‘Deeming Fictions’ Under the Income Tax Law

Legal “deeming fictions” are assumptions treated as true by law, regardless of reality. Under the Income Tax Act, these provisions have evolved from narrow anti-abuse tools into central components governing residency, deemed dividends, and income characterization. For example, Section 50 deems gains on depreciable assets as short-term for computation purposes, though it does not alter the asset’s inherent nature. Significant contention surrounds Section 56(2)(x), which taxes property receipts for inadequate consideration, leading to debates over its application to bonus and rights issues. Furthermore, the Finance Act 2024 shifted buyback taxation from companies to shareholders, treating proceeds as deemed dividends. Complexities also arise when domestic fictions, such as indirect transfer rules, conflict with Double Taxation Avoidance Agreements (DTAAs), which generally prevail. While essential for plugging loopholes, the expansive use of these fictions increasingly triggers interpretational challenges and litigation.

INTRODUCTION

Fiction is something invented by the imagination, i.e., ‘make believe’. The term ‘legal fiction’ can in the simplest of forms be explained as an assumption believed to be true and present in the eyes of the law. On