Legal concept of association of persons

Font Size

Print

Feedback

Email

Discuss

Related Articles

New direct taxes code likely to hit PFC opsNSSO to estimate GST taxpayer baseProposed MAT rate could be cut by 1%Revenue secy hints at plugging tax leakages

: Section 4 is the charging section under the Income Tax Act, 1961, and it imposes a tax on the income earned by a “person” in the previous year. “Person” has been defined in section 2(31) of the Act to include an association of persons or a body of individuals, whether incorporated or not.

For the purpose of this clause, an association of persons, or a body of individuals or a local authority, or an artificial juridical person, shall be deemed to be a person whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, or profits, or gains.

As legislative history bears, there has been an amendment in section 2(31); inasmuch as prior to 1939, the phrase used in the 1922 Act was “association of individuals”. The amendment seems to have been made to remove any doubt as to the assessibility as a taxable unit of an association of which the members might not, strictly speaking, be called “individuals”. The phrase “association of persons” is of very comprehensive import. Under section 3(42) of the General Clauses Act, “person” includes any company or association or body of individuals, whether incorporated or not.

Therefore, an “association of persons” (AOP) may have as its members, companies, firms, joint families and associations (MMIpoh vCIT (67 ITR 106)). Evidently, the companies entering into a joint venture can also be an assessable unit as an AOP, as held in Ganga Metal Refining CoPte Ltd vCIT (67 ITR 771). In various judicial pronouncements, the courts have enunciated the essential ingredients, which constitute an AOP. In fact, the words “association of persons” have not been used in any technical sense but have to be construed in their plain ordinary meaning.

Analysing its plain ordinary meaning, the Supreme Court observed in the case of CIT vIndiraBalkrishna (39 ITR 546) that the word 'associate' means according to the 'Oxford Dictionary', to join in common purpose, or to join in an action'. Therefore, an 'association of persons', 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.