TaxTMI 
TaxTMI 
Taxation of AOPs, BOIs, and AJPs Formed for Specific Purposes : Clause 318 of the Income Tax Bill, 2025 Vs. Section 174A of the Income-tax Act, 1961
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....ridical persons (AJPs) formed for specific events or purposes, particularly where such entities are likely to dissolve soon after their formation. This provision is the legislative successor to Section 174A of the Income-tax Act, 1961, which was introduced by the Finance Act, 2002. Both provisions address a notable lacuna in the tax assessment regime, ensuring that transient entities do not escape tax liability by dissolving soon after their purpose is fulfilled. This commentary undertakes a detailed analysis of Clause 318, explores its objectives, practical implications, and compares it with the existing Section 174A, highlighting both continuity and change in the statutory approach. Objective and Purpose The legislative intent behind bo....
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....riding effect over the general provisions of annual assessment. The provision applies where an Assessing Officer (AO) forms the opinion that an AOP, BOI, or AJP, formed for a particular event or purpose in a tax year, is likely to be dissolved in the same year or immediately after. The provision is deliberately broad: * It covers all types of collective entities-AOPs, BOIs, and AJPs-regardless of their legal structure, as long as their formation is for a specific event or purpose. * It is triggered by the AO's satisfaction regarding the likelihood of dissolution, which is an administrative determination based on facts and circumstances. * The period of income assessment is from the beginning of the tax year up to the date of diss....
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....actices and simplification of tax terminology. The clause also explicitly mentions the period "beginning from the first day of that tax year up to the date of its dissolution," thereby removing ambiguity regarding the relevant period for assessment. 5. Ambiguities and Potential Issues Despite its clarity, certain interpretative issues may arise: * AO's Satisfaction: The provision hinges on the AO's subjective satisfaction regarding the likelihood of dissolution. While this is a practical necessity, it may give rise to disputes over the adequacy of the AO's basis for such belief. * Overlap with Regular Assessment: Questions may arise regarding the treatment of income earned prior to the formation of the entity, or income a....
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....res. Auditors must ensure that the entity's accounts reflect all income up to the date of dissolution and that tax provisions are appropriately made. 4. Compliance and Procedural Impact Entities covered by Clause 318 must: * File returns for the relevant period (from beginning of year to dissolution), * Comply with expedited assessment notices, * Ensure payment of tax before dissolution is finalized, and * Maintain documentary evidence justifying the period of income and dissolution. Failure to comply may result in penal consequences and recovery proceedings against members or persons in charge. Comparative Analysis with Section 174A of the Income-tax Act, 1961 1. Structural Parity Both Clause 318 and Section 174A are func....
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....emblematic of the overall modernization of the Indian tax code. The new provision preserves the anti-avoidance rationale while updating terminology, clarifying assessment periods, and harmonizing procedural aspects. The essence of both provisions is the same: to tax income that might otherwise escape the net due to the temporary nature of certain entities. 4. Potential for Judicial Interpretation Given the similarities, judicial precedents interpreting Section 174A will continue to inform the application of Clause 318, especially regarding the AO's satisfaction, the scope of income assessable, and the procedural requirements. However, the clarified drafting in Clause 318 may reduce litigation over interpretative ambiguities. Comparat....