AOP Registration

Definition of AOP

The Andhra Pradesh High Court has laid down the principles governing an AOP Registration in one of its cases. It clearly states that an association of persons does not necessarily mean any and every combination of persons. It is only applicable when individuals involved associate themselves in an income-producing activity. Persons must combine to engage in such a business, and the engagement must be under the combined voluntary will of the persons constituting the association. Therefore, there are apparent differences between Association of Persons and a Body of Individuals. In a nutshell, an Association of Persons may apply to the association of persons that exists under the following conditions. 1.When there are two or more individuals as part of the association. 2.Voluntary participation by the involved persons. 3.A collective purpose with the objective to produce profit or gain. 4.Combining for a joint enterprise. 5.Creating a specific kind of scheme for collective management. It can be seen that an AOP is formed and not created. An AOP may either choose to register or stay unregistered. Association of Persons generally mean two or some individuals coming together and forming an association where the goal is to achieve the same object. It should be noted that the word ‘person’ includes any person be it a HUF, Individuals and so on.  

Exclusions from AOP Registration

AOP does not include the following for determination of tax liability (taxation).

1. Company
2. Cooperative Society (as specific rates of tax have been prescribed for it)
3. Societies formed under the Societies Registration Act, 1860 or under any other law corresponding to that Act in force in part of India.

 

Taxation of Association of Persons

  The imposition of tax on Association of Persons occurs majorly in two phases. One at the AOP level and the other at the members’ level. At the first level, taxation of income depends on whether the share of income is determined or not. When the shares are confirmed, and the income of the AOP is assessed concerning every members’ share at their applicable rate, then the income of the member will be taxed on their respective share with the credit of taxes paid by the AOP. The provisions of Section 167B and Section 86 have been condensed into the table given below.  

Nature of AOP	AOP – Assessed	Member – Assessed
Share Determined – Income assessment	Income of AOP is assessed at Maximum Marginal Rate	Exempt from the hands of the members
Share Determined – Income assessment	NIL rate/ other than Maximum Marginal Rate – when individuals are members	Chargeable in the hands of the assessee with credit of taxes if any.
Share Undetermined – Income assessment	Income is assessed at Maximum Marginal Rate. Any member is assessed at higher than Maximum Marginal Rate, Income is assessed at such a higher rate.	The share of Income is exempt in the hands of the member.

 

Computation of Taxable Income of AOP Registration

The total income of an AOP is taxable, either at the rates applicable:

• To an individual.
• At the maximum marginal rate.
• At the rate that is higher than the applicable maximum marginal rate.

The tax incidence on AOP depends upon whether or not the individual shares of members in a whole or any part of the income of the AOP are determined. There are two steps to compute the total taxable income of the Association of Persons.

Step 1

Total income is computed under different heads such as income from house property, profits or gains of business or professions, capital gains, and income from other sources, ignoring the prescribed income exemptions. Therefore, the total gross income is obtained.

Step 2

The prescribed deductions under Section 80A of the Chapter VIA are made from the total gross income. The balance amount is the taxable income.

• Interest paid by the AOP to a member is not permitted as a deduction from the income of the AOP under Section 40 (BA) of the Act.
• Any salary, bonus, commission or remuneration paid by the AOP or the BOI to a member is not permitted as a deduction from the income of the AOP.

Tax calculation of AOP Registration

There are two situations where the tax can be calculated in two different ways. They are listed below.

Section 167B (1): Where the Shares of the Members are unknown.

Where the individual shares of the members of the AOP in the whole or part of its income are indeterminate or unknown, tax shall be charged on the Total Income of the AOP at the maximum marginal rate for example a 30 per cent surcharge plus Health and Education Cess at a rate of 4 per cent shall be levied on the amount of tax computed, inclusive of surcharge. However, if the income of any member of AOP is chargeable at a rate higher than 30 per cent, the tax will be charged on the Total Income of the AOP also at such a higher rate.

Section 167B (2): Where the Share of the Members are known

In a case where one of the members has a total income exceeding the maximum exemption limit. Where the total income of any of the members of an AOP, without including his income from AOP exceeds the Maximum Exemption Limit, then such an AOP will be charged to tax at a rate higher than 30 per cent plus surcharge, plus Education Cess plus Secondary and Higher Education Cess as applicable on its total income. However, in this case, if the income of one or more member of the AOP is chargeable at a rate higher than 30 per cent plus surcharge and Education Cess plus Secondary and Higher Education Cess as applicable, tax shall be charged on that portion or on the part of income of AOP which is relatable to the share of such a member(s) at such a higher rate and the balance of the revenue is taxable at the maximum marginal rate of tax. In a case where none of the members has a total income exceeding maximum exemption limit. There are two situations that may emerge from a case such as this. They are listed in the table below for a reference.

Serial Number	Situation	Liability of Tax
1	None of the members has a total income exceeding the maximum exemption limit, and none of the members is taxable at a rate more than the maximum marginal rate.	The AOP, in this case, will pay income tax on its total income at the rates which apply to an individual and the benefit of basic exemption of INR 2.5 Lakhs for the assessment year 2019-2020 shall be available to such AOP.
2	Although none of the members has a total income exceeding the maximum exemption limit, one or more members is/ are liable to tax at the rate of more than the maximum limit (i.e. taxable at a rate higher than 30 per cent) which is possible only if the foreign company is also a member.	On that portion of the income of AOP which is relatable to the member, i.e. foreign company, the tax rate applicable shall be the rate of income tax which applies to such member and the total balance income of the AOP shall be charged at the maximum marginal rate.

Taxation rates on capital gains

The taxation rates on long-term capital gain and short-term capital gain are different and are listed below.

• Long-term capital gains of an AOP shall be taxable at a special rate of 20 per cent or 10 per cent, as the case may be, as stated in Section 112. It shall not be taxable at the rate mentioned above.
• Similarly, short-term capital gains covered under Section 111A shall be taxable at the special rate of 15 per cent.

Section 86: Assessment of Share of AOP members

The share of a member in the total income of an AOP will be treated as follows.

1. If an AOP has paid an amount as tax at the maximum marginal rate or a rate that is higher, the member’s share in the total income of the AOP will not be included in his total revenue and will be exempt.
2. If an AOP has paid an amount as tax at regular rates that apply to an individual, then the member’s share in the income of the AOP will be included in his total revenue, and he will be allowed rebate at the average rate of tax in respect of such a share.

AOP Registration

An Association of Persons (AOP) refers to a group of individuals, businesses, or other entities who come together with a common purpose or objective. The term “Association of Persons” is commonly used in the context of income tax regulations in India. Under the Indian Income Tax Act, an AOP is treated as a separate entity for tax purposes. It is a legal framework that allows a group of people or entities to combine their resources, skills, or efforts to carry out activities that generate income or profits. The income earned by an AOP is subject to taxation, and the AOP is required to file income tax returns accordingly. An AOP can be formed by individuals, partnership firms, companies, or other entities. The members of the AOP may jointly contribute capital, share profits, and be involved in the management of the AOP’s activities. The AOP is distinct from its members and has its own separate legal existence. It is important for an AOP to comply with tax regulations, maintain proper accounting records, and file tax returns in a timely manner. The taxation rules for AOPs may vary depending on the nature of their activities and the applicable tax laws. It is recommended to consult with a qualified tax professional to understand the specific requirements and implications related to forming and operating an Association of Persons in a particular jurisdiction.

The benefits of forming an Association of Persons (AOP) include:

1. Shared Resources: Having an AOP Registration allows individuals, businesses, or entities to pool their resources, such as capital, skills, or expertise, to achieve common goals. By joining forces, the members can leverage collective strengths and capabilities.
2. Flexibility: AOPs provide flexibility in terms of structuring and organising activities. Members can define the terms of their association, profit-sharing arrangements, and decision-making processes based on their specific needs and objectives.
3. Joint Ventures and Collaborations: AOPs are commonly used for joint ventures and collaborative projects. By forming an AOP, multiple entities or individuals can come together to undertake a specific venture or business activity, sharing risks, costs, and potential rewards.
4. Risk Sharing: In an AOP, risks and liabilities can be shared among the members. This can help reduce individual exposure to risks associated with a particular project or activity, providing a more secure and balanced approach.
5. Taxation Benefits: AOPs have their own separate legal existence for tax purposes. This can lead to certain tax advantages, such as the ability to utilise tax deductions, exemptions, or special tax treatments available to associations or partnerships.
6. Combined Expertise: AOPs allow for the pooling of diverse skills, knowledge, and expertise. This collective wisdom can enhance decision-making, problem-solving, and overall operational efficiency.
7. Synergies and Scale: By joining forces, AOP members can achieve economies of scale and synergistic effects. This can result in cost savings, increased market presence, improved bargaining power, and enhanced competitiveness.

 Here is a checklist of key aspects to consider for AOP Registration:

1. Common Objective: Define a common objective or purpose that brings the members of the AOP together. This could be a specific project, business venture, or any other activity that requires collaboration.
2. Agreement or Partnership Deed: Prepare a written agreement or partnership deed that outlines the terms and conditions of the AOP. This document should specify the roles, responsibilities, profit-sharing arrangements, decision-making processes, and any other relevant provisions.
3. Identification of Members: Identify the individuals, businesses, or entities that will be part of the AOP. Clearly document the details of each member, including their names, addresses, and roles within the AOP.
4. Tax Obligations: Understand the tax obligations and implications for the AOP and its members. Determine the applicable tax rates, deductions, exemptions, and reporting requirements. Consult with a tax professional to ensure compliance with relevant tax laws.
5. Financial Management: Establish proper accounting and financial management systems for the AOP. Maintain accurate records of income, expenses, assets, and liabilities. Consider appointing a designated person or entity responsible for financial management.
6. Decision-Making Processes: Determine the decision-making procedures within the AOP. Establish mechanisms for voting, consensus building, or any other suitable method for making important decisions collectively.
7. Contracts and Agreements: Enter into contracts or agreements with third parties, if required, on behalf of the AOP. Clearly define the rights, obligations, and terms of these agreements, keeping in mind the authority and powers of the AOP as a collective entity.
8. Regulatory Compliance: Be aware of any specific regulations or legal requirements that may apply to the activities of the AOP. Ensure compliance with relevant laws, licences, permits, or industry-specific regulations.
9. Dissolution Clause: Include a provision in the agreement or partnership deed outlining the conditions and process for the dissolution of the AOP. Specify how the assets, liabilities, and other matters will be dealt with in case of dissolution.
10. Legal and Professional Advice: Seek legal and professional advice to ensure that the formation and operations of the AOP Registration are in accordance with the law and to address any specific requirements or considerations based on the nature of the activities.

It is important to note that this checklist provides a general overview and it is recommended to consult with legal and tax professionals who can provide tailored guidance based on your specific circumstances and the applicable laws and regulations.

There are certain steps you can follow to establish and register an AOP. Here is a general outline of the process:

1. Determine the Objective: Clearly define the common objective or purpose for forming the AOP. This could be a specific project, business venture, or any other collaborative activity.
2. Draft an Agreement: Prepare a written agreement or partnership deed that outlines the terms and conditions of the AOP. This document should cover aspects such as the objective, roles of members, profit-sharing arrangements, decision-making processes, and any other relevant provisions.
3. Execute the Agreement: All members of the AOP Registration should sign and execute the agreement or partnership deed. This demonstrates their consent and commitment to the terms outlined in the document.
4. Obtain Necessary Registrations: While AOPs do not have a formal registration process, you may need to obtain certain registrations depending on the nature of your activities. For example, if you are engaged in charitable or non-profit work, you may need to register under the relevant laws governing such organisations.
5. Obtain PAN: Apply for a Permanent Account Number (PAN) from the Income Tax Department. PAN is necessary for conducting financial transactions and fulfilling tax-related obligations.
6. Maintain Proper Records: Maintain accurate and up-to-date records of the AOP’s activities, income, expenses, assets, and liabilities. This includes maintaining books of accounts, financial statements, and other relevant documentation.
7. Comply with Tax Obligations: Fulfil your tax obligations as per the applicable tax laws. This includes filing income tax returns, paying taxes, and adhering to any tax-related compliance requirements.
8. Seek Professional Advice: It is advisable to seek legal and professional advice to ensure compliance with relevant laws, regulations, and any specific requirements based on the nature of your AOP’s activities.

The key deliverables for an Association of Persons (AOP) are the important outcomes or documents that you can expect to obtain during the process. In simple words, the key deliverables of an AOP are:

• Registered Agreement: A written agreement or partnership deed that outlines the terms and conditions of the AOP and is signed by all members. This document establishes the framework for the AOP’s operations.
• Trust Registration Certificate: If your AOP is involved in charitable or non-profit activities, you may obtain a registration certificate under the relevant laws governing such organisations. This certificate serves as proof of your AOP’s legal recognition as a charitable entity.
• PAN (Permanent Account Number): PAN is a unique identification number issued by the Income Tax Department. It is necessary for financial transactions and fulfilling tax-related obligations. Your AOP can obtain a PAN that identifies it as a separate entity for tax purposes.

Beyond AOP Registration, Tej and Associates offers a broad spectrum of services to Indian owners (OPC, Proprietary concern, LLP, Pvt Ltd, Trusts/Societies), international owners (Subsidiary company, Branch/Liaison Office), and special entities (Section 8 Company), assuring compliance and efficiency.