P and R, are individuals, aged 28 years and 30 years respectively, who constitute an Association of Persons, sharing profit and losses in the ratio…

CA Final · Direct Tax Laws and International Taxation · MTP · November 2026
P and R, are individuals, aged 28 years and 30 years respectively, who constitute an Association of Persons, sharing profit and losses in the ratio of 2:1. For the accounting year ended 31 st March 2026, the Profit and Loss account of the business is as under: Figures are in '000s Cost of goods sold 4,250 Sales 4,900 Remuneration to: Dividend from Indian companies 25 P 130 Long term capital gains (computed) 640 R 170 Employees 256 Interest to: P 48.3 R 35.7 Other expenses 111.7 GST penalty due 39 Net profit 524.3 5,565 5,565 Additional information furnished: Other expenses included: wrist watches costing ₹ 2,500 each were given to 12 dealers, who had exceeded the sales quota prescribed under a sales promotion scheme; employer's contribution of ₹ 6,000 to the Provident Fund for the month of November, 2025 was paid on 14 th January 2026. ₹ 30,000 was paid in cash to an advertising agency for publicity. Outstanding GST penalty was paid on 15 th October 2026. The penalty was imposed for non-filing of returns and statements by the due dates. P and R had, for this year, income from other sources of ₹ 4,60,000 and ₹ 2,32,000 respectively. On the basis of information provided above: Compute the total income of the AOPs for the assessment year 2026-27; and Discuss the tax implication for that year in the hands of the individual members.

Suggested Answer and Working Notes:

2. (a) (i) Computation of total income of the AOP for A.Y.2026-27 Particulars ₹ ₹ Profits and Gains of Business or Profession Net profit as per profit & loss account 5,24,300 Add: Inadmissible payments Interest to members P & R (₹ 48,300 + ₹ 35,700) 84,000 Advertising [Disallowance under section 40A(3) (100% of ₹ 30,000 being a cash payment)] 30,000 Remuneration to members P & R (₹ 1,30,000 + ₹ 1,70,000) 3,00,000 Employer's Contribution [Since the employer's contribution to PF has been paid during the previous year itself, it is allowable as deduction] Nil Value of Wrist watches gifted to Distributors [Expenses with respect to distribution of wrist watches are allowable as deduction by virtue of section 37] Nil GST penalty [Penalty imposed for delay in filing GST return is not deductible since it is on account of infraction of the law requiring filing of the return within the specified period³] 39,000 4,53,000 9,77,300 Less: Income not taxable under this head Long term capital gain 6,40,000 Dividend from Indian companies 25,000 6,65,000 Profits and gains of business 3,12,300 Long term capital gain 6,40,000 Income from other sources - Dividend from Indian companies 25,000 Total income 9,77,300 (ii) Tax implication in the hands of members P & R for the A.Y. 2026-27 Members of the AOPs have to pay tax on their total income taking into account savings/ investments etc. Since one of the members has total income excluding share from AOP more than the basic exemption limit, the AOPs will be chargeable to tax at the maximum marginal rate. Since the AOPs is taxed at maximum marginal rate, the share income of members is not taxable in their hands individually as per section 86.

Topics: Assessment of Various Entities, Profits and Gains of Business or Profession

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