Bond washing transactions are the transactions in Securities which leads to shift in income. Now one may think that the provision of shifting may lead to the provision of clubbing. But, what about transfer in case transfer is made to friend? The Clubbing provisions do not apply. For such cases Section 94 of Income Tax Act 1961, comes into picture.

Section 94 aims at preventing avoidance of tax by an assessee where there is a transfer of securities before the due date of payment of interest and re-acquisition thereof after due date. Such transfer avoids tax or shifts the burden of tax to some other person. As per Section 94, the income of the securities transferred shall be deemed to be that of the transferor and shall be assessable in his hands accordingly and therefore bond washing transactions shall have null effect.

For example, Mr. Ram holds 12% debentures of Rs. 1 crore of Company “A”. Company “A” provides interest half-yearly say on 30th June and 31st December.

On 28th June 2018, Mr. Ram sells the said debentures of Rupees 1 crore to his friend Mr. Shyam and re-acquires those debentures on 1st July 2018. Now interest of rupees 6 lakhs received by Mr. Shyam shall not be taxable in hands of Mr. Shyam but shall be taxable in the hands of Mr. Ram by virtue of Section 94 of the Act.

However, Section 94 shall not apply and the said interest shall not be taxable in hands of Mr. Ram:

  • If Mr. Ram proves that the interest is taxable in hands of Mr. Shyam at the same rate as it would have been taxable in his hands i.e. proves that there is no avoidance of income tax or
  • Mr. Ram proves that he sold debentures on 28th June 2018 as he was in urgent need of money and there has been no such Bond washing transaction in any of the three previous year ending 31st March 2018.

Explanation to Section 94(1) provides that if transferor re-acquires similar type of securities, then his tax burden shall not be greater than or less than what would have been if he had sold original securities.

Accordingly if Mr. Ram buy backs on 1st July 2018 shares of Company “B” with interest of 11%, then still the amount that will be added to Mr. Ram’s income would be Rs. 6 lakhs (1cr * 12% * 6 / 12) and not Rs.5.5 lakhs ( 1cr * 11% * 6 / 12).

So, Bond Washing Transactions can be done, provided the person produces the evidence showing urgency of money or that there is no tax avoidance.



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