Section 175: avoidance of tax by certain transactions in securities

Interest deemed to remain the owner's income

Where the owner of securities sells or transfers them and buys back or reacquires them (or buys/acquires similar securities), any interest that becomes payable on those securities is deemed, for all purposes of the Act, to be the owner's income if it is receivable by someone else - and it is not treated as that other person's income, whether or not it would otherwise have been taxable to them.

Where similar securities are bought or acquired in this way, the owner is not under any greater income-tax liability than if the original securities had simply been bought back or reacquired.

Beneficial interest and apportionment of income

If a person has had a beneficial interest in securities at any time in a tax year, and as a result of a transaction relating to those securities (or the income from them) either no income is received by him, or less income than would have accrued day-to-day and been apportioned accordingly, then the income from those securities for that year is deemed to be his income.

Exception where there is no tax avoidance

These provisions (interest deeming, similar securities, and beneficial-interest apportionment) do not apply if the owner or beneficial-interest holder proves to the Assessing Officer's satisfaction that there was no avoidance of income-tax, or that any avoidance was exceptional and not systematic, and that no similar avoidance occurred in his case in any of the preceding three years.

Dealers in securities

Where a person carrying on a business of dealing in securities buys or acquires securities and sells them back or retransfers them, and the result is that interest receivable by him is not deemed his income because of the ownership-deeming rule, no account is taken of that transaction in computing the profits or loss of the business for any purpose of the Act. This applies with necessary modifications to selling or transferring similar securities as well.

The Assessing Officer may, by written notice, require a person to give details (within not less than twenty-eight days) of all securities owned, or in which they had a beneficial interest, during a specified period, to discover whether tax has been borne on the interest on those securities.

Record-date loss disallowance (dividend/bonus stripping)

If a person buys or acquires securities or a unit within three months before the record date, then sells or transfers the securities within three months after (or the unit within nine months after) that date, and the dividend or income on them is exempt, any loss on the purchase and sale - up to the amount of the exempt dividend/income received or receivable - is ignored when computing taxable income.

Similarly, if a person buys securities or a unit within three months before the record date, is allotted additional securities or units without payment based on that holding, and sells all or part of the original securities/units within nine months after the record date while continuing to hold all or part of the additional ones, any resulting loss is ignored for computing taxable income. That ignored loss is instead deemed to be the cost of acquisition of the additional securities or units still held on the date of sale.

Key definitions

Frequently asked questions