AO code denotes your area jurisdiction according to Income-tax department.
Practically, Income-tax department give codes to the areas in cities so that they can easily follow the range of particular Income-tax return of the assessee.
AO code is very important in e-filing. In case any return is not processed by CPC it gets transferred to Assessing Officer (AO).
An assessing officer is a person who has jurisdiction to make assessment of an assessee.