Section 174 is the substantive equivalent of 1961 s. 93 -- a SPECIFIC ANTI-AVOIDANCE provision targeting offshore-asset-transfers designed to avoid Indian tax. The provision predates GAAR (Chapter XI) and continues alongside it.…
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ITA 2025 · Section 174
Section 174 — - AVOIDANCE OF TAX THROUGH TRANSFER OF ASSETS
Section 174 is the substantive equivalent of 1961 s. 93 -- a SPECIFIC ANTI-AVOIDANCE provision targeting offshore-asset-transfers designed to avoid Indian tax. The provision predates GAAR (Chapter XI) and continues alongside it. Architecture: where there has been transfer of assets resulting in income arising to a non-resident person, but the resident transferor (or person having power-to-enjoy the income) has rights / interest enabling enjoyment of that income in India, such income is DEEMED to be the income of that resident. Targets: (a) transfer-and-enjoy schemes -- resident transfers asset to NR but retains enjoyment; (b) deferred-receipt structures -- resident structures payment as accruing later to NR. Includes elaborate definitions of 'power to enjoy' and 'capital sum'.
STATUTORY ARCHITECTURE
Section 174 operates as a TARGETED ANTI-AVOIDANCE provision (TAAR) for asset-transfer-style avoidance. Its scope: (a) RESIDENT-TRANSFEROR / NR-TRANSFEREE: where resident has transferred (alone or with associates) assets to NR and resulting income arises to NR; AND (b) RESIDENT POWER TO ENJOY: resident has power to enjoy that income, directly or indirectly. Effect: income deemed of resident, taxed as if NR-receipt were resident-receipt. POWER TO ENJOY (broadly): (i) Income credited to or applied for benefit of resident; (ii) Income accumulated for resident's benefit; (iii) Resident exercises control over application of income (trustee-style); (iv) Resident has equivalent benefit through other income / loans / advances. Anti-deferral: even if NR-receipt taxed in India only on resident's actual receipt, the deeming attaches at NR-receipt-time -- accelerating Indian tax. BONA-FIDE BUSINESS CARVE-OUT: where transfer was for bona-fide commercial purpose and not designed to avoid tax, s. 174 doesn't apply. Subjective test; AO scrutiny intense. Practitioner relevance: cross-border family-trust structures; offshore-receipt-deferral schemes; asset-transfer-to-NR-affiliate-with-economic-retention. Distinction from GAAR (Chapter XI): GAAR is broader, requires 'main purpose tax benefit' + impermissible arrangement test; s. 174 is specific to asset-transfer and deeming-based; both can apply to same transaction (overlapping but not exclusive).
CASE LAW
(i) CIT v. R.K. Lakshmi (Mad HC) -- 1961 s. 93(1) application; foundational. (ii) ITAT decisions on 'power to enjoy' interpretation; broad reading favouring revenue. (iii) Bonafide-business carve-out test cases; AO-evidentiary burden after FA 2017 amendment.
PLANNING NOTES
(i) BONA-FIDE DOCUMENTATION -- for cross-border asset transfers, document commercial rationale; legal opinion on tax-non-avoidance purpose. (ii) TRUST STRUCTURES -- cross-border family trusts must satisfy substantive non-control test; resident-settlor-with-power-to-enjoy creates deeming exposure. (iii) GAAR / s. 174 OVERLAY -- post-2017, GAAR adds further scrutiny; coordinated defence required. (iv) DTAA INTERACTION -- s. 174 deeming may interact with DTAA residence-based attribution; review treaty articles.
CROSS-REFERENCES