Section 94C: The Anti-Tax Avoidance Rule on Securities Transactions

Taxation is not just about claiming deductions and exemptions—it is equally about ensuring compliance with anti-avoidance provisions. Over the years, the Government of India has introduced different sections in the Income Tax Act, 1961 to close loopholes & prevent misuse of tax benefits. One such provision is Section 94C of Income Tax Act.

While deductions and exemptions (such as those under Section 80C, Section 10, or Section 54) are widely discussed, provisions like Section 94C often go unnoticed. However, understanding it is crucial for professionals, businesses, and investors who deal with complex transactions.

In this blog, we’ll decode Section 94C of Income Tax Act, its background, implications, and how taxpayers should approach it to stay compliant while planning taxes effectively.

What is Section 94C of Income Tax Act?

Section 94C of Income Tax Act was introduced to address situations where taxpayers might create artificial arrangements purely to avoid tax. It works as an anti-avoidance measure, ensuring that income which rightfully should be taxed is not disguised or shifted to claim undue benefits.

In simple terms, if a transaction lacks genuine commercial purpose & is only designed to reduce tax liability, Section 94C empowers the tax authorities to step in.

Objectives of Section 94C

The primary aim of Section 94C of Income Tax Act is to discourage tax avoidance. Here are the key objectives:

1. Prevent Misuse of Deductions
   • Taxpayers sometimes route investments or transactions only to claim deductions. Section 94C ensures such misuse is stopped.
2. Ensure Fair Taxation
   • Income must be taxed where it is actually earned. Shifting it artificially to another entity or person just for tax saving is restricted."
3. Strengthen Anti-Avoidance Measures
   • Along with General Anti-Avoidance Rules (GAAR), Section 94C adds strength to India’s anti-abuse tax framework.

Also Read: Penalty for Under-Reporting and Misreporting of Income

How Section 94C Works

The provision applies when a transaction or arrangement does not have a valid commercial purpose apart from tax saving. In such cases:

• The Assessing Officer has the right to disregard such arrangement.
• Income will be taxed in the hands of the taxpayer as if the artificial structure did not exist.
• Any benefit derived from the arrangement will be reversed.

This ensures that tax liability remains genuine & fair.

Relevance of Section 94C for Taxpayers

Even though Section 94C may not be directly applicable in routine salary or business income, it plays a key role in:

• Corporate tax planning
• High-value investments
• Cross-border transactions
• Speculative structures

For ordinary taxpayers, the main takeaway is that while tax planning is legal, tax avoidance through artificial means is not.

Section 94C and Anti-Avoidance Rules

It is important to note that Section 94C works in line with broader anti-avoidance provisions:

1. General Anti-Avoidance Rules (GAAR)
   • GAAR gives sweeping powers to tax authorities to nullify arrangements made solely to avoid tax.
2. Section 94 Series
   • Sections under 94 (like 94(7), 94(8), etc.) deal with avoidance in mutual funds, dividends, and securities transactions.
   • Section 94C of Income Tax Act acts as an extension, plugging specific loopholes.

Importance for Professionals and Businesses

• For Professionals: Doctors, CAs, lawyers, and consultants must ensure their contracts & partnerships are commercially valid.
• For Corporates: Large companies setting up subsidiaries or shell entities abroad for tax reasons must be cautious.
• For Investors: Those engaged in complex financial transactions, derivatives, or arrangements must verify compliance with Section 94C.

Also Read: Penalty for Concealment or Misreporting

Practical Example of Section 94C

Suppose a company routes its profits through an intermediary entity that has no commercial activity, only to claim deductions under a tax treaty.

• Under Section 94C of Income Tax Act, tax authorities can ignore this arrangement.
• The income will be taxed as if no such intermediary existed.

This prevents artificial shifting of profits & ensures fair tax collection.

Common Misconceptions about Section 94C

1. It applies to all taxpayers – Not true. It mainly applies to cases where artificial arrangements are used.
2. It prevents genuine tax planning – Incorrect. The law only targets sham or colorable transactions.
3. It overrides all exemptions – No, genuine exemptions like Section 80C or Section 10 benefits remain valid if transactions are real.

Challenges with Section 94C

While the intent of the section is strong, challenges exist:

• Subjectivity: What counts as “artificial” may be debated between taxpayers & tax officers."
• Litigation Risk: Many cases end up in tribunals due to interpretation differences.
• Compliance Burden: Businesses must maintain strong documentation to prove the commercial purpose of their transactions.

Tax Planning vs Tax Avoidance

To understand Section 94C better, taxpayers must differentiate:

• Tax Planning: Legal, includes claiming deductions under 80C, exemptions under 10(14), etc.
• Tax Avoidance: Illegal, involves creating sham arrangements to reduce liability.

Section 94C is strictly against avoidance, not planning.

Also Read: Understanding Dividend Stripping and Capital Loss Restrictions

Why Section 94C Matters Today

In an era of globalization & digital economy, cross-border tax avoidance has increased. Provisions like Section 94C give Indian tax authorities the power to regulate & monitor such practices effectively.

For domestic taxpayers, it is a reminder to stay compliant and focus on genuine tax-saving strategies rather than artificial ones.

Conclusion

Section 94C of Income Tax Act serves as a safeguard against artificial tax avoidance. It empowers authorities to ensure that income is taxed fairly, avoiding misuse of deductions or loopholes. For professionals, corporates, and investors, understanding Section 94C is crucial to avoid penalties & litigation.

While tax planning is encouraged, artificial tax avoidance is risky & counterproductive. Staying compliant not only ensures peace of mind but also helps avoid disputes with the Income Tax Department.

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