest paid to the member are added to this amount, resulting in their total taxable share.

Scenario 2: An AOP incurs a loss of ₹5,00,000. It pays ₹1,00,000 as salary to its members. The loss is apportioned among members based on their shares. If a member’s share is 30%, their apportioned loss is ₹1,50,000. The salary paid to the member is adjusted against this loss, reducing their taxable loss to ₹50,000.

This section ensures clarity in computing a member’s share in the income or loss of an AOP/BOI, while also addressing specific deductions and adjustments for compliance purposes.