What is an AOP i.e Association of Person under Income Tax Act ?

AOP or Association of Person is defined as  a person under section 2(31)(v ) of the Income Tax Act . However, what is an Association of Person itself is not defined . Therefore, understanding the meaning of this taxable entity is very important , because in many cases for deciding whether a receipt is chargeable in hand of an entity , one is required to decide the nature of assessee .

Meaning of AOP

Since Income Tax Act has no definition , the meaning of Association of Person has to be understood from the meaning assigned to the term by Hon’ble  Supreme Court which observed in the case of CIT v Indira Balkrishna (39 ITR 546) that 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.

The Andhra Pradesh High Court,  in the case of Deccan Wine and General Stores vCIT (106 ITR 111), laid down the principles governing an AOP by stating that it is clear that an association of persons does not mean any and every combination of persons; it is only when they associate themselves in income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough

The meaning , as culminates from different decision of Supreme Court and High court , of AOP is that  an association of persons  exist when following conditions are satisfied :

(i) Two or more persons joins ;

(ii) Voluntarily for ;

(iii) A common purpose or common action with object to produce profit or gains. However, the object to produce profit or gains is no longer a sine qua non with the explanation as discussed above;

(iv) and combine for in joint enterprise; and

(v) creates some kind of scheme for common management.

So, when one requires to decide about taxation of an entity  where a group of persons are involved , the question , first to be decided whether the said entity is AOP or BOP is very important.