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

Mr. Sanjay Gupta transferred assets to a foreign trust, and income arose to the trust. Later Mr. Gupta received a loan from the trust, which was not repaid under full consideration terms and is connected with the transfer. Under section 174 of the Income-tax Act, 2025, how is the loan treated?

The loan is a capital sum, because the definition includes any sum paid or payable by way of loan. Since it is connected with the transfer, the income that became the non-resident trust's is deemed to be Mr. Gupta's, unless he proves the statutory defences.

  1. AIt is a capital sum, so the income that became the non-resident's by virtue of the transfer is deemed Mr. Gupta's, subject to the defences in the sectionCorrect
  2. BIt is ignored because loans are never capital sums
  3. CIt is a capital sum only if received before the transfer
  4. DIt is taxed as his income only to the extent repaid

Explanation

Section 174(7)(d) defines capital sum to include any sum paid or payable by way of loan or repayment of loan. Under section 174(3), if the person receives a capital sum connected with the transfer, whether before or after it, the income that became the non-resident's is deemed his. The defences in sub-section (5) still apply. Timing before or after the transfer does not matter.

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