Section 86

CHAPTER VII — INCOMES FORMING PART OF TOTAL INCOME ON WHICH NO INCOME-TAX IS PAYABLE

SECTION 86 — SHARE OF MEMBER OF AN ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS IN THE INCOME OF THE ASSOCIATION OR BODY

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

STATUTORY TEXT (as in force, Income-tax Act, 1961)

Marginal heading: Share of member of an association of persons or body of individuals in the income of the association or body.

86. Where the assessee is a member of an association of persons or body of individuals (other than a

company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of

1860), or under any law corresponding to that Act in force in any part of India), income-tax shall not be

payable by the assessee in respect of his share in the income of the association or body computed in the

manner provided in section 67A :

Provided that,—

(a) where the association or body is chargeable to tax on its total income at the maximum marginal rate

or any higher rate under any of the provisions of this Act, the share of a member computed as

aforesaid shall not be included in his total income;

(b) in any other case, the share of a member computed as aforesaid shall form part of his total income :

Provided further that where no income-tax is chargeable on the total income of the association or body, the

share of a member computed as aforesaid shall be chargeable to tax as part of his total income and nothing

contained in this section shall apply to the case.

A. SECTION COMMENTARY

A.1 Structural position

Section 86 is the sole live operative provision of Chapter VII (its companion sections 81 to 85C and 86A having all been omitted). The Chapter heading — 'Incomes forming part of total income on which no income-tax is payable' — describes section 86 exactly: the member's share in the income of an AOP/BOI is, in the cases the section identifies, part of total income for rate/aggregation purposes yet bears no tax in the member's hands. Section 86 is to be read with section 67A (which prescribes how a member's share in the income of an AOP/BOI is computed) and with section 167B (which fixes the rate — including the maximum marginal rate — at which the AOP/BOI itself is taxed).

A.2 Provision taxonomy

Section 86 has no numbered sub-sections; it comprises a main relief limb and two provisos:

Main limb: where the assessee is a member of an AOP/BOI — other than a company, a co-operative society, or a society registered under the Societies Registration Act, 1860 — income-tax is not payable by the member on his share in the income of the AOP/BOI, that share being computed in the manner provided in section 67A.

First proviso, clause (a): where the AOP/BOI is itself chargeable to tax on its total income at the maximum marginal rate (MMR) or any higher rate, the member's share shall not be included in his total income at all.

First proviso, clause (b): in any other case (i.e. the AOP/BOI is charged at normal/slab rates), the member's share shall form part of his total income — included for rate purposes, with relief given so that it is not taxed again at the member's end.

Second proviso: where no income-tax is chargeable on the total income of the AOP/BOI (e.g. its income is below the taxable limit), the member's share is chargeable to tax as part of his total income and nothing in section 86 applies to that case.

A.3 Core doctrinal themes

Five themes dominate section 86 jurisprudence. (i) The threshold question — whether an AOP/BOI exists at all within section 2(31); section 86 has nothing to operate upon unless there is a genuine, volitional, income-producing combination (Indira Balkrishna; Murugesan; Shanmugham). (ii) The AOP/BOI distinction — a body of individuals is a combination of individuals only, but both require an income-producing activity (Deccan Wine; Meera & Co.). (iii) Single-point taxation — AOP income is taxed once, in the right hands; under the 1961 Act it must be assessed in the AOP's hands (Ch. Atchaiah), the historical option of the 1922 Act having gone (Murlidhar Jhawar). (iv) The rate at which the AOP/BOI is taxed — slab, MMR or higher (section 167B) — which selects between clauses (a) and (b) of the first proviso. (v) The MMR exclusion in operation — where the AOP/BOI is taxed at MMR, the member's share is excluded outright and cannot be re-taxed (Ramesh Chandra Rai, affirmed in Ramswaroop Shivhare).

A.4 Legislative evolution / FA amendment trail

The present architecture of section 86 — keyed to the computation in section 67A and to the maximum-marginal-rate scheme in section 167B — is the product of the restructuring of AOP/BOI taxation by the Finance Act, 1989 (w.e.f. AY 1989-90) and refinements through the Finance Acts of the 1990s. The provision excludes from its relief members that are companies, co-operative societies or registered societies (these were brought within or kept outside the scheme as the inter-corporate and co-operative reliefs evolved). No Finance Act of recent years — including the Finance Acts of 2023, 2024, 2025 and 2026 — has amended section 86; its text is stable.

A.5 CA practitioner pointers

(1) Decide AOP/BOI status first. Volition plus a common income-producing purpose is essential; co-heirs or co-owners who merely receive income jointly are taxed as individuals, and section 86 does not arise (Indira Balkrishna; Govindbhai Mamaiya). (2) Identify the rate at which the AOP/BOI is assessed. MMR or higher (section 167B) engages proviso (a): exclude the share from the member's total income entirely. (3) If the AOP/BOI is taxed at slab/normal rates, proviso (b) applies: include the share in the member's total income for rate purposes, with relief so it is not taxed again. (4) If no tax is chargeable on the AOP/BOI's total income, the second proviso applies: the member's share is fully taxable in his hands and section 86 does not relieve it. (5) Members that are companies, co-operative societies or registered societies are outside section 86; their share is dealt with under the provisions applicable to them. (6) The share must be the section 67A share (the member's proportion of the AOP/BOI's income as computed under the Act), not a fixed or guaranteed sum. (7) Reporting: an exempt AOP/BOI share is disclosed in Schedule EI of the return; retain the AOP/BOI's assessment particulars (PAN, status and the rate at which it was assessed) to support the proviso-(a) exclusion.

B. FA 2026 IMPACT NOTE

Section 86 of the Income-tax Act, 1961 is NOT amended by the Finance Act, 2026. FA 2026 makes no change to the text of section 86, to section 67A (computation of a member's share) or to section 167B (rate/MMR trigger). The single-point-taxation scheme for AOP/BOI members therefore continues unchanged for assessments under the 1961 Act, including AY 2026-27.

Consequence for case law: every authority listed in Part C below continues to be good law for assessments under the 1961 Act. The MMR-exclusion line (Ramesh Chandra Rai, affirmed by the dismissal of the SLP in Ramswaroop Shivhare) governs current syndicate/joint-venture assessments.

Transition note: the Income-tax Act, 2025 (30 of 2025), which commences on 1 April 2026 and replaces the 1961 Act, carries forward the AOP/BOI single-point-taxation scheme in its own provisions; the doctrine in the cases below remains relevant to the corresponding provision of the new Act.

C. CASE LAW — CLUSTERED BY ISSUE

Cluster C-1 : Whether an AOP/BOI exists — the threshold for section 86

1. CIT v. Indira Balkrishna (1960) 39 ITR 546 (SC)

Facts: On the death of the assessee's husband, three widows succeeded to his estate, which yielded income from shares, dividends, property and a money-lending business. The Revenue assessed the three widows in the status of an 'association of persons'.

Issue: What is the meaning of 'association of persons' in the charging provision, and were the three widows an AOP merely because they jointly succeeded to and held income-yielding assets?

Held: The Supreme Court (S. K. Das, Kapur and Hidayatullah JJ.) held that an 'association of persons' means an association in which two or more persons join in a common purpose or common action with the object of producing income, profits or gains; the coming together must be the result of volition. On the facts there was no finding that the widows had combined in any joint enterprise to produce income, so they could not be assessed as an AOP.

Ratio: The locus classicus on the meaning of AOP: a voluntary combination for a common purpose of producing income is essential; mere co-ownership or joint receipt of income is not enough.

Relevance to s.86: Section 86 presupposes a genuine AOP/BOI. Where the group is merely a set of co-owners, there is no AOP and section 86 has nothing to operate upon — the members are taxed directly on their respective shares.

2. Mohamed Noorullah v. CIT (1961) 42 ITR 115 (SC)

Facts: On the death of the proprietor of a bidi business, disputes among the heirs led to the business being carried on by joint receivers appointed by the court for the common benefit of the heirs, pending partition.

Issue: Whether the heirs, whose inherited business was continued as a single concern by receivers for their joint benefit, were assessable as an association of persons.

Held: The Supreme Court held that they were an AOP: the business was a going concern carried on as one unit for the common benefit of all the heirs, which amounted to a joint income-producing activity, notwithstanding the pendency of disputes among them.

Ratio: Where heirs continue a single business as a going concern for their common benefit, the requisite common income-producing purpose exists and an AOP is constituted.

Relevance to s.86: Illustrates the positive side of the AOP test for section 86 — continuation of a joint business venture (as opposed to passive co-ownership) brings the group within the AOP/BOI charge that section 86 then addresses at the member level.

3. N. V. Shanmugham & Co. v. CIT (1971) 81 ITR 310 (SC)

Facts: A firm was dissolved but its business was carried on, during the winding-up, by receivers/agents for the benefit of the erstwhile partners, who continued to share in the results.

Issue: Whether persons for whose benefit a business is carried on by a common agency, with a common purpose of earning income, form an association of persons even though the ultimate division of profits follows pre-existing shares.

Held: The Supreme Court held that what is decisive is a common purpose or common action to produce income; the manner in which profits are ultimately divided is not the test. As the business was carried on for the common benefit of the members with a view to earning income, they constituted an AOP.

Ratio: Common purpose/common action in producing income — not the mode of division of profits — is the touchstone of an AOP.

Relevance to s.86: Refines the AOP test relevant to section 86: the existence of an income-producing combination, not the profit-sharing arrangement, determines whether there is an AOP whose members can claim the section 86 relief.

4. G. Murugesan & Bros. v. CIT (1973) 88 ITR 432 (SC)

Facts: Shares were held and dividends received jointly by members of a family group; the Revenue sought to assess them as an association of persons.

Issue: Whether mere joint holding of shares and joint receipt of dividends, without a volitional combination to produce income, makes the co-holders an AOP.

Held: The Supreme Court held that an AOP can be formed only when two or more persons voluntarily combine to carry on a joint enterprise with the object of producing income; an AOP does not come into existence merely because some persons receive income jointly. On the facts there was no such volitional combination.

Ratio: Volition — a voluntary combination for a common income-producing purpose — is the sine qua non of an AOP.

Relevance to s.86: Marks the outer boundary of section 86: absent a volitional income-producing combination there is no AOP/BOI, and the relief is not attracted.

5. Deccan Wine and General Stores v. CIT (1977) 106 ITR 111 (AP)

Facts: On the death of the proprietor of certain businesses, his widow and two minor children succeeded; the status in which the heirs were to be assessed (individual, HUF, AOP or body of individuals) was in issue across several years.

Issue: What distinguishes a 'body of individuals' from an 'association of persons', and when does each come into existence?

Held: The Andhra Pradesh High Court held that a 'body of individuals' is a conjunction of individuals (only) who carry on some activity with the object of earning income; it differs from an AOP in that an AOP may include non-individuals, but both require the element of an income-producing activity. A mere collection of persons who do not join in an income-producing activity is neither.

Ratio: BOI = a combination of individuals engaged in a common income-producing activity; the income-producing element distinguishes a real BOI/AOP from passive co-holders.

Relevance to s.86: The leading High Court exposition of 'body of individuals' — the second limb of section 86 — clarifying exactly which groupings of individuals attract (and may claim relief under) the section.

6. Meera & Co. v. CIT (1997) 224 ITR 635 (SC)

Facts: The status of a group continuing a business after the proprietor's death was again in question, requiring the Court to revisit the AOP/BOI tests.

Issue: The tests for an AOP, and whether a 'body of individuals' is something wholly distinct from an 'association of persons'.

Held: The Supreme Court (B. P. Jeevan Reddy, S. C. Sen and G. T. Nanavati JJ., 11 March 1997) reiterated that an AOP is an association formed with the common purpose of producing income, and explained the relationship and overlap between AOP and BOI, approving the reasoning in the High Court line including Deccan Wine.

Ratio: Reaffirms the volition/common-purpose test and clarifies the overlap between AOP and BOI.

Relevance to s.86: Identifies precisely the entities to whose members section 86 extends, harmonising the AOP and BOI concepts that the section uses in tandem.

7. CIT v. Govindbhai Mamaiya (2014) 367 ITR 498 (SC)

Facts: Three brothers inherited agricultural land from their father. The land was compulsorily acquired and enhanced compensation with interest was received; the Revenue assessed the brothers as an AOP.

Issue: Whether co-heirs receiving acquisition compensation are an AOP, and the correct status in which they are assessable.

Held: The Supreme Court held that since no association had been formed by the volition of the parties for the purpose of producing income — the property having devolved on them by inheritance — they were not an AOP; the income was assessable in their hands as individuals in their respective shares.

Ratio: Inheritance and co-ownership, without a volitional income-producing combination, yield the status of individuals, not an AOP.

Relevance to s.86: A recent reaffirmation that section 86 applies only where a true AOP/BOI exists; a mis-characterised co-ownership defeats both the AOP assessment and any section 86 claim premised on it.

Cluster C-2 : Single-point taxation — AOP or member, not both

8. CIT v. Murlidhar Jhawar & Purna Ginning & Pressing Factory (1966) 60 ITR 95 (SC)

Facts: Three persons carried on a joint venture in groundnut and cotton. The Income-tax Officer first assessed each of the three individually on his share, and then sought also to assess the AOP on the same income.

Issue: Under the Indian Income-tax Act, 1922, could the same income be taxed both in the hands of the individual members and in the hands of the AOP?

Held: The Supreme Court (Shah J., 7 January 1966) held that under the 1922 Act the officer had an option to assess either the AOP / unregistered firm or the members individually, but having exercised the option one way he could not tax the same income over again in the other capacity.

Ratio: Under the 1922 Act there was an option to assess the AOP or its members, but the same income could not be taxed twice over.

Relevance to s.86: Establishes the historical baseline of single-point taxation of AOP income which section 86 of the 1961 Act now secures by statute at the member's end.

9. ITO v. Ch. Atchaiah (1996) 218 ITR 239 (SC)

Facts: For income of an association, the Assessing Officer in some years assessed the members and later sought to assess the association itself, raising the question of the officer's power under the 1961 Act.

Issue: Whether, under the Income-tax Act, 1961, the Assessing Officer retains the 1922-Act 'option' to assess either the AOP or its members.

Held: The Supreme Court (B. P. Jeevan Reddy and S. C. Sen JJ.) held that, unlike under the 1922 Act, the Assessing Officer under the 1961 Act has no option: he must tax the right person — the person who is liable under the Act. AOP income is the income of the AOP and must be assessed in the AOP's hands.

Ratio: Under the 1961 Act the correct assessee must be taxed; AOP income belongs to, and must be assessed in the hands of, the AOP.

Relevance to s.86: The doctrinal spine of section 86: because AOP income is assessed in the AOP's hands, section 86 then regulates whether and how the member's share is treated, preventing a second tax on the same income.

Cluster C-3 : Operation of the proviso — maximum-marginal-rate exclusion and no double taxation

10. Pr. CIT v. Ramesh Chandra Rai, ITA No. 272 of 2022 (Madhya Pradesh High Court, 2024)

Facts: The assessee was a member of liquor-contract syndicates assessed as AOPs/BOIs at the maximum marginal rate. The Assessing Officer nonetheless sought to include and tax the member's share again in his individual hands.

Issue: Where the AOP/BOI has itself been taxed at the maximum marginal rate, can the member's share be included and taxed again in the member's assessment?

Held: The High Court (Sushrut Arvind Dharmadhikari and Anuradha Shukla JJ.) upheld the CIT(A) and the Tribunal: once the income of the AOP/BOI has been taxed at the maximum marginal rate, clause (a) of the first proviso to section 86 excludes the member's share from his total income; it cannot be taxed a second time in his hands.

Ratio: Proviso (a) to section 86 squarely excludes a member's share where the AOP/BOI is taxed at MMR; the share cannot be taxed again at the member level.

Relevance to s.86: A direct and recent application of proviso (a) — valuable authority for members of syndicates and joint ventures assessed at MMR.

11. Pr. CIT (Central) v. Ramswaroop Shivhare, SLP (Civil) Diary No. 66167 of 2025 (Supreme Court; SLP dismissed 19 December 2025)

Facts: The Department carried the same syndicate issue (as in Ramesh Chandra Rai) to the Supreme Court by way of a special leave petition.

Issue: Whether the High Court was right in holding that a member's share in an AOP/BOI taxed at the maximum marginal rate cannot be re-taxed in the member's hands under proviso (a) to section 86.

Held: The Supreme Court dismissed the special leave petition (19 December 2025), leaving the High Court's view undisturbed.

Ratio: The dismissal of the SLP lends finality, at the apex level, to the proviso-(a) exclusion applied by the High Court.

Relevance to s.86: Confirms, at the highest level for the present, that proviso (a) operates to exclude an MMR-taxed AOP/BOI share from the member's total income — directly reinforcing the operation of section 86.