Income Tax 2025

Appearance

Charge of tax where shares of members in association of persons or body of individuals unknown, etc. ​

311(1) ​

Where the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body are indeterminate or unknown,—

  • (a) tax shall be charged on the total income of the association or body at the maximum marginal rate; or
  • (b) where the total income of any member of such association or body is chargeable to tax at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.

311(2) ​

Where the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body are determinate or known,––

  • (a) the total income of any member thereof for the tax year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rate;
  • (b) any member or members thereof is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate,— (i) tax shall be charged on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members at such higher rate or rates, as the case may be; and (ii) the balance of the total income of the association or body shall be taxed at the maximum marginal rate.

311(3) ​

For the purposes of this section, the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body shall be deemed to be indeterminate or unknown if such shares (in relation to the whole or any part of such income) are indeterminate or unknown on the date of formation of such association or body or at any time thereafter.

Explanation

Section Summary: ​

Section 311 of the Income Tax Act deals with the taxation of income for Associations of Persons (AOP) or Bodies of Individuals (BOI) where the individual shares of members in the income are either indeterminate/unknown or determinate/known. The section specifies the tax rates applicable in such cases, ensuring that the income is taxed appropriately based on the nature of the members' shares and their individual tax liabilities.

Key Changes: ​

  1. Taxation at Maximum Marginal Rate (MMR):

    • If the shares of members in the income of the AOP/BOI are indeterminate or unknown, the entire income of the AOP/BOI is taxed at the maximum marginal rate (MMR) or a higher rate if any member is subject to a higher tax rate.
    • If the shares are determinate or known, but any member's total income (excluding their share from the AOP/BOI) exceeds the basic exemption limit, the AOP/BOI's income is taxed at the MMR.

  2. Higher Tax Rate for Specific Members:

    • If any member of the AOP/BOI is subject to a higher tax rate than the MMR, the portion of the AOP/BOI's income attributable to that member is taxed at the higher rate, while the remaining income is taxed at the MMR.

  3. Deemed Indeterminate Shares:

    • Shares are deemed indeterminate or unknown if they are not fixed at the time of formation of the AOP/BOI or at any subsequent time.

Practical Implications: ​

  1. For AOPs/BOIs with Indeterminate Shares:

    • The entire income of the AOP/BOI will be taxed at the MMR (currently 30% plus applicable surcharge and cess) or a higher rate if any member is subject to a higher tax rate.

  2. For AOPs/BOIs with Determinate Shares:

    • If any member's total income (excluding their share from the AOP/BOI) exceeds the basic exemption limit, the AOP/BOI's income will be taxed at the MMR.
    • If any member is subject to a higher tax rate, the portion of the AOP/BOI's income attributable to that member will be taxed at the higher rate, and the remaining income will be taxed at the MMR.

  3. Impact on Members:

    • Members of AOPs/BOIs need to ensure that their shares in the income are clearly defined to avoid being taxed at the MMR or higher rates.
    • Members with higher tax liabilities (e.g., due to high individual income) may result in a higher tax burden for the AOP/BOI.

Critical Concepts: ​

  1. Maximum Marginal Rate (MMR):

    • The highest rate of tax applicable under the Income Tax Act (currently 30% for individuals and HUFs, plus surcharge and cess).

  2. Indeterminate/Unknown Shares:

    • Shares are considered indeterminate or unknown if they are not fixed at the time of formation of the AOP/BOI or at any subsequent time.

  3. Determinate/Known Shares:

    • Shares are considered determinate or known if they are clearly defined and fixed.

  4. Basic Exemption Limit:

    • The threshold income below which no tax is payable by an individual (e.g., ₹2.5 lakh for individuals below 60 years of age).

Compliance Steps: ​

  1. Determine Share Allocation:

    • Ensure that the shares of members in the income of the AOP/BOI are clearly defined and documented at the time of formation or as early as possible.

  2. Assess Member Tax Liabilities:

    • Evaluate the individual tax liabilities of members to determine if any member is subject to a higher tax rate than the MMR.

  3. Calculate Tax Liability:

    • For indeterminate shares, tax the entire income at the MMR or higher rate (if applicable).
    • For determinate shares, tax the income attributable to members with higher tax rates at the applicable rate and the remaining income at the MMR.

  4. File Returns Accurately:

    • Ensure that the income of the AOP/BOI is reported correctly in the tax return, reflecting the applicable tax rates.

Examples: ​

  1. Indeterminate Shares:

    • An AOP earns ₹10 lakh in a year, but the shares of its members are not defined. The entire ₹10 lakh will be taxed at the MMR (30% plus surcharge and cess).

  2. Determinate Shares with Higher Tax Rate Member:

    • An AOP earns ₹10 lakh, and the shares of its members are clearly defined. One member has a total income (excluding their share from the AOP) of ₹12 lakh, making them subject to a 30% tax rate. Another member has a total income of ₹60 lakh, making them subject to a 30% tax rate plus a 10% surcharge.
    • The portion of the AOP's income attributable to the second member (e.g., ₹4 lakh) will be taxed at 30% plus 10% surcharge, while the remaining ₹6 lakh will be taxed at 30%.

  3. Deemed Indeterminate Shares:

    • An AOP is formed without defining the shares of its members. Even if the shares are later defined, they will be deemed indeterminate, and the entire income will be taxed at the MMR.

This section ensures that AOPs/BOIs are taxed appropriately based on the clarity of members' shares and their individual tax liabilities, preventing tax avoidance through indeterminate income allocations.