Separate roles and profits reduce ventures’ tax risks

Recent Indian judicial decisions have increased uncertainty about taxes in respect of joint ventures where the venture is not a legal entity. Many such ventures are treated as an “association of persons” (AOP) – a tax concept leading to higher taxes on revenue. Indeed, the tax authorities have extended the AOP concept not only to industries with hard assets like infrastructure but also to industries such as media and entertainment.

What is an AOP?

The term AOP is not defined under the Income Tax Act, 1961. Section 2(31) of the act defines the term “person” which includes “an association of persons or a body of individuals, whether incorporated or not”. The explanation to the section clarifies that “an AOP shall be deemed to be a person, whether or not formed with the object of deriving income, profits or gains”.

Various judicial precedents have laid down the parameters that determine the existence of an AOP. The Supreme Court in the case of CIT v Indira Balkrinan (1960) held that a joint venture would be an AOP if the parties have come together with a common purpose to earn revenue from the venture.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Pranay Bhatia is a partner at the firm and Janhavi Sharma is an associate.