Chapter X - Special Provisions Relating to Avoidance of Tax
Section 174
Section 174: avoidance of income-tax by transferring income to non-residents
Section 174 stops a person from avoiding Indian tax by transferring assets so that income becomes payable to a non-resident, while the transferor still effectively retains the power to enjoy that income. In such cases, the income is deemed to be the transferor's income and taxed accordingly - unless the transfer was a genuine, bona fide commercial arrangement not aimed at avoiding tax.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Where there is a transfer of assets before and after the commencement of this Act, and by virtue or in consequence of it,–– (a) either alone; or (b) in conjunction with associated operations, any income becomes payable to a non-resident, the provisions of this section shall apply.
(2) If any person (“first mentioned person”), by means of any transfer referred to in sub-section (1), either alone or in conjunction with associated operations, acquires any rights,–– (a) by virtue of which he has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a non-resident; and (b) such income would have been chargeable to income-tax if it were such first mentioned person’s income, then, that income shall, whether or not it would have been chargeable to income-tax under any other provisions of this Act, be deemed to be the income of such first mentioned person for all the purposes of this Act.
(3) If any such first mentioned person receives or is entitled to receive any capital sum,–– (a) the payment of which is in any way connected with the transfer or any associated operations; and (b) whether before or after any such transfer, then any income, which has become the income of a non-resident by virtue or in consequence of such transfer, either alone or in conjunction with associated operations, shall be deemed to be the income of such first mentioned person for all the purposes of this Act, whether or not it would have been chargeable to income-tax under any other provisions of this Act.
(4) Where any person has been charged to income-tax on any income deemed to be his under the provisions of this section and that income is subsequently received by him, whether as income or in any other form, it shall not again be deemed to form part of his income for the purposes of this Act.
(5) The provisions of this section shall not apply if the first mentioned person in sub-section (2) or (3) shows to the satisfaction of the Assessing Officer that— (a) neither the transfer nor any associated operation had for its purpose or for one of its purposes the avoidance of liability to taxation; or (b) the transfer and all associated operations were bona fide commercial transactions and were not designed for the purpose of avoiding liability to taxation.
(6) In this section,— (a) references to assets representing any assets, income or accumulations of income include references to shares in or obligation of any company to which, or obligation of any other person to whom, those assets, that income or those accumulations are or have been transferred; (b) any body corporate incorporated outside India shall be treated as if it were a non-resident; (c) a person shall be deemed to have power to enjoy the income of a non-resident if— (i) the income is in fact so dealt with by any person as to be calculated at some point of time and, whether in the form of income or not, to enure for the benefit of the first mentioned person in sub-section (2) or (3); or (ii) the receipt or accrual of the income operates to increase the value to such first mentioned person of any assets held by him or for his benefit; or (iii) such first mentioned person receives or is entitled to receive at any time any benefit provided or to be provided out of that income or out of moneys which are or shall be available for the purpose by reason of the effect or successive effects of the associated operations on that income and assets which represent that income; or (iv) such first mentioned person has power by means of the exercise of any power of appointment or power of revocation or otherwise to obtain for himself, whether with or without the consent of any other person, the beneficial enjoyment of the income; or (v) such first mentioned person is able, in any manner whatsoever and whether directly or indirectly, to control the application of the income; (d) in determining whether a person has power to enjoy income, regard shall be had to the substantial result and effect of the transfer and any associated operations, and all benefits which may at any time accrue to such person as a result of the transfer and any associated operations shall be taken into account irrespective of the nature or form of the benefits.
(7) For the purposes of this section,— (a) “assets” includes property or rights of any kind and “transfer” in relation to rights includes the creation of those rights; (b) “associated operation” in relation to any transfer, means an operation of any kind effected by any person in relation to— (i) any of the assets transferred; or (ii) any assets representing, whether directly or indirectly, any of the assets transferred; or (iii) the income arising from any such assets; or (iv) any assets representing, whether directly or indirectly, the accumulations of income arising from any such assets; (c) “benefit” includes a payment of any kind; (d) “capital sum” means— (i) any sum paid or payable by way of a loan or repayment of a loan; and (ii) any other sum paid or payable otherwise than as income, being a sum, which is not paid or payable for full consideration in money or money’s worth.
Introduction
Section 174 addresses asset transfers and associated operations that make income payable to a non-resident while a person can still enjoy it. Its anti-avoidance test is fact-intensive and includes statutory exclusions and an opportunity for explanation.
Key takeaways
Income shifted to non-resident
The anti-avoidance rule can apply when an asset transfer, alone or with associated operations, makes income payable to a non-resident while a person retains power to enjoy that income.
Statutory safeguards
The section contains conditions and exceptions addressing the transfer's purpose and the person's benefit; apply the full test before attributing income.
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.
Step-by-step flow for applying Section 174
- 1
Was there a transfer of assets (alone or with associated operations) as a result of which income became payable to a non-resident?
A body corporate incorporated outside India is treated as a non-resident. "Assets" includes property or rights of any kind.
- No: Section 174 does not apply.
- Yes: Go to the next step.
- 2
Did any person, by means of the transfer, acquire rights giving power to enjoy that income (income that would be chargeable if it were his), or receive (or become entitled to) a connected capital sum?
Power to enjoy is tested under Section 174(6)(c) and (d), looking at the substantial result and effect. A capital sum includes a loan or loan repayment, or any sum not paid for full consideration.
- Neither: Section 174 does not apply.
- Either: Go to the next step.
- 3
Can the person show the Assessing Officer there was no tax-avoidance purpose, or that the transactions were bona fide commercial ones?
- Yes: Section 174 does not apply.
- No: The non-resident's income is deemed to be the person's income for all purposes of the Act.
- 4
Is the deemed income later actually received by the person?
- Yes: It is not taxed again (Section 174(4)).
Practical checklist
Do
- Map the asset transfer, related operations, non-resident income and any continuing power to enjoy it.
- Document genuine commercial purpose, control and benefit flows before applying or contesting the provision.
Avoid
- Do not assume every foreign transfer is caught without testing the enjoyment and statutory conditions.
- Do not ignore indirect arrangements or associated operations.
Illustrative example
Worked example: shares moved to a foreign company
Hypothetical facts (illustration only, not a real taxpayer): Mr. Mehta, resident in India, transfers shares he owns to a company incorporated outside India and controlled by him. The company receives dividends of ₹10,00,000 on those shares in a tax year, which would have been chargeable had Mr. Mehta received them. He can decide how the company uses that money.
Transfer and non-resident
The shares were transferred, and the foreign company is treated as a non-resident (Section 174(6)(b)). The dividend income is payable to it as a result of the transfer.
Power to enjoy
Because he can control how the income is applied, he is deemed to have power to enjoy it (Section 174(6)(c)(v)).
Deeming
Unless the Section 174(5) exception is shown, the ₹10,00,000 is deemed to be his income for that year.
Later receipt
If the company later pays that ₹10,00,000 to him, in any form, it is not added to his income again (Section 174(4)).
Outcome
- The burden is on Mr. Mehta to satisfy the Assessing Officer about purpose or bona fide commercial nature.
- Keep a record of the commercial reasons for the transfer and every associated operation.
Glossary
- Associated operations
- Related steps examined with the asset transfer under this provision.
- Power to enjoy
- A continuing benefit or control connection used by the provision to attribute income.
Frequently asked questions
Does Section 174 apply only to transfers made after the 2025 Act came into force?
No - it applies to a transfer of assets whether made before or after the commencement of the Act, so long as income becomes payable to a non-resident by virtue or in consequence of it.
Can a genuine business transfer escape Section 174?
Yes - the section does not apply if the person satisfies the Assessing Officer that neither the transfer nor any associated operation had tax avoidance as a purpose, or that the transfer and operations were bona fide commercial transactions not designed to avoid tax.
Is income taxed twice if it is later actually received after being deemed taxable?
No - once a person has been taxed on income deemed to be his under this section, that same income is not taxed again when it is subsequently actually received by him.
Need help applying this provision to your situation?
Get expert guidance on cross-border transfer arrangementsLast updated 10 October 2026