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TMI BlogAnti-Avoidance Provisions in Securities Transactions : Clause 175 of the Income Tax Bill, 2025 Vs. Section 94 of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the 1961 Act, undergoing various amendments to address evolving tax planning strategies. This commentary provides an in-depth analysis of Clause 175, its objectives, detailed provisions, practical implications, and a comparative analysis with Section 94, highlighting continuities, departures, and potential issues. Objective and Purpose The primary objective of both Clause 175 and Section 94 is to prevent the avoidance of tax through certain transactions in securities that, in substance, do not alter the economic ownership or beneficial enjoyment of income but are structured to obtain tax advantages. The legislative intent is to ensure that income from securities (including dividends and interest) is taxed in the hands of the true economic owner, and that artificial losses or deferrals arising from short-term transfers or "dividend stripping"/ "bonus stripping" are disregarded for tax purposes. Historically, these provisions were introduced to counteract strategies such as: - Transferring securities shortly before the record date to a person in a lower tax bracket or exempt entity, who receives tax-free income (dividend/interest), and then transferring them back, thus avoidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roof on Taxpayer The deeming provisions in Clause 175(1) to (3) do not apply if the taxpayer proves to the Assessing Officer that: - There was no avoidance of income-tax; or - The avoidance was exceptional and not systematic, and no similar avoidance occurred in the preceding three years. This introduces a safeguard for genuine transactions, shifting the onus onto the taxpayer to demonstrate the bona fides of the transaction. Sub-section (5): Non-Recognition of Certain Business Transactions For persons dealing in securities as a business, if interest received is not deemed to be their income due to sub-section (1), no account is to be taken of such transactions in computing business profits or losses for tax purposes. This prevents the double benefit of both escaping tax on income and recognizing losses. Sub-section (6): Extension to Similar Securities This extends Sub Clause (5) to cases where similar securities are sold or transferred, not just identical ones, ensuring comprehensive coverage. Sub-section (7): Power to Call for Information Empowers the Assessing Officer to require any person to furnish details of securities owned or in which the person had a beneficial inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h transactions both in terms of income and business profits/losses. * Assessing Officers: Given the power to call for detailed information, tax authorities are better equipped to detect and counteract avoidance schemes. * Mutual Funds, Business Trusts, AIFs: As vehicles often used in such strategies, these entities must ensure compliance and educate investors regarding the tax implications. Procedurally, the provision requires vigilance in tax reporting, increased documentation, and may lead to more scrutiny of transactions near record dates. Comparative Analysis: Clause 175 vs. Section 94 A close comparison of Clause 175 and Section 94 reveals that Clause 175 is essentially a re-enactment, with minor modifications and language modernization, of Section 94. The structure, definitions, and anti-avoidance mechanisms are largely retained, but certain clarifications and expansions are evident. Provision Section 94 of the Income-tax Act, 1961 Clause 175 of the Income Tax Bill, 2025 Analysis/Comment Deeming provision - income from securities Sub-section (1) Sub-section (1) Substantially similar; both deem income as that of the owner in avoidance cases. Similar se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icles (e.g., Alternative Investment Funds). * Explicit Inclusion of Similar Securities: While Section 94 includes an explanation for similar securities, Clause 175 integrates this concept more directly into the operative provisions, reducing ambiguity. * Scope of Application: The expanded definitions and references in Clause 175 ensure the provision applies to a broader range of investment products and market participants, including modern collective investment vehicles. * Procedural Clarity: Clause 175(7) sets a clear minimum period for the notice to furnish information, enhancing procedural fairness. * Cost of Acquisition Rule: Clause 175 separates the deemed cost of acquisition for bonus units into a distinct sub-section (10), whereas Section 94 combines it within sub-section (8). Ambiguities and Potential Issues in Interpretation Despite the clarity of the drafting, certain issues may arise: * Definition of "similar securities": While the provision defines similar securities as those with identical rights, practical determination may be complex, especially with hybrid instruments or complex financial products. * Proof of bona fide transactions: The burden on the t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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