Section 175 — Avoidance of tax by certain transactions in securities. Successor to s.94 of the 1961 Act.
Section 175 is in Chapter X — Special Provisions Relating to Avoidance of Tax, which runs from section 161 to section 177.
Sub-sections (1) and (2) deal with a sale and buy-back of securities. Where the owner sells or transfers securities and buys back or reacquires them, or buys or acquires similar securities, any interest becoming payable on those securities that is receivable by someone other than the owner is deemed for all purposes of the Act to be the income of the owner and not the income of that other person, whether or not it would have been chargeable under any other provision. Where similar rather than the original securities are reacquired, sub-section (2) ensures the owner is under no greater liability than if the original securities had been bought back.
Sub-section (3) deals with income stripped out of securities during the year. If a person had a beneficial interest in securities and, as a result of a transaction relating to them or to their income, he receives no income in respect of them for the year, or less than he would have received had the income accrued from day to day and been apportioned, the income from those securities for that year is deemed to be his income.
Sub-section (4) is the escape. Sub-sections (1), (2) and (3) do not apply if the owner, or the person with the beneficial interest, proves to the satisfaction of the Assessing Officer either that there has been no avoidance of income-tax, or that the avoidance was exceptional and not systematic and that in any of the three preceding years there was no avoidance by a transaction of the kind described in sub-section (1), (2) or (3) in his case. Sub-sections (5) and (6) apply to a person carrying on a business consisting wholly or partly in dealing in securities: where he buys or acquires securities and sells back or retransfers them and the interest is not deemed his income because of sub-section (1), the transaction is left out of account entirely in computing the profits or loss of that business for any purpose of the Act, and the same applies with necessary modifications to selling or transferring similar securities.
Sub-section (7) lets the Assessing Officer require any person, by notice in writing, to give details within a specified time not less than twenty-eight days of all securities he owned or had a beneficial interest in during a specified period, for the purposes of this section and to discover whether tax has been borne on the interest.
Sub-sections (8) to (10) are the stripping rules. Under sub-section (8), where a person buys securities or a unit within three months before the record date and sells the securities within three months after that date or the unit within nine months after it, and the dividend or income on them is exempt, the loss on that purchase and sale is ignored in computing his income to the extent it does not exceed the exempt dividend or income. Under sub-section (9), where a person buys securities or a unit within three months before the record date, is allotted additional securities or units without payment on the basis of that holding, and sells all or any of the original securities or units within nine months after the record date while continuing to hold all or any of the additional ones, the whole loss on that purchase and sale is ignored. Sub-section (10) then treats the loss so ignored as the cost of purchase or acquisition of the additional securities or units still held on the date of that sale.
Sub-section (11) defines the terms — "interest" includes a dividend; "record date" is the date fixed by a company, a Mutual Fund or the Administrator or specified company under the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, a business trust under section 2(21) or an Alternative Investment Fund; "securities" includes stocks and shares; securities are similar if they carry the same rights against the same persons as to capital and interest and the same remedies, whatever the nominal amounts, the form of holding or the manner of transfer; and "unit" covers a business trust unit, a unit under section 208(3)(c), and an investor's beneficial interest in an Alternative Investment Fund, including shares or partnership interests.
Interest and dividends attach to a security on one day, so ownership can be moved across that day to place the income where it is untaxed and leave a loss behind where it is useful. Sub-sections (1) to (3) return the income to the real owner; sub-sections (8) to (10) attack the mirror image, where the loss created by the price falling ex-dividend or ex-bonus is claimed while the distribution itself is exempt. Sub-section (10) keeps that disallowance from being a permanent forfeiture by rolling the ignored loss into the cost of the bonus securities.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Minimum time to respond to an information notice | Not less than twenty-eight days | Notice in writing by the Assessing Officer requiring details of securities owned or beneficially held during a specified period | Sub-section (7) |
| Look-back for the escape in sub-section (4) | Three preceding years | Only for clause (b); the assessee must show no avoidance of the kind in sub-section (1), (2) or (3) in his case in any of those years | Sub-section (4)(b) |
| Purchase window before the record date, dividend stripping | Within three months before the record date | Applies to both securities and units | Sub-section (8)(a) |
| Sale window after the record date, dividend stripping | Within three months for securities; within nine months for units | The dividend or income on the securities or unit must be exempt | Sub-section (8)(b)(i) and (ii) |
| Extent of the loss ignored, dividend stripping | So much of the loss as does not exceed the exempt dividend or income | Loss above that amount is not affected | Sub-section (8) |
| Purchase and sale windows, bonus stripping | Within three months before, and within nine months after, the record date | Additional securities or units allotted without payment, and the person still holds all or any of them at the date of sale | Sub-section (9)(a) and (c) |
The two stripping rules look alike but differ in what they take away. Sub-section (8) ignores the loss only up to the amount of the exempt dividend or income, so a larger loss survives to that extent; sub-section (9) ignores the whole loss, with no cap, and it applies even if only part of the original holding is sold and only part of the bonus holding retained. Sub-section (10) softens sub-section (9) alone — the ignored loss becomes the cost of the additional securities or units still held, so it comes back on their eventual sale; there is no equivalent for sub-section (8). The escape in sub-section (4) is not available against the stripping rules at all: it is drafted only against sub-sections (1), (2) and (3), and even there it requires the assessee to satisfy the Assessing Officer, with clause (b) additionally requiring a clean three-year record. Note also that "interest" is defined in sub-section (11)(a) to include a dividend, so the deeming provisions in sub-sections (1) and (3) reach dividend income as well.
An investor buys units of a fund two months before the record date, receives an exempt income distribution, is allotted bonus units without payment on the basis of that holding, and sells the original units seven months after the record date at a loss of Rs. 40 lakh while keeping the bonus units. Because the purchase was within three months before and the sale within nine months after the record date, sub-section (9) ignores the whole Rs. 40 lakh — not merely the part matching the distribution. Sub-section (10) then adds that Rs. 40 lakh to the cost of the bonus units he still holds, so the loss is recovered only when those units are sold.
An investor meets this section in an assessment or reassessment order disallowing a short-term loss claimed around a record date, and directly in a written notice under sub-section (7) from the Assessing Officer calling for details of every security owned or beneficially held over a stated period.
is receivable by a person other than the owner, shall be deemed, for all purposes of this Act, to be the income of the owner
the avoidance of income-tax was exceptional and not systematic and also that in any of the three preceding years any avoidance of income-tax by a transaction of the nature referred to in sub-section (1), (2) or (3) was not there in his case
the loss, if any, arising to him on account of such purchase and sale of all or any of such securities or unit shall be ignored for the purposes of computing his income chargeable to tax
See the full 1961 to 2025 concordance.
See the circulars index.
See the notifications index.