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CA Final · Direct Tax Laws & International Taxation · Non Resident Taxation

Kiran Textiles (India) transferred assets to a foreign company, Bellmar Ltd, incorporated outside India. Because of this transfer, income became payable to Bellmar. Kiran, the transferor, has power to control the application of that income and receives benefits out of it. Under section 174 of the Income-tax Act, 2025, what is the consequence, and what is the main escape route for Kiran?

The non-resident's income is deemed to be Kiran's income because Kiran can control its application. Kiran escapes only by satisfying the Assessing Officer that neither the transfer nor associated operations had tax avoidance as a purpose, or that they were bona fide commercial transactions not designed to avoid tax.

  1. AThe income of the non-resident is deemed to be Kiran's income, unless Kiran satisfies the Assessing Officer that avoiding tax was not a purpose of the transfer or that it was a bona fide commercial transactionCorrect
  2. BThe income is taxed only in Bellmar's hands, as a foreign body corporate is outside the section
  3. CThe income is deemed to be Kiran's, and no escape is available even for bona fide commercial transactions
  4. DThe income is deemed Kiran's only if Kiran is a non-resident

Explanation

Section 174(2) deems income of a non-resident, over which the person has power to enjoy, to be that person's income; section 174(6)(b) treats a foreign-incorporated body as non-resident, and 174(6)(c)(v) treats control of application of income as power to enjoy. Section 174(5) allows relief if no tax avoidance purpose or if transactions were bona fide commercial. The no-escape option ignores section 174(5).

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