Sec-94(7) of the Income Tax Act, 1961, deals with the provisions related to the dividend stripping.
Dividend stripping is a attempt to reduce the tax liability, by an investor who invests in securities (i.e. shares, stock or debentures etc.) and units (Mutual fund units or units of UTI), shortly before the record date and getting a tax free dividend/income, and exiting after the record date at a price lower than the price at which, such securities/units were purchased and incurring a short-term capital loss.
The strategy behind dividend stripping is a two way strategy wherein-
Record date:- Date fixed by a company or mutual funds for the purpose of entitlement of holders of securities or units, to receive dividend or other income.
Hence, provisions of sec-94(7) come into force to curb the investors to gain double benefit, by way of dividend stripping. Sec 94(7) specified the conditions to be satisfied to attract the provisions of this section which are as follows:-
|Buying or acquiring||Within a period of 3 months prior to the record date||Within a period of 3 months prior to the record date|
|Selling or transferring||Within a period of 3 months after the record date||Within a period of 9 months after the record date|
|Dividend or income during intervening period||Exempt||Exempt|
Note: – All the conditions are required to be satisfied to attract the provisions of sec – 94(7) of Income Tax Act – 1961.
If the above mentioned conditions are met, then the short term capital loss, if any, arising to the investor on purchase and sale of such securities or units, not exceeding the amount of dividend or income received/receivable on such securities or units, shall not be considered while computing the total income chargeable to tax.
Even, u/s 94(7) the short term capital loss arising, shall not be allowed to be set-off or carried forward, to the extent of dividend or income received.
Notes: – 1) According to the provisions of sec – 10(34) of IT Act 1961, dividend received on shares is exempt in the hands of shareholders. And as per sec -10(35) dividend or any income received on units is exempt in the hands of unit holders.
2) According to the provisions of sec-115BBDA, (introduced by Finance Act, 2017) exemption u/s 10(34) is not available if the amount of dividend exceeds Rs. 10Lakhs. Hence, if dividend received exceeds Rs. 10Lakhs then, such excess amount shall be chargeable to tax @ 10% in the hands of shareholders.
3) Sec-94 covers the holding of securities/units both as capital assets and as stock-in-trade. Hence sec-94(7) would be applicable to both an investor and trader of securities/units.
Example: – Mr. A purchases 10,000 equity shares of X Ltd. on 30th May, 2017 for Rs. 50 each. X Ltd.’s record date for declaration of dividend @ Rs. 5 per share, being 10th of August, 2017. Mr. A sold 7,000 equity shares at Rs. 35 per share on 28th September, 2017 and the balance 3,000 equity shares at Rs. 25 per share on 18th December, 2017.
|S.No.||Particulars||Calculation in different cases (Amount in Rs.)|
| 7000 shares (SP – Rs. 35)
Sold on 28.09.2017
|3000 shares (SP –Rs. 25)
Sold on 18.12.2017
|B||Cost of Acquisition||3,50,000||1,50,000|
|C||Short Term Capital Loss (A-B)||1,05,000||75,000|
Consequence: – According to the provisions of sec – 94(7) ,Out of the total short term capital loss of Rs. 1,80,000/-, loss amount to Rs. 35,000/- (i.e. amount equivalent to the dividend received on 7,000 shares) shall not be allowed to be set off or carried forward.
Hence, Only Rs. 1,45,000/- of Short term capital loss is allowed to be carried forward.
Sec-94(8) of the Income Tax Act – 1961, deals with the provisions related to the Bonus stripping.
Bonus stripping provides, that the loss, if any, arising to an investor on account of purchase and sale of Original units shall be ignored for the purpose of computing his total income chargeable to tax, subject to the following conditions-
|Bought or acquired (Original units)||Within a period of 3 months prior to the record date|
|Allotment of additional units (Bonus units)||Without any payment on such record date|
|Sold or transferred (Original units)||Within 9 months after the record date|
|Holds atleast one additional bonus unit||On the date of such sale or transfer of original units|
*Provisions of sec- 94(8) are applicable only in respect of units and not for shares.
Hence, if the above conditions are met, the loss will be considered to be the cost of acquisition of the bonus units held on the date of sale. (Benefit of indexation is available on such cost of acquisition)
Notes: – 1) The provisions of sec- 94(8) are applicable, even in case of units are held as stock-in-trade.
2) The provisions of sec- 94(8) are not applicable, in case all the additional units (bonus units) are transferred before the original units are sold.
For Example – 1 Stanford mutual funds declare 1:1 bonus units on its units on 30th April, 2017. The record date for bonus units issue fixed to be 31st of May, 2017. Mr. A purchases 10,000 units (Original units) of Stanford mutual funds on 15th May, 2017 at a rate of Rs. 50 per unit. Mr. A sells 10,000 original units on 15th December, 2017 at a rate of Rs. 35 per unit.
|S.No.||Particulars||Calculation (Amount in Rs.)|
|A||Sales value (10000 x 35)||3,50,000|
|B||Cost of acquisition (10000 x 50)||5,00,000|
|C||Short term capital Loss (A-B)||1,50,000|
|D||No. of bonus units||10,000|
Consequence:- According to the provisions of sec- 94(8) of IT Act – 1961, The Short term capital loss amount to Rs. 1,50,000/- shall not be considered in computing the total income and such short term capital loss shall neither be set off nor be carried forward.
Hence, the cost of acquisition of 10,000 bonus units shall be taken to be Rs. 1,50,000.
Example – 2:- If in above example, Mr. A sells 10,000 original units on 15th December, 2017 at a rate of Rs. 35 per unit and 7,000 units of such bonus units at a rate of Rs. 35 per unit on 20th December, 2017 then-
|S.No.||Particulars||Calculation (Amount in Rs.)|
|Original units (10,000)||Bonus units (7,000)|
|B||Cost of acquisition||5,00,000||1,05,000*|
|C||Short term capital Loss/Gain (A-B)||(1,50,000)||1,40,000|
Consequence:- According to the provisions of sec- 94(8) of IT Act – 1961, The Short term capital loss amount to Rs. 1,50,000/- shall not be considered in computing the total income and such short term capital loss shall neither be set off nor be carried forward. Hence, the cost of acquisition of 10,000 bonus units shall be taken to be Rs. 1,50,000.
*Cost of acquisition of 7,000 bonus units = 1,50,000 x 7,000 = Rs. 1,05,000
The Short term capital gain on sale of bonus units Rs. 1,40,000 shall be taxable.
Example – 3:- If in example 1, Mr. A sells all the 10,000 bonus units on 20th October, 2017 at a rate of Rs. 35 per unit and 10,000 original units on 15th December, 2017 at a rate of Rs. 35 per unit then-
|Particulars||Calculation (Amount in Rs.)|
|Original units (10,000)||Bonus units (10,000)|
|B||Cost of acquisition||5,00,000||NIL|
|C||Short term capital Loss/Gain (A-B)||(1,50,000)||3,50,000|
Consequence: – In this case, the provisions of sec- 94(8) are not applicable since as on the date of sale of original units, the assessee does not hold any additional bonus unit. The Short term capital loss amount to Rs. 1,50,000 is allowed to set off and carried forward.
Avoidance of tax by certain transactions in securities.
94. (1) Where the owner of any securities (in this sub-section and in sub-section (2) referred to as “the owner”) sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.
Explanation.—The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired.
(2) Where any person has had at any time during any previous year any beneficial interest in any securities, and the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person.
(3) The provisions of sub-section (1) or sub-section (2) shall not apply if the owner, or the person who has had a beneficial interest in the securities, as the case may be, proves to the satisfaction of the Assessing Officer—
(a) that there has been no avoidance of income-tax, or
(b) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1) or sub-section (2).
(4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub-section (1), no account shall be taken of the transaction in computing for any of the purposes of this Act the profits arising from or loss sustained in the business.
(5) Sub-section (4) shall have effect, subject to any necessary modifications, as if references to selling back or retransferring the securities included references to selling or transferring similar securities.
(6) The Assessing Officer may, by notice in writing, require any person to furnish him within such time as he may direct (not being less than twenty-eight 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 in the notice, such particulars as he considers necessary for the purposes of this section and for the purpose of discovering whether income-tax has been borne in respect of the interest on all those securities.
(a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
(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;
(c) the dividend or income on such securities or unit received or receivable by such person is exempt,
then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
(a) 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 of such units on such date;
(c) such person sells or transfers all or any of the units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b),
then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.
Explanation.—For the purposes of this section,—
(a) “interest” includes a dividend ;
(aa) “record date” means such date as may be fixed by—
(i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or
(ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to clause (35) of section 10, for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be;
(b) “securities” includes stocks and shares ;
(c) 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;
(d) “unit” shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB.
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