Association of Persons or Body of Individuals :
Definition of ‘Person’ includes ‘Association of Persons’ (AOP) or ‘Body of Individuals’, whether incorporated or not, in India or outside India.
It seems the main distinction between ‘body of individuals’ and ‘Association of Persons’ is that the term ‘person’ is wide and would include company, LLP or body corporate also, while ‘body of individuals’ would cover only individual persons. Otherwise, principally, there seems no difference between the two.
As per Oxford Dictionary, ‘associate’ means to join in common purpose of to join in an action.
Thus, some people coming together is not ‘AOP’. It should be for common purpose (of providing a taxable service jointly).
In B. N. Elias, In re (1935) 3 ITR 408 (Cal) it was held that the word “associate” means, according to the Oxford Dictionary, “to join in common purpose, or to join in an action.” Therefore, an AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. This was the view expressed in CIT v. Lakshmidas Devidas (1937) 5 ITR 584 and also in Dwarakanath Harischandra Pitale In re (1937) 5 ITR 716 (Bom). In re, B. N. Elias (supra), it was held : “It may well be that the intention of the legislature was to hit combinations of individuals who were engaged together in some joint enterprise but did not in law constitute partnerships. – – When we find that there is a combination of persons formed for the promotion of a joint enterprise, then no difficulty arises whatever in the way of saying that these persons did constitute an association”. All these three decisions were quoted with approval in CIT v. Indira Balkrisha (1960) 39 ITR 546 (SC) – also in N V Shanmugham & Co. v. CIT (1971) 81 ITR 310 (SC 3 member bench).
In CIT v. Indira Balkrisha (1960) 39 ITR 546 (SC), it was held that the definition of AOP hits combination of individuals who were engaged together in some joint enterprise but did not constitute partnership in law – same view in Meera & Co. v. CIT (1997) 4 SCC 677 = 91 219 = 224 ITR 635 (SC).
In Mohamed Noorullah v. CIT (1961) 42 ITR 115 (SC), business of deceased carried on by receivers. There was unity of control of business and its continuity. Business was carried on by consent of all parties as one unit. It was held that the Co-heirs did form an AOP. Income of business of a deceased carried on as a single business by receivers with the consent of all the parties with unitary control was assessable as income of an AOP.
An AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains- CIT v. Indira Balkrisha (1960) 39 ITR 546 (SC). In this case, three cowidows had inherited property of deceased husband. They succeeded estate of husband as co-heirs, and had rights of survivorship and equal beneficial enjoyment. They are entitled as between themselves to an equal share of the income. It was held that in absence of evidence that the persons (three widows in this case) have combined in a joint enterprise to produce income, they cannot be considered as AOP.
An element of joint venture for profit is necessary to constitute an AOP – CAIT v. Raja Ratan Gopal (1966) 59 ITR 728 (SC).
In CIT v. Govindbhai Mamaiya (2015) 229 138 = 52 270 (SC), it has been held that if income from land was obtained through inheritance, these persons have to be assessed as ‘individuals’. It is not AOP as it was not formed by volition of parties to generate income.
Association of persons means an association in which two or more persons join in a common purpose or common action, and the association must be one, the object of which is to produce an income, profit or gains. However, ultimate division of profits is not relevant factor. – N V Shanmugham & Co. v. CIT (1971) 81 ITR 310 (SC 3 member bench). In this case, the business of erstwhile partnership was carried on by receivers on behalf of erstwhile partners with their consent under a unified control and management. The receivers did not (and indeed could not) represent the individual interests of various owners of business. The control and the management of the business was in the hands of the receivers. That control and management was a unified one. It was held that this is business of AOP.
Two persons joining together, purchasing immovable properties by contributing capital equally, such properties jointly held and managed by or on behalf of them resulting in profits and gains which were divided by them equally, they constituted “association of individuals”, notwithstanding that one of them was a minor – CIT v. Laxmidas Devidas (1937) 5 ITR 584 (Bom HC DB).
“AOP”, means the members of the body must have joined together for the purpose of producing income – CIT v. HarivadanTribhovandas (1977) 106 ITR 494 (Guj HC DB).
In CIT v. Buldana District Main Cloth Importers Group (1961) 42 ITR 172 (SC), the business of import and distribution of cloth was carried on a joint basis. The purchases were joint, so were the sales. The profits were ascertained on a joint basis and then distributed according to the capital contributed by each member of the group. It was held that this is AOP.
In Geoconsult ZT GMBH, In re (2008) 172 396 = 304 ITR 283 (AAR), it has been held that an unincorporated Joint Venture is ‘Association of Persons’ for purpose of income tax, if it satisfies following essentials of AOP-
(i) two or more persons
(ii) Voluntary combinations and
(iii) A common purpose or common action with object to produce profits or gains – similar view in ABC In re (2012) 207 315 = 20 152 (AAR).
If there is common purpose or common action, it is case of two adventures coming together for promotion of a joint enterprise, it is AOP – B N Elias In re (1935) 3 ITR 408 (Cal HC) – quoted with approval in Linde AG, Linde Engineering Division In re (2012) 19 238 = 207 299 (AAR).
In Linde AG, Linde Engineering Division In re (2012) 19 238 = 207 299 (AAR), the appellant had formed a consortium in the nature of Unincorporated Joint Venture (UJV). It was found that the parties were liable jointly and severally. Splitting up of contract was not possible. Transaction should be ‘looked at’ and not ‘looked through’. Internal division of responsibility by consortium and its recognition by customer cannot dislodge the legal position of formation of AOP. It was held that the consortium is AOP.
However, this decision has been reversed in Linde AG v. Dy DIT (2014) 44 224 = 224 43 = 365 ITR 1 (Del HC DB). It was held that mere fact that they had accepted contractual obligation towards third party would not in itself lead to conclusion that the members have formed as AOP. [The example given was that of director giving personal guarantee for loan given to company. This cannot be AOP]. It was held that in AOP, there must be common action and some common management. Mere cooperation is not sufficient to form AOP.
In Van Ord ACZ BV In re – (2001) 115 317 (AAR), it was held that in order to constitute an AOP, there has to be common purpose or action. The object must be to produce income jointly. Mere receiving income jointly is not sufficient, if each party has agreed to bear its own loss or retain its profit separately. The intention should be to carry on any business in common and not to execute part of a job by each party independently. There should be some element of control or connection between work done by one party with work done by another party.
CBDT vide circular No. 07/2016 dated July 2016 has clarified that to determine whether the consortium is AOP has broadly accepted the aforesaid principles.
Co-owners are not AOP or BOI, if they have not voluntarily come together for business- Co-owners are not AOP or BOI, if they have not come together for purpose of business. Lease rent from property purchased jointly with specific shares is separately assessable in the hands of the individual co-owners and not in the hands of an association of persons – CIT v. Shivsagar Estate (2002) 124 606 = 177 CTR 107 =257 ITR 59 (SC).
In Nizam-ud-Din Amir-und-din of Loahre In re (1943) 11 ITR 443 (Lahore HC DB), Co-heirs of deceased had Inherited specific shares of property under Mohammedan Law. Income was derived by way of rent. Munshi (clerk) was employed to manage the property and collect rent. Net income was distributed in accordance with respective shares. It was held that there is no question of assessees forming a business concern. It is not a joint venture. Assessees did not form an association of individuals/They should be separately assessed.
In CIT, Burma v. M. A. Baporia and Others (1939) 7 ITR 225, it was held that the expression “association of individuals” as used in that section must be construed according to the rule of ejusdem generis with all the other groups of persons mentioned therein, namely HUF, company and firm. By merely inheriting shares in a family property, the co-shares cannot become members of an association of individuals – quoted with approval in Nizam-ud-Din Amir-und-din of Loahre In re (1943) 11 ITR 443 (Lahore HC DB).
In G Murugesan and Bros v. CIT (1973) 4 SCC 211 = 88 ITR 432 (SC), it was held that in order to form AOP, the members must join together for the purpose of producing an income. An AOP can be formed only when two or more individuals voluntarily combine together for certain purpose. Hence, volition on the parts of members of association is an essential ingredient.
InCIT v. Indira Balkrisha (1960) 39 ITR 546 (SC), three co-widows had inherited property of deceased husband. They succeeded estate of husband as co-heirs, and had rights of survivorship and equal beneficial enjoyment. They are entitled as between themselves to an equal share of the income. It was held that in absence of evidence that the persons (three widows in this case) have combined in a joint enterprise to produce income, they cannot be considered as AOP.
Trustees and beneficiaries merely receiving an income is not AOP, as they have not come together for earning of income – CIT v. SAE Head Office Monthly Paid Employees Welfare Trust (2004) 141 364 (Del HC).
In CIT v. S R Sugar Mills (1985) 22 277 = 44 CTR 129 : (1985) 156 ITR 273 (ALL HC DB), the position was that dispute arose between co-owners of mills. The dispute resulted in induction of an official receiver to carry on the business. There was finding of fact by Tribunal that there was no material or evidence on record prove co-owners of mills joined together in a common purpose or common action. It was held that assessee mills through receiver could not be taxed in the status of AOP/BOI.
Service supplied jointly by more than one persons – Whether eligible for separate exemption-A building co-owned by two people is given on rental basis. Issue is whether the exemption available to both of them separately or the GST is payable as AOP?
In my view, each person is separate supplier of service and can claim separate exemption, if property is inherited. If property is specifically purchased jointly for providing renting services or for business purposes, the turnover will be clubbed for purpose of exemption available to small suppliers of service, as they will be treated as AOP or BOI.
In Dinesh K Patwa v. CST (2012) 37 STT 375 = 25 515 (CESTAT), a prima facie view has been held that each co-owner is eligible for separate exemption available to small service providers – similar order in Smt K D Chaudhary v. CST (2012) 37 STT 425 = 26 339 (CESTAT) * Manju Champaklal Bafna v. CST (2014) 43 GST 691 = 42 320 (CESTAT) * Dilip Parikh v. CST (2014) 43 GST 447 = 41 311 (CESTAT) * Sanjay K Motwani v. CST (2014) 46 GST 183 = 46 98 (CESTAT).
Section 26 of Income Tax Act recognizes that where a property consisting of land and buildings is owned by two or more persons and their shares are definite and ascertainable, these persons shall not be assessed as AOP.
In case of income tax, it has been clarified vide CBDT circular No. 715 dated 8-8-1995 that if there are number of payees, each having definite and ascertainable share in property, the limit of TDS (Rs 1,20,000), will apply to each of the payee/co-owner separately. Thus, indirectly, it is held that each co-owner is a separate service provider.
In Jaswant Singh Mann v. UOI (2016) 53 GST 108 = 64 204 = 99 VST 77 (P&H HC DB), it has been held that an unincorporated AOP can be a ‘person’ and that definition in section 65B(37)(vii) of Finance Act, 1994 is valid. [However, in this judgment, there is no specific decision that for purpose of renting, joint owners will be considered as AOP. Hence, this decision cannot be taken as authority that renting income of joint owners can be clubbed for purpose of service tax on renting of immovable property].
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