Section 174: avoidance of income-tax by transferring income to non-residents

When the section applies

Section 174 applies where there is a transfer of assets, before or after commencement of this Act, and by virtue or in consequence of it - alone or together with associated operations - income becomes payable to a non-resident.

Income deemed to be the transferor's

If the person making the transfer (the "first mentioned person") acquires, by means of the transfer alone or with associated operations, rights by which he has power to enjoy - forthwith or in future - the non-resident's income, and that income would have been taxable if it were his own, then that income is deemed to be the first mentioned person's income for all purposes of the Act, whether or not it would otherwise have been chargeable.

Similarly, if the first mentioned person receives or is entitled to receive any capital sum connected with the transfer or associated operations (before or after the transfer), any income that became the non-resident's income by virtue of the transfer is deemed to be the first mentioned person's income for all purposes of the Act.

Where a person has already been taxed on income deemed to be his under this section, and that income is later actually received by him (as income or otherwise), it is not taxed again as part of his income.

Exception for bona fide commercial transactions

Section 174 does not apply if the first mentioned person satisfies the Assessing Officer that:

• neither the transfer nor any associated operation had, as its purpose or one of its purposes, the avoidance of tax liability; or
• the transfer and all associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding tax liability.

When a person is deemed to have "power to enjoy" income

A person is deemed to have power to enjoy the non-resident's income if:

• the income is in fact dealt with so as to enure, at some point, for the benefit of the first mentioned person;
• the receipt or accrual of the income increases the value to that person of any assets held by or for his benefit;
• that person receives or is entitled to receive at any time a benefit provided (or to be provided) out of that income or related moneys;
• that person has power, by exercise of any power of appointment, revocation or otherwise, to obtain beneficial enjoyment of the income (with or without another's consent); or
• that person is able, directly or indirectly, in any manner, to control the application of the income.

Key definitions

Any body corporate incorporated outside India is treated as if it were a non-resident. "Assets" includes property or rights of any kind, and "transfer" in relation to rights includes creating those rights. "Associated operation" covers any operation relating to the transferred assets, assets representing them, or income/accumulations arising from them. "Benefit" includes a payment of any kind. "Capital sum" means a sum paid/payable by way of a loan or its repayment, and any other sum paid or payable otherwise than as income where it is not for full consideration in money or money's worth.

In determining whether a person has power to enjoy income, regard is had to the substantial result and effect of the transfer and any associated operations, taking into account all benefits that may accrue at any time, irrespective of their nature or form.

Frequently asked questions