Transactions in Securities [Section 94] :
Section 94 aims at preventing avoidance of tax by an assessee by sale or purchase of securities in devices and under different circumstances. In all cases where there is a transfer of shares or securities before the due date of payment of interest whereby the transferor avoids tax or shifts the burden of tax to some other person, the income from the securities transferred shall be deemed to be that of the transferor and shall be assessable in his hands accordingly.
Bond washing transactions: Bond washing transactions, i.e. cases of sale of securities and shares cum-interest or cum-dividend would fall within the provisions of the section. Income by way of interest on securities or dividends does not accrue day by day but on a certain fixed date or on the date of declaration, as the case may be. Accordingly, the seller of securities cum-interest or shares cum-dividends, on accrual of the interest, is not assessable on the interest or dividend income on the securities or shares sold by him since that part of the consideration received would be part of the capital price realised on sale. As a result, if a person, on the eve of payment of interest, sells or otherwise transfers his securities to another and buys back or re-acquires the same after the interest income had been received by the transfer would escape tax thereon. This would amount to either total avoidance of tax or shifting the burden of tax by the transferor indirectly and transactions of this type are commonly known as bond washing transaction. In order to prevent this type of avoidance of tax by the assessee, sub-section (1) specifically provides that where the owner of any shares or securities sells or otherwise transfers them and then buys them back or otherwise reacquires them, the interest received by the transferee shall be the income of the transferor.
Similarly, in cases where shares or securities are sold by the owner of such shares or securities or by a person having beneficial interest therein and, as a result of the sale, the transferor receives either no income or less income from the securities or shares than that which would have been received by him, had the sale not been made, then the income from such securities or shares of such year shall be deemed to be the income of the transferor.
Thus, sub-section (2) applies only to cases where (i) the income accrues or falls due periodically and (ii) the income in question is of a recurring nature, though the interval of time between the two dates of accrual may not equal (e.g., dividends). However, the notional dividends specified in section 2(22) would not be covered by this section and the assessment of such fictional dividends should be made only in the hands of the person who is entitled to the same and not in the hands of the transferor.
There is however, one exception to both the above provisions given in sub-section (3). According to the exception, the provisions of sub-section (1) and (2) would not apply (i) if there has been no avoidance of tax, (ii) if the avoidance was exceptional and not systematic and there was no avoidance of income-tax by the assessee during the three years immediately preceding the previous year. It is for the assessee to prove to the satisfaction of the Assessing Officer that there had been no avoidance of tax or that the avoidance of tax is exceptional and not systematic.
Where any person carrying on business, wholly or in part, as a dealer in shares and securities, buys or acquires any security and sells back or re-transfers the same, then, the interest, received or receivable by him in respect of such securities, which is deemed to be the income of the transferor, shall not be taken into account for computing his business income.
The Assessing Officer is empowered to issue a notice in writing requiring any person to furnish to him within a specified time (not being less than 28 days) in respect of all securities of which such person was the owner or in which he had a beneficial interest at any time during the period specified by him in the notice, such particulars at he may consider necessary for purposes of this Section and for the purpose of ascertaining whether tax has been borne in respect of interest or dividends on all those securities or shares.
(a) If any person buys or acquires any securities or unit within a period of three months prior to the record date and
(b) such person sells or transfers –
(i) such securities within a period of three months after such date, or
(ii) such unit within a period of nine months after such date and
(c) the dividend or income on such securities or unit received or receivable by such person is exempted,
then, the loss, if any, arising therefrom shall be ignored for the purposes of computing his income chargeable to tax. Such loss should not exceed the amount of dividend or in come received or receivable on such securities or unit [Sub-section (7)].
(a) Where any person buys or acquires any units within a period of three months prior to the record date;
(b) such person is allotted additional units without any payment on the basis of holding such units on such date;
(c) such person sells or transfers all or any of the units referred to in (a) above within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in (b), then –
(i) the loss on sale of original units sold within a period of 9 months after the record date will be ignored and
(ii) the amount of such loss will be considered as the cost of purchase or acquisition of the bonus units held by him on the date of such sale or transfer.
For the purposes of this section,-
(a) “interest” includes a dividend;
(b) “record date” means such date as may be fixed by a company or a Mutual Fund or the Unit Trust of India for the purposes of entitlement of the holder of the securities or the unit holder, to receive dividend or income, as the case may be; It also includes such date on which a unit holder is allotted or is entitled to additional units without any payment;
(c) “securities” includes stocks and shares;
(d) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred.