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TMI Blog1984 (6) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... ccumulated, while 90 per cent of such income was to be distributed amongst the members of AOPS, as per shares specified in each of the agreements. (iii) The assessee's share in the twenty-two AOPS, which made profits, amounted to Rs. 4,12,744, while its share of loss in Aradhna Corpn. as mentioned above, was Rs. 41,192. 4. In its return of income, as well as at the time of assessment proceedings, the assessee claimed that Rs. 3,71,552 (Rs. 4,12,744-Rs. 41,192) could not be included in its total income, by virtue of the fact that each of the AOPs has to be assessed separately under the Act. The ITO, however, rejected the assessee's claim in the following manner : " It is noticed that in computing the total income the assessee has excluded the amount of Rs. 3,71,552 claiming the same to be exempt. Section 86(v) contemplates that income-tax shall not be payable by an assessee in respect of portion of the amount which it is entitled to receive from the associations of persons on which Income-tax has already been paid by the associations or body. The assessee has merely submitted a list of associations of persons in which the assessee is a member and also a list showing profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngar as well as Circular No. 308 [F. No. 131(31)/81-TPL], dated 29-6-1981 issued by the Board. 6. The Commissioner (Appeals), however, upheld the action of the ITO by holding that the reported decisions, the commentaries and the Board's circular nowhere say that the revenue cannot assess the shares from the AOPs in the hands of its members. As regards the assessee's claim for set off of the loss of Rs. 41,192, the Commissioner (Appeals) gave the following directions to the ITO : " This brings us to the share of loss of Rs. 41,192 claimed from an AOP, viz., Aradhna Corpn. The ITO has ignored this loss and taken the appellant's share at Rs. nil, 'in the absence of any material.' Obviously, the ITO has held that there is no material produced before him for supporting the claim of share of loss of Rs. 41,192. On the other hand, it is appellant's claim that on the basis of accounts of that AOP the share of loss was rightly claimed at Rs. 41,192. Taking totality of circumstances into account, it would be reasonable to direct that within a reasonable time (say a fortnight) of the receipt of this order by the appellant, if the appellant produces before the ITO adequate material and pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Cases'. In this view of the matter, he urged that Rs. 3,71,552 would not be included in the total income of the assessee in the manner the income-tax authorities have included. The said amount, at best, could be considered for rate purposes only, as contemplated under section 86(v) read with Explanation thereto. However, since the income of the company is taxed at a flat rate, it has no consequence regarding tax collection. 8. The learned representative for the revenue, on the other hand, justified the action of the income-tax authorities. In this connection, he referred to the following clauses of the agreement of the AOP, in the case of Rajiv Trading Co. : " 4. The income arising out of the business carried on by the association of persons shall be distributed amongst the members of the association the following manner : 90 per cent of the income shall be distributed as under : (1) Mr. Prayasvin B. Patel 2 per cent (2) Mr. Bhanubhai I. Patel 2 per cent (3) Western Metal Caps (P.) Ltd. 86 per cent the remaining 10 per cent of the income is to be accumulated and shall form part of the capital and assets of the association. 5. On expiry of the said period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income of the association at the maximum marginal rate. (2) Where the individual shares of the members of an association of persons (other than a company or co-operative society) in any part of the income of such association are indeterminate or unknown, the income-tax payable by the association shall be the aggregate of--- (i) the amount of income-tax calculated on the aforesaid part of the total income, at the maximum marginal rate ; and (ii) the amount of income-tax with which it would have been chargeable had the remaining part of the total income been its total income. Explanation : For the purposes of this section,---- (a) 'maximum marginal rate' shall have the meaning assigned to it in Explanation 2 below sub-section (3) of section 164 ;(b) the individual shares of the members of an association of persons in the income of such association shall be deemed to be indeterminate or unknown if such shares are indeterminate or unknown on the date of formation of such association or at any time thereafter. " 10. While inserting section 167A, in his Budget Speech for 1981-82, the Hon'ble Finance Minister observed as under : " Another device being used for avoidin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax avoidance through the medium of associations of persons wherein shares of members are not defined.---Under the existing provisions, an 'association of persons' is an assessable entity. The expression 'association of persons' has not been defined in the Income-tax Act. For forming an association of persons, it is, however, necessary that members must join together for the purposes of producing income. 26. The income of an association of persons is charged to income-tax at the rates applicable to an individual. Further, in the case of a member of an association of persons, no tax is payable on any portion of amount which such member is entitled to receive from the association of persons on which income-tax has already been paid by the association. Such portion is, however, taken into account for determining the rate of tax in the case of the member. 27. Instances have come to the notice of the Government that some taxpayers are increasingly resorting to the creation of associations of persons without defining the shares of members with a view to avoiding proper tax liability. The modus operandi in such cases is that a taxpayer with large income creates a number of association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the aforesaid provisions will be as follows : (i) Where the shares of the members of an association of persons in the whole of its income are indeterminate or unknown, the association will be chargeable to income-tax at the maximum marginal rate on its entire income. Further, for the purpose of determining the rate of income-tax to be applied to the income of a member of such association, every member will be deemed to be entitled to receive an equal share in the total income of the association and the amount of income so determined will be included in his assessment for rate purposes. (ii) Where the shares of members of an association of persons in only a part of its income are indeterminate or unknown, the association will be chargeable to income-tax at the maximum marginal rate in respect of such part while the balance of its income in which the shares of the members are specific, will be chargeable at the normal rates. Further, for the purpose of determining the rate of income-tax to be applied to the income of a member of such association, every member will be deemed to be entitled to receive an equal share in that part of the total income of the association in which t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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