Provisions pertaining to bonus stripping and dividend stripping to be made applicable to securities and units
Section 94 of the Act contains anti avoidance provisions to deal with transactions in securities and units of mutual fund which, inter-alia, include dividend stripping and bonus stripping.
2. However, the current provisions of sub-section (8) of section 94 of the Act do not apply to bonus stripping undertaken in case of securities. It is also not applicable to units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs) as the definition of the term “unit” has not been modified subsequent to introduction of provisions relating to RETIs, InvITs etc. Further, the current provisions of sub-section (7) of section 94 of the Act, i.e. provisions pertaining to dividend stripping, are not applicable to the units of new pooled investment vehicles such as InvIT or REIT or AIFs.
4. In view of the above, it is proposed to amend sub-section (8) of section 94, pertaining to the prevention of tax evasion through bonus stripping, so as to make the said provision applicable to securities as well.
5. It is also proposed to amend the Explanation to the said section to modify the definition of unit, so as to include units of business trusts such as InvIT, REIT and AIF, within the definition of units.
6. This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.
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Note on Clause 25 of Finance Bill 2022
Clause 25 seeks to amend section 94 of the Income-tax Act relating to avoidance of tax by certain transactions in securities.
It is proposed to amend sub-section (8) of said section so as to provide that the provisions of the said sub-section shall also be applicable to securities.
It is further proposed to substitute clause (aa) of the Explanation to the said section, so as to substitute the definition of the expression “record date” to mean such date as may be fixed by a company, or a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the Explanation to clause (35) of section 10; or a business trust as defined in clause (13A) of section 2; or an Alternative Investment Fund as defined in clause (b) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend, income, or additional securities or unit without any consideration, as the case may be.
It is also proposed to amend clause (d) of the aforesaid, Explanation to amend the definition of the term “unit”.
These amendments will take effect from the 1st April, 2023 and will, accordingly, apply in relation to the assessment year 2023-2024 and subsequent assessment years.
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Extract of Clause 25 of Finance Bill 2022
25. Amendment of section 94.
In section 94 of the Income-tax Act, with effect from the 1st day of April, 2023,––
(i) in sub-section (8), for the word “units” wherever it occurs, the words “securities or units” shall be substituted;
(ii) in the Explanation,––
(a) for clause (aa), the following clause shall be substituted, namely:––
‘(aa) “record date” means such date as may be fixed by—
(i) a company;
(ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company referred to in the Explanation to clause (35) of section 10; or
(iii) a business trust defined in clause (13A) of section 2; or
(iv) an Alternative Investment Fund defined in clause (b) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, 15 of 1992,
for the purposes of entitlement of the holder of the securities or units, as the case may be, to receive dividend, income, or additional securities or units without any consideration, as the case may be,’;
(b) for clause (d), the following clause shall be substituted, namely:––
‘(d) “unit” shall mean,––
(i) a unit of a business trust defined in clause (13A) of section 2;
(ii) a unit defined in clause (b) of the Explanation to section 115AB; or
(iii) beneficial interest of an investor in an Alternative Investment Fund, defined in clause (b) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, and shall include shares or partnership interests.’.
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