Assessment of persons leaving India [Section 174]

Section 174 deals with the accelerated assessment of those persons, who are likely to leave the territory of India during the course of the assessment year, or soon after the expiry of the same, without having any intention to return to India. This section constitutes an exception to the general principle of assessment under the Act, whereby income of the previous year, and not the assessment year, is charged under section 4 of the Act.

Objective of Section 174

Section 174 aims at preventing a situation whereby the tax can be recovered promptly from the assessee, before the assessee leaves the country. In case the assessee is a person intending to leave India in the manner envisaged by the section, there is a grave danger that the assessee, his assets or source of income may disappear before the time comes to make a regular assessment. It is submitted that in the absence of accelerated assessment in such cases, great prejudice may be caused to the revenue department, and, hence, this section is an absolute necessity.

Text of Section 174

174. Assessment of persons leaving India.

(1) Notwithstanding anything contained in section 4, when it appears to the ^[1][Assessing Officer] that any individual may leave India during the current assessment year or shortly after its expiry and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be chargeable to tax in that assessment year.

(2) The total income of each completed previous year or part of any previous year included in such period shall be chargeable to tax at the rate or rates in force in that assessment year, and separate assessments shall be made in respect of each such completed previous year or part of any previous year.

(3) The ^[1][Assessing Office]r may estimate the income of such individual for such period or any part thereof, where it cannot be readily determined in the manner provided in this Act.

(4) For the purpose of making an assessment under sub-section (1), the ^[1][Assessing Officer] may serve a notice upon such individual requiring him to furnish within such time, not being less than seven days, as may be specified in the notice, a return in the same form and verified in the same manner ^[2][

as a return under clause (i) of sub-section (1) of section 142], setting forth his total income for each completed previous year comprised in the period referred to in sub-section (1) and his estimated total income for any part of the previous year comprised in that period; and the provisions of this Act shall, so far as may be, and subject to the provisions of this section, apply as if the notice were ^[3][a notice issued under clause (i) of sub-section (1) of section 142.

(5) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under any other provision of this Act.

(6) Where the provisions of sub-section (1) are applicable, any notice issued by the ^[1][Assessing Officer] under ^[4][clause (i) of sub-section (1) of section 142 or] section 148 in respect of any tax chargeable under any other provision of this Act may, notwithstanding anything contained in ^[4][clause (i) of sub-section (1) of section 142 or] section 148, as the case may be, require the furnishing of the return by such individual within such period, not being less than seven days, as the ^[1][Assessing Officer] may think proper.

KEY NOTE

1.   Substituted for “Income-tax Officer” by Direct Tax Laws (Amendment) Act, 1987 with effect from 01.041988.

2.   Substituted for “as a return under sub-section (2) of section 139” by Direct Tax Laws (Amendment) Act, 1987 with effect from 01.041989.

3.   Substituted for “a notice issued under sub-section (2) of section 139” by Direct Tax Laws (Amendment) Act, 1987 with effect from 01.041989.

4.   Substituted for “sub-section (2) of section 139 or sub-section (1) of” by Direct Tax Laws (Amendment) Act, 1987 with effect from 01.041989.

Under section 174, the Assessing Officer should have come to the conclusion himself that the assessee is likely to leave India in the course of the assessment or shortly thereafter, and also that the assessee does not appear to possess any intention at present to return to India. The income of such assessee, which would be subject to tax for that assessment year would be the income accrued in the period between the expiry of the previous year for that assessment year and the expected date of the assessee’s departure from India. The section also empowers the Assessing Officer to estimate the income of the individual for the relevant period in the event that such income cannot be readily determined as per the provisions of the Act.

Under section 174(4), the assessee may be asked by the Assessing Officer to furnish a return of his total income for each of the completed previous years and the income contemplated under section 174(1) as well as estimated total income for any broken period in that period. In this respect, section 174 differs from section 176(5), which is the corresponding sub-section, since the latter does not distinguish between the income of the completed previous year and the broken period.

As per section 174(6), if any other income of the assessee is taken for assessment, in addition to the assessment under section 174, the notice to be issued, which calls for a return of total income in respect of the tax under other sections, would be reduced from thirty days to a period not below seven days.

Conditions - Income of a person leaving India is charged to tax in the previous year itself

If following conditions are satisfied, then income of a person leaving India is charged to tax in the previous year itself:

(a)     It appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry.

(b)     Such a person has no present intention of returning to India.

In above cases, the total income of such an individual upto the probable date of his departure from India shall be charged to tax in that assessment year.

PROVISIONS ILLUSTRATED

Mr. ‘X’ is a foreign citizen. He has been residing in India since January, 2010. At the time of making his assessment for the assessment year 2022-23 (in January 2023), the Assessing Officer came to know that Mr. ‘X’ is going to leave India on 10.05.2023. In this case, at the time of completing assessment for the previous year 2021-22 (i.e., assessment year 2022-23), the Assessing Officer will make following three assessments:

§  The assessment of the income of the previous year 2021-22.

§  The assessment of the income of the previous year 2022-23.

§  The assessment of the income of the period 01.04.2023 to 10.05.2023.

Order of assessment passed under section 175 without recording prima facie satisfaction that assessee was likely to transfer property to avoid tax and without issuing notice under section 174(4), is unsustainable

From the petitioner an amount of Rs. 1,74,000/- was seized by Police on night patrol duty. The seized amount was deposited in Court and after setting apart an amount of 33 percent towards income tax due the balance amount was released. The petitioner received the notice under section 142(1) as no return were filed. The assessee filed the return declaring the total income of Rs. 36,000/-. In the course of assessment proceedings the explanation was given for the sources of the cash. The Assessing Officer disbelieved the explanation and assessed the entire cash recovered as unaccounted cash recovered. The revision petition filed by the assessee under section 264 was also dismissed by Commissioner. The Assessee filed the writ petition. The Court held that before invoking the powers under section 174 and 175 there has to be prima facie satisfaction of the facts and circumstances and a specific notice has to be issued under section 174(4). The Court also held that the issue of notice under section 142(1) is not sufficient. Accordingly the assessment orders were set aside. (Related Assessment years : 2003-04, 2004-05) – [Abdul Vahab P. v. ACIT (2012) 249 CTR 102 : 205 Taxman 77 : 69 DTR 101 (Ker.)]

Obligations of principal and agent continue if ITO fails to resort to section 174 - Any omission or failure on part of ITO to take immediate proceedings under section 174 would not absolve agent of non-resident of its liability to be assessed to tax

Section 174 is merely an enabling provision authorising the ITO to have recourse to that section in the circumstances postulated by that section. If the ITO however fails to take advantage of that enabling provision, neither the non-resident principal nor the agent can be relieved of its obligation. There are no provisions in the Act to the effect that, if no action under section 174 was taken, proceedings could not be continued against the agent.

Section 174 no doubt, provides a particular machinery for the assessment of persons leaving India. Assuming that this section is applicable even to persons who come from outside India and leave India with no present intention of returning to this country, even then the question is whether any omission on the part of the ITO, to take immediate proceedings under section 174, would absolve the agent of non-resident of its liability to be assessed to tax. Admittedly, section 174 does not say that such a result would follow either expressly or by necessary implication if it is merely an enabling provision authorising the ITO to have recourse to that section in the circumstances postulated by that section. If the ITO, however, fails to take advantage of that enabling provision, either the non-resident principal or the agent cannot be relieved of its obligation.

In the instant case, it might be that D a partner of the non-resident firm, left India after obtaining a certificate from the income-tax department that no tax was due from him. Under section 230 if he was not given such a certificate, he would have been obliged to stay in India, or pay the tax if he wanted to leave India and, to that extent, hardship is undoubtedly caused to the petitioner, because its liability continues. But, that did not mean that the petitioner was relieved of the obligation cast upon it by Chapter XV of the Act. It could not be argued that since no action under section 174 was taken, the proceedings could not be continued against the petitioner. - [In favour of revenue] (Related Assessment years : 1968-69 and 1969-70) – [Barium Chemicals Ltd. v. ITO (1975) 100 ITR 637 (AP)]

Assessee’s application for tax clearance certificate under section 46A of 1922 Act was proof enough of his lack of intention to return to India and that lack of intention was sufficient to attract section 24A of 1922 Act and sustain assessment made under that section

Section 174 of the Income-tax Act, 1961 [Corresponding to section 24A of the Indian Income-tax Act, 1922] – The assessee had applied for a tax clearance certificate under section 46A of the 1922 Act. The ITO made assessment under section 24A of 1922 Act. The Tribunal held that provisions of section 24A of 1922 Act were not applicable. On reference:

Held : The wording of sections 46A and 24A of 1922 Act makes it clear that the lack of an intention of returning to India is the foundation both for the need for the certificate under section 46A of 1922 Act for a person of Indian domicile, and of an assessment under section 24A of 1922 Act.

The Tribunal was, therefore, wrong when it said that section 24A of 1922 Act had no application to the case and set aside the order of assessment. The assessee’s application for a tax clearance certificate under section 46A of 1922 Act was proof enough of his lack of an intention to return to this country and that lack of intention was sufficient to attract section 24A of 1922 Act and sustain the assessment made under that section. [In favour of revenue] – [CIT v. Ramzan (1967) 64 ITR 74 (Ker.)]