Analyzing the Tax Treatment of Collective Entities under Clause 310 of Income Tax Bill, 2025 Vs. Section 86 of Income-tax Act, 1961

Clause 310 Share of member of association of persons or body of individuals in income of association or body.

Income Tax Bill, 2025

Introduction

Clause 310 of the Income Tax Bill, 2025 and Section 86 of the Income-tax Act, 1961 are statutory provisions that address the taxation of the share of income accruing to a member of an association of persons (AOP) or body of individuals (BOI) from such association or body. These provisions are central to the determination of tax liability in cases where individuals pool resources and carry on activities collectively, a common structure in India's business and investment landscape.

The legislative intent behind these provisions is to prevent double taxation and to ensure that income arising from collective entities is taxed appropriately, either at the entity level or at the member level, depending on the circumstances. The 2025 Bill seeks to update and potentially streamline these provisions, reflecting evolving policy considerations and perhaps addressing ambiguities or inefficiencies in the existing law.

Objective and Purpose

Both Clause 310 and Section 86 aim to allocate tax liability in respect of income arising from AOPs or BOIs in a manner that is equitable and avoids double taxation. The underlying policy is to ensure that income is taxed once-either in the hands of the AOP/BOI or in the hands of its members-but not both. The provisions also take into account situations where the AOP/BOI is taxed at a higher rate (such as the maximum marginal rate), in which case the members should not be taxed again on their respective shares.

Historically, the Income-tax Act, 1961 has recognized the need for special treatment of AOPs and BOIs, which are not companies or registered societies, but are nevertheless recognized as separate taxable entities. The legislative history of Section 86, including multiple amendments, reflects ongoing efforts to balance the interests of the revenue with the need to avoid unfair double taxation of members.

Detailed Analysis of Clause 310 of the Income Tax Bill, 2025

Exemption of Member's Share from Tax

Clause 310(1) provides that income-tax shall not be payable by an assessee who is a member of an AOP or BOI in respect of his share in the income of the AOP or BOI computed in the manner provided in section 309, except in cases falling under sub-section (2).

This sub-section establishes the general rule that the share of income accruing to a member from an AOP/BOI is exempt from tax in the hands of the member if tax has already been levied at the entity level. The reference to computation u/s 309 ensures that the share is determined according to prescribed rules, maintaining consistency and fairness.

Taxability When AOP/BOI Not Taxable

Clause 310(2) carves out an exception: where no income-tax is chargeable on the total income of the AOP/BOI, the member's share (as computed) shall be chargeable to tax as part of his total income.

This provision ensures that income does not escape taxation altogether. If, for any reason, the AOP/BOI is not liable to tax (for example, due to exemption or lack of taxable income), the member's share is brought to tax in the hands of the member, plugging a potential loophole.

Specific Treatment Based on Tax Rate of AOP/BOI

Clause 310(3) distinguishes between two situations:

• (a) If the AOP/BOI is chargeable to tax at the maximum marginal rate or any higher rate under any provision of the Act, the member's share shall not be included in his total income.
• (b) In any other case, the member's share shall form part of his total income.

Thus, where the entity is taxed at the highest possible rate, the member is relieved from further taxation on his share, reinforcing the principle of single taxation. In other cases (where the AOP/BOI is taxed at a lower rate), the member's share is included in his total income and taxed accordingly, ensuring that revenue leakage is minimized.

Key Features and Legislative Technique

Clause 310 is structured to provide clear rules for allocation of tax liability. The provision is methodical, first stating the general rule (exemption), then providing exceptions (when AOP/BOI is not taxed), and finally addressing special situations (taxation at maximum marginal rate).

Notably, Clause 310 refers to computation u/s 309, which presumably sets out the method for determining the share of income of a member, analogous to section 67A in the 1961 Act.

Detailed Analysis of Section 86 of the Income-tax Act, 1961

Scope and Applicability

Section 86 applies to a member of an AOP or BOI (other than a company, co-operative society, or society registered under the Societies Registration Act, 1860 or corresponding law). The exclusion of companies and registered societies is significant, as these are taxed under separate provisions.

The section states that income-tax shall not be payable by the assessee in respect of his share in the income of the association or body computed as per section 67A.

Proviso (a): Exclusion from Total Income if AOP/BOI Taxed at Maximum Marginal Rate

Where the AOP/BOI is chargeable to tax at the maximum marginal rate or higher, the member's share is not to be included in his total income. This mirrors the policy in Clause 310(3)(a) and is designed to prevent double taxation.

Proviso (b): Inclusion in Total Income in Other Cases

In any other case, the member's share is included in his total income. This ensures that where the AOP/BOI is taxed at a concessional or lower rate, the member is not unjustly enriched by the lower entity-level tax and is taxed at personal rates.

Second Proviso: Taxation When AOP/BOI Not Chargeable to Tax

Where no income-tax is chargeable on the total income of the AOP/BOI, the member's share is chargeable to tax as part of his total income, and the main section does not apply. This provision is functionally identical to Clause 310(2), ensuring that income is not left untaxed.

Interpretation and Judicial Guidance

Section 86 has been the subject of judicial interpretation, with courts emphasizing its role in preventing double taxation and ensuring equitable allocation of tax liability. The computation of the member's share as per section 67A has also been clarified in case law, ensuring that only the appropriate portion of income is attributed to each member.

Comparative Analysis: Clause 310 vs. Section 86

Both provisions follow a similar structure:

• General rule: Member's share not taxable if taxed at AOP/BOI level.
• Exception: Member's share taxable if AOP/BOI not itself taxed.
• Special rule: Member's share excluded from total income if AOP/BOI taxed at maximum marginal rate; included otherwise.

Clause 310, however, slightly reorganizes the sequence of rules, first stating the general exemption, then the exception, and finally the special treatment based on the tax rate. Section 86, in contrast, embeds the special rules in the provisos.

Substantive Differences and Similarities

• Scope of Applicability: Section 86 expressly excludes companies and co-operative societies or registered societies from its scope. Clause 310 does not repeat this exclusion in the text provided, but this may be addressed in other clauses of the Bill or in definitions.
• Reference to Computation: Section 86 refers to computation u/s 67A, while Clause 310 refers to section 309, indicating a renumbering or reorganization in the new Bill.
• Taxation at Maximum Marginal Rate: Both provisions ensure that where the AOP/BOI is taxed at the highest rate, the member's share is not taxed again, upholding the principle of single taxation.
• Taxation When AOP/BOI Not Taxable: Both provide that if the AOP/BOI is not taxed, the member's share is taxed in his hands, preventing revenue loss.
• Sequencing and Clarity: Clause 310 arguably provides greater clarity by separating the exceptions and special cases into distinct sub-sections, potentially making the provision easier to interpret and apply.

Policy Continuity and Evolution

The essential policy-avoiding double taxation and ensuring all income is taxed once, at either the entity or member level-is preserved in both provisions. Clause 310 appears to be a restatement and clarification of Section 86, rather than a substantive departure. The reorganization may reflect an effort to modernize and streamline the law, making it more accessible to taxpayers and administrators.

Practical Implications

For Members of AOP/BOI

Members need to determine whether the AOP/BOI is taxed at the entity level and at what rate. If taxed at the maximum marginal rate, they are relieved from further tax on their share. If the entity is not taxed, they must include their share in their own returns. This requires access to information about the AOP/BOI's tax status, which may not always be straightforward, especially for passive investors.

For AOPs/BOIs

The provisions incentivize AOPs/BOIs to be transparent in their tax affairs and to communicate their tax status to members. Where the entity is taxed at a lower rate, members may face additional tax at their personal rates, affecting the overall tax efficiency of the structure.

For Tax Administrators

Administrators must ensure that income is not taxed twice, nor left untaxed. The need for cross-verification between the returns of AOPs/BOIs and their members imposes an administrative burden. The clarity and sequencing in Clause 310 may assist in reducing disputes and facilitating compliance.

Compliance and Procedural Aspects

Members must obtain information about the computation of their share and the tax status of the entity. They may need certificates or statements from the AOP/BOI. Failure to correctly report the share may lead to disputes and penalties.

Conclusion

Clause 310 of the Income Tax Bill, 2025 represents a continuity and rationalization of the principles enshrined in Section 86 of the Income-tax Act, 1961. Both provisions are designed to allocate tax liability in respect of income from AOPs/BOIs in a manner that is fair, equitable, and administratively feasible. The reorganization and clarification in Clause 310 are welcome, as they enhance the accessibility and comprehensibility of the law.

Going forward, further refinement may be needed in areas such as the definition of AOP/BOI, the treatment of losses, and the mechanics of information sharing between entities and members. Judicial clarification may also be required in cases of ambiguity or unintended consequences. Overall, the provisions reflect a mature and balanced approach to the taxation of collective entities in India.

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Full Text:

Clause 310 Share of member of association of persons or body of individuals in income of association or body.

 

Dated: 21-4-2025