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CA Final · Direct Tax Laws & International Taxation · Taxation of Digital Transactions

Ms. Tara Iyer transferred assets to a Mauritius-incorporated company, and the company's income gives her power to control its application. The Assessing Officer proposes to deem that income as hers under section 174 of the Income-tax Act, 2025. Tara shows to his satisfaction that the transfer and all associated operations were bona fide commercial transactions and were not designed to avoid liability to taxation. What is the result?

Section 174 does not apply to her. Although the Mauritius company is treated as non-resident and she controls its income, the section is excluded if she shows to the Assessing Officer that the transfer and associated operations were bona fide commercial and not designed to avoid tax.

  1. ASection 174 does not apply, since she has shown the transactions were bona fide commercial and not designed to avoid taxCorrect
  2. BSection 174 applies, because a company incorporated outside India is a non-resident and control is established
  3. CSection 174 applies, because bona fide intent is irrelevant once power to control is shown
  4. DSection 174 applies unless she also proves she received no capital sum

Explanation

A body corporate incorporated outside India is treated as non-resident and control over application of income is power to enjoy, so the section would ordinarily apply. However, sub-section (5) exempts the person who shows to the Assessing Officer that the transfer and all associated operations were bona fide commercial transactions not designed to avoid tax. Having shown this, the section does not apply. No separate proof about capital sums is required.

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