The Indian Income Tax Act, 1961, defines AOP (Association of Persons) as an integration of persons for a mutual benefit or a common purpose. They may be individual or artificial persons such as LLP or a company. For example, two companies may join together and form an AOP for the achievement of a common objective.
What is an Association of Persons (AOP)?
An Association of Persons (AOP) is a group of two or more people who come together for a common purpose, such as running a business or carrying out a specific project. According to the Income Tax Act of India, an AOP is not considered a legal entity, but rather a collection of individuals who jointly undertake an activity with a view to earning profits. In an AOP, each member shares the profits and losses of the activity in proportion to their respective contributions.
Examples of AOPs include partnerships, joint ventures, and cooperative societies. A partnership is a common type of AOP where two or more people come together to start a business and share the profits and losses. In a partnership, each partner is personally liable for the debts and obligations of the partnership.
Exclusions from AOP
- Company
- Cooperative Society (as specific rates of tax have been prescribed for it)
- Societies formed under the Societies Registration Act, 1860 or under any other law corresponding to that Act in force in part of India.
What is a Body of Individuals (BOI)?
A Body of Individuals (BOI) is also a group of two or more people who come together for a common purpose, but unlike an AOP, a BOI is not formed with the intention of earning profits. BOI is a type of association where the members collectively own and manage a property or asset, and the income generated from that property is distributed among the members.
Examples of BOIs include clubs, housing societies, and charitable trusts. In a club, the members come together to enjoy certain facilities, such as sports facilities, and the income generated from the facilities is used to maintain them. In a housing society, the members collectively own the land and buildings and share the expenses and profits arising from them.
Differences between AOP and BOI
The primary difference between AOP and BOI lies in their purpose and nature of activity. An AOP is formed with the intention of earning profits, whereas a BOI is not. AOPs are commonly used for business ventures, while BOIs are used for the management of property or assets.
Another key difference is the way profits are shared. In an AOP, profits and losses are shared among the members in proportion to their contributions, while in a BOI, the income generated from the property or asset is distributed among the members.
AOPs are also subject to taxation differently than BOIs. In an AOP, the profits are taxed at the rate applicable to the individual members, while in a BOI, the income is taxed as an association of persons. This means that the tax rate for BOIs is higher than for AOPs.
Taxation of AOP and BOI
| Share of Profits of members is unknown/ intermediate | Share of Profits of members is known/determinate |
| When the share of Income of individual members of BOI or AOP wholly or partly are unknown, tax would be charged on the total Income of the BOI/ AOP at the maximum marginal rate. In case income of a member of the AOP is chargeable at the rate that is higher than marginal rate, the former would apply i.e. the higher rate would be levied on total income of the AOP. | Where total income of the member of BOI/ AOP is more than the maximum exemption Limit, member with the highest income would be charged at maximum marginal rate of 30 percent. |
FAQs
What is an Association of Persons (AOP)?
An Association of Persons (AOP) refers to a group of individuals or entities that come together to conduct a business or activity with a common purpose, even if there is no formal partnership agreement. AOPs are recognized under the Income Tax Act in India for taxation purposes.
How is an AOP different from a partnership?
- Legal Status: A partnership is a formal legal entity registered under the Partnership Act, while an AOP is not a separate legal entity.
- Intent: A partnership typically involves a profit motive and a formal agreement, whereas an AOP can exist even without a written agreement, as long as the members share a common goal.