Bond washing is the popular name for a tax evasion practice under which a person tries to pass on the interest income arising on a security or bond to another person. This is resorted to by certain high net-worth individuals or entities , who try to minimise the taxable income , by trying to pass on the income to some other entities.
Income Tax Act Provision Against bond Washing
Section 94 is directly against such practice and it provides that if the income is transferred in that manner , the interest will be added to the person who was the owner of the securities. The provision u/s 94(1) is as under :
94. (1) Where the owner of any securities (in this sub-section and in sub-section (2) referred to as “the owner”) sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.
Explanation.—The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired.
As can be seen , the Explanation to section 94(1) provides that even if the buying back is of different securities than the one which was transferred by the owner.