The Association of Persons (AOP) and Body of Individuals (BOI) are two terms widely used in Indian taxation, but they are often confused. The two are similar in the sense that they are both characterised by a group of united people. Still, they vary significantly in terms of their aim, constitution, and tax exemption. Taxpayers, legal practitioners, and business owners need to understand these differences.
This paper discusses the meaning, nature, and significant disparities between an AOP and a BOI, as well as their treatment under the Income Tax Act, 1961.
What is an Association of Persons (AOP)?
The Association of Persons is a combination of two or more persons who enter into a voluntary agreement to do business together on a shared purpose, basically to get income or profit. The members can be individuals, firms, companies or any other legal entities.
The presence of an AOP is a result of mutual agreement or collaboration where the members share profits or losses based on a mutual understanding between them.
Example:
Assume that two companies collaborate in creating a construction project in order to generate revenues; they form an AOP.
An AOP obtains a separate identity in terms of taxation under the Income Tax Act. It is able to generate income, own property and be taxed independently of its members.
What is Body of Individuals (BOI)?
A Body of Individuals, on the other hand, is made up of individuals alone whose sole purpose is to unite on a shared goal. The reason for a BOI can be or cannot be to make a profit; it can come about as a result of joint ownership, or be inherited or created by law.
Example:
In case three brothers inherit property and share the rent coming from the same, they form a BOI.
An AOP is more organised and profit-oriented compared to a BOI. It is usually created by an operation of law or without any agreement, and not necessarily through an agreement.
Legal Differentiation Between AOP and BOI
The major distinction between an AOP and a BOI is their composition and purpose. Whereas an AOP may have individuals and entities as members, a BOI will always have only natural persons. Equally, an AOP is never established without the purpose of generating income, whereas a BOI can be established with different purposes, like the joint ownership or administration of inherited property.
The difference is crucial in taxation, where both AOP and BOI are regarded as distinct taxable entities, but the rate and mode of tax vary depending on how they were formed and how they distribute their income.
Tax Treatment under the Income Tax Act, 1961
It is specified in both AOP and BOI that they are distinct individuals as per Section 2(31) of the Income Tax Act, 1961. The mode of taxation, however, varies a bit amidst the circumstances.
- In case of determinative shares of members:
- Suppose every member has a well-established share of income, the total income of AOP or BOI is computed, and then it is distributed to the members.
- Tax is imposed on the individual slab rate imposed on each member.
- Where the shares are indeterminate or unknown:
- The AOP or BOI pays at the highest marginal rate (MMR) that is currently 30 percent (including any surcharge and cess).
- Special Case:
- Unless one of the members has income above the basic exemption limit and no member is liable to a rate of tax exceeding the average rate of tax, the AOP or BOI can be taxed at slab rates charged to an individual.
This loose system provides fair taxation and also avoids abuse of group entities in tax evasion.
Difference Between AOP and BOI
| Basis | AOP (Association of Persons) | BOI (Body of Individuals) |
| Members | Can include individuals and non-individuals (like companies, firms) | Only individuals |
| Formation | Formed for a common purpose, often a business/profit motive | Mostly arises from inheritance, common interest, or joint income |
| Examples | Company + Individual doing a joint venture | Brothers inheriting a property jointly |
| Intention | Usually, a deliberate act to earn income together | May not always be deliberate; can arise naturally |
Practical Examples
- AOP Example:
A solar energy project is being done by two companies, aiming at splitting the profit equally. Their arrangement is that of an Association of Persons, in that there are legal entities that are engaged in an aim that is profit-oriented.
- BOI Example:
The agricultural land is leased for income to four members of the family. They are viewed as a Body of Individuals since the income is not obtained as a result of an organized profit venture but through inheritance.
Why Understanding the Difference Matters?
It is not just a theoretical issue whether a group is an AOP or a BOI, but it has practical tax consequences. The classification defines:
- Income tax rate to be used.
- The allowances and concessions which may be availed.
- The responsibility of individual members in case of assessment or dispute.
For example, the taxation of an AOP that operates as a business will differ from the taxation of a BOI, which will share the inherited property. Poor classification may result in incorrect tax or compliance calculations.
Conclusion
Both the Association of Persons (AOP) and the Body of Individuals (BOI) are collective bodies defined in the Income Tax Act, but they differ in their structure, purpose, and taxation.
A typical AOP is based on an enterprise or profit-driven venture of a voluntary nature, and it may include individuals or business entities. On the contrary, a BOI typically applies to natural persons who assemble around non-commercial / inherited incomes.
It is essential to understand these differences to file taxes correctly, structure a business and comply with the law. For entrepreneurs creating a joint venture or families dealing with inherited property, the differences between the AOP and BOI can be understood, making them more suitable in terms of clarity, compliance, and effective tax planning.
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