Section 94 — Section 94 — Avoidance of Tax by Securities…

STATUTORY ARCHITECTURE — 18-ROW MAP

Statutory text — Income-tax Act, 1961

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.

(7) Where—

(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.

(8) Where—

(a) any person buys or acquires any securities or units within a period of three months prior to the

record date;

(b) such person is allotted additional securities or units without any payment on the basis of holding of

such securities or units on such date;

(c) such person sells or transfers all or any of the securities or 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

securities or 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 securities or

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 securities or 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;

(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) "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 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 (15 of 1992), and shall include shares or partnership

interests.

Function in the statutory architecture

Section 94 counters tax avoidance through transactions in securities. Where an owner sells or transfers securities and buys back or reacquires them (or similar securities), and as a result interest on them is receivable by someone else, the interest is deemed to be the owner's income (sub-section (1)). Where a person with a beneficial interest in securities receives no income, or less than the day-to-day accrual, because of a transaction, the income from the securities for the year is deemed to be his (sub-section (2)). "Interest" includes a dividend.

Sub-section (7) applies where a person buys securities or units within three months before the record date, sells the securities within three months after it or the units within nine months after it, and the dividend or income is exempt: the loss, to the extent it does not exceed that dividend or income, is ignored. Sub-section (8) applies where a person buys securities or units within three months before the record date, receives additional securities or units without payment, and sells the original holding within nine months while keeping the additional ones: the loss is ignored and treated as the cost of the additional securities or units held.

Operative consequences

Sub-sections (1) and (2) do not apply if the person proves there was no avoidance of income-tax, or that it was exceptional and not systematic with no such avoidance in any of the three preceding years (sub-section (3)).
A dealer in securities who buys and resells securities so that interest is receivable by him but not deemed his income under sub-section (1) cannot take the transaction into account in computing business profit or loss (sub-sections (4), (5)).
The Assessing Officer may require particulars of securities held, giving not less than twenty-eight days (sub-section (6)).

Status

Operative for assessment year 2026-27. The Finance Act, 2026 does not amend this section.

The 1961 Act governs assessment year 2026-27 and earlier years; the Income-tax Act, 2025 governs tax year 2026-27 onwards, and for this subject the 2025 Act provision is s. 175.

Case Laws & Commentary

SECTION 94 — AVOIDANCE OF TAX BY CERTAIN TRANSACTIONS IN SECURITIES

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

A. SECTION COMMENTARY

A.1 Structural position & legislative purpose

Section 94 is the anti-avoidance code against manipulation through transactions in securities and units — principally 'bond washing' (sub-sections (1)-(2)), dealings designed to avoid tax on interest/dividend, and the modern anti-abuse rules on 'dividend stripping' (sub-section (7)) and 'bonus stripping' (sub-section (8)). Bond-washing transactions involve selling securities cum-interest and buying them back ex-interest (or vice versa) so that interest accrues to a person in whose hands it is not taxed; the section deems such interest to be the income of the owner. Sub-section (3) provides exceptions where there has been no avoidance, or only exceptional and non-systematic avoidance.

Sub-section (7) (dividend stripping) disallows the loss arising where a person buys securities/units within three months before the record date and sells within three months (securities) or nine months (units) after it, to the extent of the exempt dividend/income received — neutralising the device of converting taxable gains into exempt dividend plus an artificial capital loss. Sub-section (8) (bonus stripping) ignores the loss on the original units (where bonus units are received and the original units are sold at a loss) and treats the ignored loss as the cost of the bonus units. The Supreme Court in Walfort settled that, prior to s.94(7), such losses were allowable, and that s.94(7) operates only to the extent of the dividend.

A.2 Sub-section / clause taxonomy

Sub-section (1): Bond washing — where the owner of securities sells/transfers and buys back/reacquires them, and the result is that interest becomes receivable otherwise than by the owner, that interest is deemed to be the owner's income for all purposes of the Act.

Sub-section (2): Where a person has a beneficial interest in securities during the previous year and, by a transaction, receives no income or less than the income that would have accrued day-to-day, the income from such securities is deemed to be that person's income.

Sub-section (3): Exceptions — sub-sections (1)/(2) do not apply if the owner/beneficial owner proves there was no avoidance of income-tax, or that the avoidance was exceptional and not systematic and there was no such avoidance in any of the three preceding years.

Sub-section (4)-(6): Provisions for dealers in securities; power of the AO to call for particulars of securities holdings.

Sub-section (7) [dividend stripping]: Where units/securities are bought within three months before the record date and sold within three months (securities) / nine months (units) after it, and the dividend/income is exempt, the loss (to the extent of the exempt dividend/income) is ignored in computing the chargeable income.

Sub-section (8) [bonus stripping]: Where units are bought within three months before the record date, bonus units are allotted, and the original units are sold within nine months after the record date while the bonus units are retained, the loss on the original units is ignored and is treated as the cost of acquisition of the bonus units retained.

Explanation: Defines 'interest' (includes a dividend), 'record date', 'securities' (includes stocks and shares), and 'similar securities'.

A.3 Core doctrinal themes

Theme (1) — Pre-s.94(7) losses allowable; planning not per se illegitimate: in Walfort the Supreme Court held that before s.94(7), dividend-stripping losses were allowable, and that mere tax planning without a colourable device is not frowned upon.

Theme (2) — s.94(7) is a limited disallowance: only the loss to the extent of the exempt dividend/income is ignored; loss in excess of the dividend remains allowable (Walfort).

Theme (3) — Bonus stripping (s.94(8)): the artificial loss on the original units is not allowed but is shifted to the cost of the bonus units (deferral rather than denial).

Theme (4) — Bond washing (sub-sections (1)-(3)): the older interest-shifting device, defeated by deeming the interest to the owner, subject to the no-avoidance exceptions.

A.4 Legislative evolution / Finance Act amendment trail

ITA 1961 (original): Sub-sections (1)-(6) — bond-washing and interest-shifting anti-avoidance.

FA 2001 (w.e.f. AY 2002-03): Sub-section (7) inserted — dividend-stripping disallowance.

FA 2004 (w.e.f. AY 2005-06): Sub-section (8) inserted — bonus-stripping rule for units.

FA 2022 (w.e.f. AY 2023-24): Sub-section (8) widened — bonus stripping extended to securities (not merely units) and dividend/bonus-stripping definitions of 'record date'/'unit' aligned, closing earlier gaps.

FA 2026: No amendment to s.94; dividend/bonus-stripping and bond-washing rules preserved.

A.5 CA practitioner pointers

(1) Test every short-holding-period purchase-and-sale straddling a record date against s.94(7) (dividend stripping) and s.94(8) (bonus stripping); the three-month/nine-month windows are mechanical.

(2) Remember Walfort — s.94(7) ignores the loss only to the extent of the exempt dividend; quantify and claim any excess loss.

(3) For bonus stripping, carry the ignored loss into the cost of the retained bonus units (it is deferred, not lost).

(4) For older bond-washing patterns, the sub-section (3) exceptions (no/exceptional-non-systematic avoidance) are the defence; maintain evidence.

B. FA 2026 IMPACT NOTE

Section 94 is NOT amended by the Finance Act, 2026. The bond-washing, dividend-stripping (sub-section (7)) and bonus-stripping (sub-section (8), as widened by FA 2022) rules continue for AY 2026-27 onward.

Practitioners should note that the FA 2022 widening of sub-section (8) to securities is historic (AY 2023-24), not an FA 2026 change; Walfort remains the governing authority on the operation and limits of sub-section (7).

C. CASE LAW — CLUSTERED BY ISSUE

Cluster C-1 : Dividend stripping — pre-s.94(7) loss and the limits of s.94(7)

1. CIT v. Walfort Share & Stock Brokers (P) Ltd. (2010) 326 ITR 1 (SC)

Facts: For AY 2000-01 the assessee purchased units of a mutual fund on the record date for about Rs.17.23 per unit, immediately became entitled to a tax-free dividend of Rs.4 per unit, and after the dividend (when the NAV fell by Rs.4 to about Rs.13.23) redeemed the units, claiming the resulting loss of about Rs.4 per unit. The dividend was exempt under s.10(33). This was before s.94(7) took effect.

Issue: Whether the loss arising on such a dividend-stripping transaction, before the insertion of s.94(7), could be disallowed as not being a genuine loss or as relating to exempt income.

Held: The Supreme Court held that the loss was allowable: (i) before s.94(7), such a loss could not be disallowed merely because it related to exempt dividend income or because the transaction was tax-motivated; (ii) s.94(7) was inserted w.e.f. 1-4-2002 precisely because such losses were otherwise allowable, and it operates to ignore the loss ONLY to the extent of the dividend, leaving any excess loss allowable; (iii) mere tax planning, without a colourable device, is not impermissible.

Ratio: Pre-s.94(7), dividend-stripping losses are allowable; s.94(7) is a limited, prospective disallowance confined to the quantum of the exempt dividend. Genuine tax planning is not struck down absent a colourable device.

Relevance: The leading authority on s.94(7); decisive both on the pre-amendment position and on the limited scope of the disallowance.

Cluster C-2 : Anti-avoidance framing for securities transactions

2. McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC)

Facts: Constitution Bench consideration of colourable devices for tax avoidance (see s.93 Cluster C-1).

Issue: Whether artificial/colourable securities arrangements designed solely to avoid tax are protected.

Held: Colourable devices and dubious methods to avoid tax are not legitimate; genuine planning within the law is permissible.

Ratio: Substance over artificial form — the doctrinal backdrop for the s.94 anti-avoidance rules and the sub-section (3) exceptions.

Relevance: Frames the avoidance enquiry where the sub-section (3) 'no avoidance' exception is in issue; qualified by Azadi Bachao (genuine planning protected).

D. PRACTITIONER'S NOTE

Securities-transaction screening: (1) flag any purchase within 3 months before a record date with a sale within 3 months (securities) / 9 months (units) after — apply s.94(7) and quantify the ignored loss only up to the exempt dividend (Walfort); (2) for bonus issues, apply s.94(8) and shift the ignored loss to the bonus units' cost; (3) for interest-bearing securities sold cum-/ex-interest and reacquired, test sub-sections (1)-(2) and the sub-section (3) exceptions.

Drafting note: when claiming an excess loss above the dividend under s.94(7), cite Walfort expressly; when defending older bond-washing patterns, build the 'no avoidance / exceptional and non-systematic' record under sub-section (3).

E. SOURCES & CITATIONS

Caveat: This material is treatise-style commentary for practitioners and academic use. It is not legal opinion. Verify the current text, the latest CBDT circulars/notifications and the most recent appellate position before relying on any proposition in assessment, audit (Form 3CEB) or litigation.

Case law on Section 94

ITAT, High Court and Supreme Court judgments applying this section, on BharatTax.net, our income tax case law search.

Section 94(7) case laws

← All sections (940)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025
s. 94(1), Explanation — sale and buy-back of securities: interest deemed income of the owner	s. 175(1), (2)
s. 94(2), (3) — beneficial interest; exceptions	s. 175(3), (4)
s. 94(4), (5) — dealers in securities	s. 175(5), (6)
s. 94(6) — notice for particulars	s. 175(7)
s. 94(7), (8) and Explanation — loss around record date; additional securities or units	s. 175(8) to (11)

Section 94 — Avoidance of Tax by Securities Transactions: Dividend Stripping - Bond Washing

Case Laws & Commentary

Case law on Section 94