Section 175 Avoidance of tax by certain transactions in securities.

Income-tax Act, 2025

At a Glance

The provided document is Clause 175 of the Income Tax Bill, 2025 (Old Version), titled "Avoidance of tax by certain transactions in securities." It sets out anti-avoidance deeming rules that attribute interest (including dividends) from certain buy-back/repurchase or short-term trading arrangements to the original owner or beneficial holder. It matters to investors, custodians, trading businesses, mutual funds, business trusts and tax authorities. Effective date or enactment date: Not stated in the document.

Background & Scope

Statutory hooks: Clause 175 (Income Tax Bill, 2025 - Old Version). Context: Special provisions aimed at preventing tax avoidance arising from transactions in securities where the economic entitlement to interest/dividend is separated from legal receipt through sale, reacquisition or similar securities transfers. Coverage: owners and persons having beneficial interest in securities; securities and units; record date mechanics for entitlement to dividend/income/additional securities. Definitions provided within the clause include "interest" (includes dividend), "record date" (entities who may fix it), "securities" (includes stocks and shares), "similar securities" (functional equivalence test), and "unit" (business trust unit / unit u/s 208(3)(c) / beneficial interest in an AIF).

Statutory Provision Mode

Text & Scope

The clause operates by deeming the income (defined to include dividends) arising from securities to be the income of the original owner where that owner sells or transfers and then buys back, reacquires, or acquires similar securities and the interest/dividend is receivable by another person. It applies irrespective of whether the income would have been chargeable under another provision. The clause also applies where a person had beneficial interest during a tax year and due to transactions receives no income or less income than would have accrued on a day-to-day apportionment; that person is deemed to have the income for the year. The clause provides exceptions, a specific rule for persons in the business of dealing in securities, AO information powers, and special short-term purchase/sale anti-avoidance rules tied to record date and entitlement to exempt dividends/income or bonus allocations.

Interpretation

The legislative intent, as indicated by the text, is to attach tax consequences to the economic owner/beneficial holder rather than to legal receipt of dividends or interest when transactions are structured to avoid tax (deeming approach). Interpretive principles signalled by the text include substance over form (deeming income to the owner/beneficial holder), temporal attribution (apportionment on day-to-day accrual logic in subsection (3)), and anti-arbitrage via short-term purchase/sale around record dates. The "similar securities" test relies on equivalence of rights and remedies rather than form or nominal amounts.

Exceptions/Provisos

The clause provides that the deeming provisions in subsections (1), (2) and (3) shall not apply if the owner or beneficial owner can satisfy the Assessing Officer that either there has been no avoidance of income-tax or that any avoidance was exceptional and not systematic and that in any of the three preceding years the taxpayer had not engaged in the nature of transaction referred to. This places an evidential burden on the taxpayer to persuade the AO. The business of dealing carve-out (subsections (5) and (6)) excludes from business profits transactions where the deeming would otherwise not attribute the interest to the dealer; such transactions are disregarded in computing profits/losses. The short-term rules (subsections (8)-(10)) ignore short-term losses where purchase/sale surrounding record date yields exempt dividend/income or allotment of additional securities, and such ignored loss may be deemed to increase cost of additional securities held.

Illustrations

• Example 1: An owner sells shares and within a short interval reacquires similar shares such that dividends payable are received by another person. Under the clause the dividend is deemed to be the income of the owner. (This follows subsection (1).)
• Example 2: A person holds beneficial interest in units during a tax year but, due to transactions, receives no dividend though the income would have accrued on a day-to-day basis. Under subsection (3) the income for the year shall be deemed to be that person's income.
• Example 3: An investor buys shares within three months before record date, receives an exempt dividend, and sells the shares within three months after record date generating a loss. The loss to the extent of the exempt dividend is ignored for computing taxable income. (Subsection (8).)

Interplay

The clause cross-references other statutory provisions by definition, notably section 208(3)(c) and section 2(21) for units and business trusts, and regulation 2(1)(b) of the SEBI AIF Regulations for Alternative Investment Funds. It also references the Explanation to section 10(35) of the Income-tax Act, 1961 for the Mutual Fund/Administrator/specified company concept. Interaction with these provisions determines the set of entities and instruments caught by the record date rules. No rules, notifications or circulars are expressly mentioned beyond these statutory/regulatory cross-references.

Differences Between the Two Provisions and Practical Impact

• Source/status: Document 1 is presented as "Section 175 of Income-tax Act, 2025" (final/statute form). Document 2 is presented as "Clause 175 of the Income Tax Bill, 2025 (Old Version)" (bill/draft form).
  • Practical impact: the statutory text (Document 1) is the operative law if enacted; the bill text (Document 2) represents an earlier draft. Where the two texts differ, the statutory text governs taxpayers and the Department.
• Definition of "record date" / cross-reference to Unit Trust provisions: Document 1, subsection (11)(b)(ii), explicitly defines "Administrator" and "specified company" by direct reference to clauses of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 and supplies parenthetical lettered sub-clauses (A) and (B) providing definitions. Document 2 instead refers to "the Administrator of the specified undertaking or the specified company referred to in the Explanation to section 10(35) of the Income-tax Act, 1961."
  • Practical impact: The statutory text in Document 1 anchors the meaning to the Unit Trust Act provisions, while Document 2 anchors to an Explanation to section 10(35) of the 1961 Act. This may shift the precise set of entities captured (or the recognised terminology) and could affect which Mutual Fund/undertaking/company forms are treated as fixing a record date; it may change coverage of certain legacy entities and therefore which transactions fall within the anti-avoidance rules.
• Wording and framing of marginal/introductory language: Document 1 uses "For the purposes of this section," to introduce the definitional clause (11). Document 2 uses "In this section," for the same.
  • Practical impact: This is a drafting variation with negligible substantive effect on interpretation; both aim to signal that the listed meanings apply to the section.
• Specificity of cross-references and historic statutory anchors: Document 1 names the Unit Trust Act (58 of 2002) when providing definitions; Document 2 cites the Income-tax Act, 1961 (43 of 1961) Explanation to section 10(35).
  • Practical impact: The two different anchors may produce interpretive consequences where the cross-referenced provisions themselves differ in scope or wording; this may affect applicability to Administrator/specified company entities and consequently the reach of record-date related anti-avoidance rules.
• Substantive provisions otherwise largely identical: Apart from the definitional/cross-reference differences noted above, the operative clauses (subsections (1)-(10)) are substantively the same in both texts: anti-avoidance deeming of interest/dividend to the original owner, exceptions, business-of-dealing carve-out, AO information powers, and short-term purchase/sale loss-ignoring rules.
  • Practical impact: Core anti-avoidance mechanics and consequences are unchanged between the two documents; most taxpayers and intermediaries should expect the same compliance and tax consequences under either text, subject to interpretive differences arising from the differing definitions of record date/Administrator/specified company.

Practical Implications

• Compliance and risk areas: Taxpayers engaging in short-term purchase/sale around record dates, buy-back/reacquisition arrangements, or transfers to capture dividends without economic ownership should anticipate the deeming rules attributing income to the original owner/beneficial holder. The evidentiary burden to rebut deeming rests with the taxpayer before the Assessing Officer, and repeated systematic transactions in prior three years may defeat the exception.
• Record-keeping/evidence points: The text implies the AO can require details of securities ownership/beneficial interest (28-day notice minimum). Taxpayers should maintain contemporaneous records demonstrating economic substance, absence of tax avoidance intent, patterns of transactions over prior years, and documentation of beneficial ownership and entitlements to dividends/bonuses to satisfy the AO's enquiries. Not stated in the document: specific forms or format for such records.

Key Takeaways

• The clause adopts a deeming approach to attribute interest/dividends to original owners/beneficial holders where transfers and reacquisitions or similar securities trades separate legal receipt from economic entitlement.
• The provisions apply irrespective of other charging provisions; they prioritize substance over form to prevent avoidance.
• Exceptions exist but require the taxpayer to satisfy the Assessing Officer that no avoidance occurred or that any avoidance was exceptional and not systematic with a clean three-year lookback.
• Persons whose business consists of dealing in securities have a carve-out: certain transactions will be ignored for computing business profits/losses if deeming would otherwise apply.
• Short-term transactions around record dates that secure exempt income or bonus securities are specifically targeted: specified losses are ignored and may be recharacterised as cost of additional securities.
• The clause empowers the Assessing Officer to demand ownership/beneficial interest details with at least 28 days' notice.
• Interpretive reach depends on cross-references to other statutory/regulatory definitions (business trusts, AIFs, units, and Mutual Fund/Administrator concepts under earlier tax law).

Full Text:

Section 175 Avoidance of tax by certain transactions in securities.