Section 94C of the Income Tax Act, 1961 deals with the transactions in securities that are entered into solely with the objective of avoiding taxes. In simpler terms, this section deals with situations where an individual or a company enters into transactions that have no commercial substance but are purely intended to reduce their tax liability. This section aims to prevent such abusive tax avoidance practices by deeming such transactions as void.
Let’s dive deeper into Section 94C of the Income Tax Act, 1961 and explore its various aspects in detail.
Introduction to Section 94C
Section 94C was introduced in the Income Tax Act, 1961 in the year 2011. The primary objective of this section is to prevent tax avoidance through the use of sham transactions. The section provides that any transaction entered into by an assessee with the sole objective of avoiding taxes shall be deemed to be void for the purpose of computing taxable income.
Applicability of Section 94C
Section 94C applies to transactions in securities entered into on or after 1st April 2011. This section applies to all assesses, including individuals, HUFs, firms, companies, and any other entity. The section applies to all transactions in securities, including derivatives, that are entered into solely for tax avoidance purposes.
Deeming Provision
Section 94C provides for a deeming provision, which means that any transaction that is entered into solely for tax avoidance purposes shall be deemed to be void for the purpose of computing taxable income. This means that the tax authorities shall disregard such transactions while computing the taxable income of the assessee.
Meaning of Transactions in Securities
The term ‘Transactions in Securities’ includes any sale, purchase, or any other dealing in securities. The term ‘securities’ has been defined to include shares, scrips, stocks, bonds, debentures, derivatives, or any other marketable securities of a similar nature.
Exceptions to Section 94C
Section 94C provides for certain exceptions where the transactions in securities shall not be deemed to be void. These exceptions include:
a. If the transaction is carried out by a recognized stock exchange in accordance with the rules and regulations prescribed by SEBI.
b. If the transaction is carried out by a market maker registered with SEBI.
c. If the transaction is carried out by a scheduled bank in the ordinary course of its business.
d. If the transaction is carried out by an insurer in the ordinary course of its business.
Penalty for Non-Compliance
If an assessee enters into a transaction in securities solely for tax avoidance purposes, the transaction shall be deemed to be void, and the tax authorities shall disregard such transactions while computing the taxable income of the assessee. Further, the assessee shall be liable to pay a penalty equal to the amount of tax that would have been avoided if the transaction had been accepted by the tax authorities.
Importance of Section 94C
Section 94C plays a crucial role in preventing tax avoidance through the use of sham transactions. It ensures that taxpayers cannot engage in such practices to reduce their tax liability. The provision is particularly important in the current economic scenario where the number of financial transactions is increasing rapidly. Section 94C acts as a deterrent to those who may be tempted to engage in tax avoidance practices.
Challenges in Implementing Section 94C
While Section 94C is an important tool to prevent tax avoidance, it is not without its challenges. One of the main challenges is in determining whether a transaction has been entered into solely for tax avoidance purposes. The burden of proving that a transaction is not a sham transaction lies with the taxpayer. This can be challenging as it may require the taxpayer to provide evidence to show the commercial substance of the transaction.
Another challenge is in determining the amount of penalty that should be imposed for non-compliance. The penalty should be equal to the amount of tax that would have been avoided if the transaction had been accepted by the tax authorities. However, it can be difficult to determine the exact amount of tax that would have been avoided.
Conclusion:
In conclusion, Section 94C of the Income Tax Act, 1961 is a powerful tool to prevent tax avoidance through sham transactions. This section aims to ensure that transactions in securities are carried out with commercial substance and not solely for tax avoidance purposes. Any transaction that is entered into solely for tax avoidance purposes shall be deemed to be void, and the assessee shall be liable to pay a penalty. Therefore, it is crucial for taxpayers to ensure that their transactions in securities have commercial substance and are not solely intended to reduce their tax liability.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
What is Section 94C of the Income Tax Act, 1961?
Section 94C is a provision that deals with transactions in securities that are entered into solely for tax avoidance purposes. It deems such transactions as void for the purpose of computing taxable income.
When did Section 94C come into force?
Section 94C was introduced in the Income Tax Act, 1961 in the year 2011.
What is the objective of Section 94C?
The primary objective of Section 94C is to prevent tax avoidance through the use of sham transactions.
What is the meaning of transactions in securities?
The term ‘transactions in securities’ includes any sale, purchase, or any other dealing in securities. The term ‘securities’ has been defined to include shares, scrips, stocks, bonds, debentures, derivatives, or any other marketable securities of a similar nature.
What is the penalty for non-compliance with Section 94C?
If an assessee enters into a transaction in securities solely for tax avoidance purposes, the transaction shall be deemed to be void, and the tax authorities shall disregard such transactions while computing the taxable income of the assessee. Further, the assessee shall be liable to pay a penalty equal to the amount of tax that would have been avoided if the transaction had been accepted by the tax authorities.
What are the exceptions to Section 94C?
Section 94C provides for certain exceptions where the transactions in securities shall not be deemed to be void. These exceptions include transactions carried out by a recognized stock exchange, market maker registered with SEBI, scheduled bank, or insurer in the ordinary course of its business.
How is it determined if a transaction is solely for tax avoidance purposes?
The burden of proving that a transaction is not a sham transaction lies with the taxpayer. The taxpayer must provide evidence to show the commercial substance of the transaction.
What are the challenges in implementing Section 94C?
One of the main challenges is in determining whether a transaction has been entered into solely for tax avoidance purposes. Another challenge is in determining the amount of penalty that should be imposed for non-compliance.
Who does Section 94C apply to?
Section 94C applies to all assesses, including individuals, HUFs, firms, companies, and any other entity.
How important is Section 94C in preventing tax avoidance?
Section 94C is an important provision to prevent tax avoidance through sham transactions. It acts as a deterrent to those who may be tempted to engage in tax avoidance practices.
