Section 94(7) — Losses from Certain Transactions in Securities

Section 94(7) of the Income-tax Act, 1961 addresses the issue of tax avoidance through the purchase and sale of securities around the time of dividend declaration. This section disallows the set-off of losses incurred from the sale of securities if the taxpayer has received any income from such securities, such as dividends, which is exempt from tax. The statutory test requires that the securities must have been acquired within three months prior to the record date and sold within three months after the record date. The burden of proof lies on the taxpayer to demonstrate that the transaction does not fall within the ambit of this section. This provision is significant as it prevents taxpayers from claiming artificial losses to reduce their taxable income, thereby safeguarding the revenue. In practice, it ensures that taxpayers cannot exploit timing differences in the receipt of dividends and the realization of losses.

Common Litigation Flashpoints

1. Timing of acquisition and sale of securities
2. Classification of income as exempt
3. Determination of the record date
4. Proving the intention behind transactions

Judgments on Section 94(7) — Losses from Certain Transactions in Securities

• Vodafone International Holdings B.V. vs Union of India & Anr. — SC,
  Section 9 of the Income Tax Act does not cover indirect transfers of capital assets situated in India.
• The Authority for Advance Rulings (Income Tax) and Others vs Tiger Global International II Holdings — SC,
  The DTAA between India and Mauritius allows capital gains to be taxed only in Mauritius, provided the entity holds a valid TRC.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.
• C.I.T., Mumbai vs M/s. Walfort Share & Stock Brokers P. Ltd. — SC,
  Section 14A does not apply to dividend stripping transactions prior to 1.4.2002, and losses from such transactions cannot be disallowed as artificial.
• Aditya Birla Nuvo Limited vs The Deputy Director of Income-tax — HC,
  The beneficial ownership of shares, despite being registered in the name of a permitted transferee, determines the taxability of capital gains in India.