Legalities of trading from AOP

Association of person has not been defined anywhere in the Income Tax Act 1961. However, section 2(31) of the Income Tax Act defines the term ‘Person’ which includes includes an individual, a Hindu Undivided Family, a Partnership Firm, a Company, an Association of  Persons, a Body of Individual, a Local Authority and every other Artificial Juridical Entity. Under the Income Tax Act 1961, income tax is payable by every assessee at the rates fixed by the Finance Act every year. An ‘Assessee’ means a person by whom any tax or any other sum of money (i.e. penalty or interest) is payable under the Act. Association of persons under the Income Tax Act is an entity or unit of assessment as the association of persons is included in the definition of person.

An AOP does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an AOP. 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 a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression ‘AOP’ flows from the meaning of the word ‘association’

An AOP is a separate assesse. First, the total income under the different heads i.e. income from house property, profits or gains of business or profession, capital gains, and income from other sources, ignoring the prescribed incomes exemptions. Thus, “gross total income” is obtained.  From the gross total income, prescribed deductions under Section 80C of the Income Tax Act of Chapter VI-A are made. The balance amount is the taxable income.

Interest paid by the AOP to a member is not allowed as deduction from the income of the AOP. However, if an individual in a representative capacity has paid interest to the AOP then such interest shall not be disallowed as deduction. Any salary, bonus, commission or remuneration (by whatever name called), paid by the AOP to a member is not allowed as deduction from the income of the AOP.

The total income of the AOP is taxable, either at the rates applicable to an individual, or at the maximum marginal rate or at a rate higher than maximum marginal rate. However when any member is charged at a higher rate than maximum marginal rate, the income shall be taxed at a higher rate.

An AOP is assessed in two manners, firstly where shares of the members are indeterminate or unknown and secondly, where shares of the members are determinate or known.

Thanks a lot for your kind guidance. I furthur want to know one more thing that has been putting me in confusion for a long time. My company's agreement tells the following clause,

"Either during the period of your traineeship or during the period of your employment
as a confirmed employee, you are not permitted to undertake any other
employment, business, assume any public or private office, honorary or remunerative,
without the prior written permission of the company."

I want to form an AOP/BOI and do trading with the combined investments of my friends and me. Please guide me whether that shall violate the above stated agreement clause.

Thanks in advance