What the courts have decided on section 86, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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Sanand Properties P Ltd v Jt CIT
Supreme CourtHelps department
My company is a member of an AOP and takes 35% of the AOP's gross sale proceeds under the AOP deed. We showed it as an exempt share of the AOP's profit. After a survey the AO reopened two years and now says it is revenue. Can he reopen, and is the money taxable in my hands?
No on the reopening challenge and no on the exemption. Where the assessment order shows the Assessing Officer never applied his mind to the character of the receipt at all, there is no opinion to change, and material coming out of a s.133A survey that reveals the true nature of the receipt is tangible material for s.147. On the merits the Court read Clause 7 of the AOP deed itself and held that a member's entitlement to 35% of gross sale proceeds, taken upfront and untouched by the AOP's expenses, is not a share of profit but a diversion of the AOP's receipts by overriding title, taxable in the member's hands as a business receipt. Two Revenue appeals were allowed and the assessee's appeal dismissed.
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PCIT v Ramesh Chandra Rai
Supreme CourtHelps taxpayer
The AO has added my share of the syndicate's profit straight to my own return. Can he do that without assessing the syndicate?
No. An association of persons is a separate person under s.2(31) and its income has to be assessed in its own hands. The Assessing Officer cannot bypass that and club the member's share, and the disallowances he thinks the syndicate should have suffered, into the member's individual assessment. Section 86 then decides what, if anything, the member includes.
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Statutory position — s.167B: when an association of persons or body of individuals is charged at the maximum marginal rate, and when only part of its income is
CBDT Circulars & InstructionsCuts both ways
Our association of persons has fixed member shares, but one member has other income well above the basic exemption limit. Can the Assessing Officer still charge the association at the maximum marginal rate?
Yes. Section 167B(2)(i) is a separate and often-overlooked trigger: even where the members' shares are determinate, if the total income of ANY member for the previous year — excluding his share from the association or body — exceeds the maximum amount not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax is charged on the total income of the association or body at the maximum marginal rate. Sub-section (1) is the more familiar trigger: where the individual shares of the members are indeterminate or unknown, tax is charged on the total income of the association or body at the maximum marginal rate, and its proviso pushes that up to a member's higher rate where any member is chargeable above the maximum marginal rate. Section 167B(2)(ii) deals with the split case where a member is chargeable at a rate higher than the maximum marginal rate: his relatable portion goes at the higher rate and the balance at the maximum marginal rate. Companies, co-operative societies and societies registered under the Societies Registration Act, 1860 or a corresponding State law are excluded from sub-section (1).
Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.
