Disallowance of sum paid to members of AOP or BOI

Introduction

No deduction shall be allowed to an AOP or BOI in respect of any salary, bonus, commission, remuneration or interest paid by it to the members. While as any other payment made to the members (i.e., rent, consultancy fees, etc.) shall be allowed as deduction.

1. About

1.1. Disallowance for Remuneration and Interest

Any sum paid by an AOP or BOI to its members in form of salary, bonus, commission, remuneration or interest shall not be allowable as deduction. Even if the commission is paid by the AOP or BOI to the proprietary business of one of its members, it is not allowed as deduction

If interest is paid by an AOP or BOI to a member and the member has also paid interest to such AOP or BOI, the amount of interest to be disallowed under this provision shall be limited to the net amount of interest paid by the AOP or BOI to the member. Such adjustment of interest paid and received shall be made member wise and the net interest paid to a member shall be disallowed

Example, if an AOP pays interest to three of its members and receives interest from the fourth member, entire amount of interest paid to three members shall be disallowed under Section 35(f). While the interest received from the fourth member is taxable as income in the hands of the AOP.

Exception: Payment to member in representative capacity

Where an individual is a member in an AOP or BOI on behalf of any other person, interest paid to such member, otherwise than as member in a representative capacity, shall not be disallowed under this provision. Similarly, where an individual is a member in an AOP or BOI in his personal capacity, interest paid to such member, on behalf of any other person, will not be taken into account for the purposes of disallowance under this provision.

1.2. Deduction allowed for other payments

Only salary, bonus, commission, remuneration or interest paid by an AOP or BOI to its members are subject to disallowance. Any payment other than these shall be allowed as deduction.

Example: Mr. A is a member in an AOP and he lets out his premises to such AOP. Rent paid by the AOP to the member shall not be subject to disallowance under this provision.

References

R.A. Goodsir & Co. v. CEPT [1948] 16 ITR 367 (Mad.)

Sugar Dealers v. CIT [1980] 122 ITR 826 (All.)

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.