Avoidance of income-tax by transactions resulting in transfer of income to non-residents
[Section-174 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 174(1) of Income Tax Act 2025
174(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.
Section 174(2) of Income Tax Act 2025
174(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.
Section 174(3) of Income Tax Act 2025
174(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.
Section 174(4) of Income Tax Act 2025
174(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.
Section 174(5) of Income Tax Act 2025
174(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.
Section 174(6) of Income Tax Act 2025
174(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 ensure 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.
Section 174(7) of Income Tax Act 2025
174(7) In 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.
FAQs Section 174 of Income Tax Act 2025
What is the objective of Section 174 of the Income Tax Act, 2025?
The objective is to prevent tax avoidance by deeming certain income transferred to non-residents as taxable in the hands of the person who has control or benefit from such income.
When does Section 174 apply?
It applies when there is a transfer of assets, either before or after the commencement of the Act, resulting in income becoming payable to a non-resident.
Who is considered the “first mentioned person” in Section 174?
The “first mentioned person” refers to the individual who, through the transfer, acquires rights to enjoy the income of a non-resident.
What happens if the first mentioned person gains rights to enjoy income of a non-resident?
Such income will be deemed to be the income of the first mentioned person and taxed accordingly, even if it wouldn’t be otherwise chargeable under the Act.
What is the treatment of capital sums received in connection with such transfers?
If a capital sum is received and connected with the transfer or associated operations, the related income will be deemed to be the income of the first mentioned person.
Will income taxed once under Section 174 be taxed again when received?
No. If income has already been taxed under this section, it will not be taxed again when it is subsequently received.
Can a person be exempt from Section 174’s application?
Yes, if the person proves to the satisfaction of the Assessing Officer that the purpose of the transfer or associated operations was not to avoid tax or was part of bona fide commercial transactions.
What constitutes “power to enjoy” the income of a non-resident?
Power to enjoy includes rights or control that result in the benefit from the income, directly or indirectly, even if not formally received as income.
Does the section apply only if there is a direct transfer?
No, it also applies if the income is routed through associated operations along with the transfer.
How are non-residents defined under Section 174?
Any body corporate incorporated outside India is treated as a non-resident for the purposes of this section.
What are associated operations?
They are operations connected to the transfer that relate to the transferred assets, income arising from them, or accumulations of such income.
What does the term ‘assets’ include under Section 174?
It includes property or rights of any kind, and the creation of rights is considered a transfer.
What is meant by a “capital sum” under this section?
It means sums paid by way of loan or repayment or other sums not treated as income and not paid for full money or money’s worth.
How is beneficial enjoyment determined?
It is based on the substantial result and effect of the transfer and associated operations, considering all forms of benefits, regardless of their nature.
Does the Assessing Officer have discretionary power under this section?
Yes, especially in determining whether the transfer was intended to avoid tax or part of bona fide commercial dealings.
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