In the case of AOP/BOI, income will be determined as under:
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If any salary, bonus, commission or remuneration (by whatever name called) is paid by the AOP/BOI to its members, it is not deductible [section 40(ba)].
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Similarly, any interest paid by AOP/BOI to its members (on loan, capital, or borrowing) by whatever name called is not deductible [section 40(ba)].
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Total income of the AOP/BOI is taxable either at the rates applicable to an individual, or at the Maximum Marginal Rate or at a Rate Higher Than Maximum Marginal Rate.
A. Remuneration Not Allowed as Deduction – –
In the case of AOP/BOI, salary, bonus, commission or remuneration to members (by whatever name called), is NOT allowed as deduction in the computation of income of the AOP/BOI. Even remuneration for actual services is not deductible.
B. Interest paid by AOP/BOI to its Members is not Allowed as Deduction by virtue of Section 40(ba) –
1. WHEN INTEREST IS PAID ON CAPITAL AND CHARGED ON DRAWING –
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Explanation 1 to Section 40(ba) provides … that 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, that is the amount by which the payment of interest by the AOP/BOI to the member exceeds the payment of interest by the member to the AOP/BOI.
For Example :
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- if a AOP/BOI pays interest of Rs. 40,000 to a member A and receives Rs. 13,000 from the same member as interest on withdrawals, the amount which is to be disallowed as deduction under section 40(ba) is Rs. 27,000.
- If, on the other hand, an AOP/BOI pays interest of Rs. 5,000 to a member and that member pays interest of Rs. 8,000 to the AOP/BOI in the same previous year, no disallowance of interest is required to be made under section 40(ba).
[There is, however no provision in the Act permitting an adjustment of interest received from a member against interest paid to other members.]
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Where AOP/BOI pays interest to three of its members and receives interest from the fourth member, the entire amount of interest paid to the three members will be disallowed under section 40(ba), while interest received from the fourth member is taxable as income in the hands of the AOP/BOI—
2. WHEN RECIPIENT OF INTEREST ACTS IN REPRESENTATIVE CAPACITY –
Explanations 2 and 3 deal with cases where the recipient of interest acts in a representative capacity.
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EXPLANATION 2 - Explanation 2 provides that where an individual is a member in an AOP/BOI on behalf, or for the benefit of any other person, interest paid by the AOP/BOI to such individual, otherwise than as member in a representative capacity, is not taken into account, for the purpose of Section 40(ba).
It is also provided that in such cases, interest paid by the AOP/BOI to such individual, as member in a representative capacity and interest paid by the AOP/BOI to the person, so represented, is taken into account for the purposes of section 40(ba).
For Example : ,
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X is a member in AOP/BOI on behalf of his HUF. The AOP/BOI pays interest on deposit and capital— Rs. 23,000 to X (otherwise than as member in a representative capacity) and Rs. 15,000 to X (for HUF). In this case, section 40(ba) will not be applicable in respect of payment of Rs. 23,000; it will be deductible. However, the payment of Rs. 15,000 will be subject to application of section 40(ba) (and consequently, it will not be deducted).
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EXPLANATION 3 - Explanation 3 provides that where an individual is a member in AOP/BOI (otherwise than in a representative capacity) interest paid by the AOP/BOI to such individual will not be taken into account for the purpose of section 40(ba), if such interest is received by him, on behalf, or for the benefit, of any other person.
For Example :
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X, a member, receives Rs. 10,000 from the AOP/BOI as interest on deposit made by his minor son, Rs. 10,000 will be allowed subject to the provisions of sections 36(1)(iii), 40(a)(i) and 40A(2) while computing income of the AOP/BOI.
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Similarly, if X is a partner in a AOP/BOI in his personal capacity interest paid by the AOP/BOI to X (not in his personal capacity, but say, as representing the HUF of which he is karta) is not taken into account for the purpose of section 40(ba).
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C. How to Compute Taxable Income of an AOP/BOI
First find out the taxable income of the AOP/BOI under the following steps:
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Find out income under the different heads of income (viz., “Income from house property”, “Profits and gains of business or profession”, “Capital gains” and “Income from other sources”, ignoring incomes exempt under sections 10 to 13A.
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Make adjustments on account of brought forward losses/allowances. The total income under the aforesaid heads is “Gross total income”.
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From the “gross total income” make deductions under sections 80G, 80GGA, 80GGC, 80-I, 80-IA, 80-IB, 80-IC and 80JJA.
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The balancing amount is total income or taxable income.
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