Section 94 of the Income Tax Act: Tax Avoidance in Securities
Section 94 of the Income-tax Act, 1961 dealt with tax avoidance through certain transactions in securities and units. It included rules for transactions that divert securities income, as well as specific provisions commonly described as dividend stripping and bonus stripping.
What did Section 94 cover?
The provision was an anti-avoidance rule aimed at specified securities transactions where the legal form of a transaction could shift income, reduce taxable income or create a tax loss without a corresponding economic loss. It operated by deeming income to belong to a particular person in specified cases or by ignoring specified losses for tax computation.
The section covered both traditional securities-income arrangements and stripping transactions involving securities or units. It also empowered the Assessing Officer to call for information about securities in which a person had ownership or a beneficial interest.
Main rules under Section 94 of the Income-tax Act, 1961
Sale and reacquisition of securities
Where an owner sold or transferred securities and bought them back, reacquired them or acquired similar securities, the provision could attribute the relevant interest income back to the owner where the transaction resulted in that income being receivable by another person.
Beneficial interest and reduced securities income
Where a person had a beneficial interest in securities and a transaction caused that person to receive no income, or less income than would have accrued on a day-to-day apportionment, the provision could deem the appropriate securities income to be that person's income.
Exception where avoidance is disproved
The earlier provision contained relief where the taxpayer could satisfy the Assessing Officer that there had been no avoidance of income-tax, or that the avoidance was exceptional rather than systematic and the statutory conditions concerning the preceding years were met.
Securities dealers and information notices
Special computation rules applied to a person carrying on a business wholly or partly in dealing in securities in the circumstances specified by the section. The Assessing Officer could also require prescribed particulars about securities owned or beneficially held, allowing not less than twenty-eight days for compliance under the old provision.
Dividend stripping rule
Old section 94(7) addressed specified purchase-and-sale transactions around the record date. Broadly, the rule applied where a person acquired securities or units within three months before the record date, disposed of the securities within three months after that date or the units within nine months after that date, and received exempt dividend or income.
Where the statutory conditions were satisfied, the loss on the purchase and sale was ignored to the extent of the exempt dividend or income received or receivable. The rule was intended to prevent an exempt distribution from being paired with an artificial or tax-driven loss.
Bonus stripping rule
Old section 94(8), as expanded by the Finance Act, 2022 with effect from assessment year 2023-24, applied to specified bonus stripping arrangements involving securities or units. Broadly, it covered acquisition within three months before the record date, allotment of additional securities or units without payment, and sale of the original holding within nine months after the record date while the additional holding continued to be held.
Where the conditions were met, the specified loss on the original securities or units was ignored in computing taxable income. The amount of loss so ignored was treated as part of the cost of the additional securities or units that continued to be held, in accordance with the statutory rule.
Important definitions under the provision
| Term | Meaning in the statutory context |
|---|---|
| Interest | Includes dividend for the purposes of the anti-avoidance provision. |
| Record date | The date fixed by the relevant company, fund, business trust or other covered entity for entitlement to dividend, income or additional securities or units, as applicable under the law. |
| Securities | Includes stocks and shares. |
| Similar securities | Securities carrying the same rights against the same persons as to capital and interest and the same remedies for enforcement, subject to the statutory wording. |
| Unit | The statutory definition was expanded to cover specified investment vehicles, including covered business trust and Alternative Investment Fund interests. |
Current law: Section 175 of the Income-tax Act, 2025
The Income Tax Department's official section-mapping material places the subject previously contained in section 94 of the Income-tax Act, 1961 under section 175 of the Income-tax Act, 2025. The newer provision retains the core anti-avoidance framework in reorganised and simplified drafting, including rules concerning securities income, information sought by the Assessing Officer, dividend stripping and bonus stripping.
For current compliance, return preparation, assessment or litigation after the commencement of the 2025 Act, the applicable tax year and the statutory transition rules should be checked before relying on the old section number. A reference to section 94 in older assessments, orders, judgments or documents should not automatically be replaced with section 175 without considering the period and law governing the matter.
Practical points to check
- Identify whether the transaction is governed by the Income-tax Act, 1961 or the Income-tax Act, 2025.
- Check the acquisition date, record date and disposal date carefully.
- Determine whether the relevant dividend or income is exempt for the applicable period.
- For bonus issues, identify whether additional securities or units were received without payment and whether they were still held when the original holding was sold.
- Review the statutory definitions of securities, unit and record date applicable to the relevant year.
- Where an Assessing Officer has issued an information notice, verify the minimum response period and the exact information requested under the applicable statute.
This page is a general legal and tax reference. The applicable provision depends on the relevant tax year, facts, amendments and transition provisions.