Differnce beetween aop & bop

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05 February 2016 tellme diifernce between association of person & Body of person

Arpit Shah

Arpit Shah (Expert)
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05 February 2016 An AOP (Association of Persons) is not defined in the Indian laws. General Clauses Act, 1897 has not defined an AOP directly but, while defining person, it also includes association.

Section 2(31) of the Income-tax Act, 1961 also has not defined AOP, but given similar treatment to AOP the way General Clauses Act has given. An AOP is formed by relation between parties. It may be a consortium or joint venture registered or unregistered. Since association of persons is not defined, the meaning has to be understood from the meaning assigned to the term by the Supreme Court which observed in the case of

CIT vs. 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 the association must be one the object of which is to produce income, profits or gains.

Andhra Pradesh High Court, in the case of Deccan Wine and General Stores vs. CIT (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 nutshell, there must be a common design to produce income. If there is no common design, there is no association. The meaning, as culminates from different decisions of the Supreme Court and the High court, of an AOP is that an association of persons exists when following conditions are satisfied:

(i) Two or more persons join;

(ii) Voluntarily for;

(iii) A common purpose or common action with object to produce profit or gains and

(iv) Combine for in joint enterprise; and

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

It is evident that an AOP is not created but formed. It may be either registered or unregistered, as the case may be.

Relevance of AOPs Infrastructure development is an area of concern for the Government of India till date. The Government has introduced public-private partnership (PPP) concept in the infrastructure development. Both the Government and the private parties join together in building an infrastructure facility. Highway contracts, toll roads, water resource development contracts, etc., are some of the live examples in this case. The Government forms a special purpose vehicle (SPV) and takes the infrastructure development under its control. The SPV will award the contract to the eligible contractors. In today’s scenario, these contracts are awarded to a consortium only, so that risk and investment will be spread. Further, if the tender calls for international commercial bidding (ICB), there must one partner in the consortium who has the relevant expertise being a nonresident. This method of ICB is followed in developing infrastructure for exploration of oil contracts. It is evident that, in the current day’s scenario, it is inevitable to form an AOP to win a bid and execute the contract especially when they are awarded by the Government /Government companies An AOP, duly formed and executed by the documents of deed, shall be legally binding on the parties, whether it is registered or not. Such a duly formed AOP normally follows two methods of executing the project.

Registered AOP:

AOP shall be registered as such for all purposes and it will have separate registration number under various compliances. Profit or loss on the contract is ascertained each year and members will divide the same in an agreed ratio. In this method, parties to the AOP normally subcontract the work from an AOP and bill their respective share to the AOP.

An AOP will raise a consolidated bill on the customer. Customer will pay to the account of AOP and the AOP will pay the subcontract charges to the members initially. Remaining profit will be shared in the agreed ratio. Method 2 - Unregistered AOP:

An AOP will be formed through a deed/memorandum. Members among them appoint one leader for coordination with the customers. They either raise bill on the customer and forward to the leader, or, raise the bill on the leader for their share of work.

Leader will raise a consolidated bill on the customer on behalf of all the members. The Collection mechanism is also made through respective bank accounts of the member. Otherwise, the leader will collect the amount and pay the respective share to the members concerned. In this method of operation, there is no need for separate registration under various statutes governing the business. Rather, the members of consortium will discharge their compliance part. There will be no separate profit/loss account in the AOP as such, and an AOP is just a facilitator in the contract. In present scenario, almost all contracts floated by the Government require an AOP formation from the bidding stage itself. Hence, the contractors can opt for any method suitable for the execution. Further, Method 2 adheres to the proportionate consolidated method of AS 27.

Arpit Shah

Arpit Shah (Expert)
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05 February 2016 http://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Tax-Concepts/Person.html

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