Educational institution

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KAPIL (Querist)
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24 May 2016 One of my friend has opened up a playschool and for getting registered in the state it had to be of trust character... my question is that he had opened the school for profit motive and registered as a trust what is criteria for determining the eligibilty for audit... gross receipts exceeds 2. 5lakhs thanks in advance

CA Shubhang Goyal

CA Shubhang Goyal (Expert)
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24 May 2016 Yes it will liable for audit.

As you mentioned the school is opened for profit motive and is not registered under section 12AA/80G of Income tax Act,1961 then it will be considered as Association of persons(AOP) on which tax will be levied at maximum marginal rate.Go through below mentioned matter where tax will be levied as per composition of trust:

Where shares of the members are determinate (under Section 67A)
The total income of an AOP/BOI wherein the shares of the members are determinate and known shall be computed as follows :

Any interest, salary, bonus or remuneration paid to any member of AOP shall be deducted from their total income.

The balance income (either profit or loss) shall be apportioned to the members, to which salary, interest, etc. shall be added. This income shall be treated as member's share in income of AOP.

The member's share so ascertained shall be apportioned under various heads of income in the same manner as it is done for AOP.

Any interest paid by member on capital borrowings for investment purposes in AOP shall be deducted from member's share while computing his income under the head profits and gains of business/profession.
The tax is chargeable on the total income of an AOP/BOI at the same rate as is applicable in the case of an individual.

But, when the total income of any member of the AOP/BOI for the previous year (excluding his share from the AOP/BOI) exceeds the maximum amount which is 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 AOP/BOI at the maximum marginal rate (i.e. the highest slab applicable to an individual).

And, where, the total income of any member of the AOB/BOI (whether or not it exceeds the maximum amount not chargeable to tax in the case of an individual) is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged on that portion of the total income of the AOP/BOI which is relatable to such member at a higher rate and the balance of the total income of the AOP/BOI shall be taxed at the maximum marginal rate.

Where shares of members are indeterminate(under Section 167B)
The tax is charged on the total income of the AOP/BOI at the maximum marginal rate, which is the rate of tax (including surcharge, if any) applicable in relation to the highest slab of income in the case of an individual as specified in the Finance Act of the relevant year. However when any member is charged at a higher rate than maximum marginal rate, the income shall be taxed at a higher rate.

Regards,
CA Shubhang Goyal