A new section 94(8) has been inserted with effect from assessment year 2005-06 to curb the practice of creation of losses via bonus stripping. Briefly, it provides that the loss, if any, arising to a person on account of purchase and sale of original units shall be ignored for the purposes of computing his income chargeable to tax if the following conditions are satisfied:-

• The person has bought or acquired the units within a period of 3 months prior to the record date.
• He is allotted additional units without any payment on the basis of holding of such units on such date (bonus units).
• He has sold or transferred all or any of the units referred to in (a) with in a period of 9 months after the record date.
• On the date of sale or transfer referred to in (c) above, he held at least one of the additional bonus units allotted to him.

However, the loss will be considered to be the cost of acquisition of the bonus units held on the date of sale.

The provision:

• applies to all units whether bought or ‘acquired’
• covers both open ended and close ended equity funds
• is applicable even in case where units are held as stock in trade
• is applicable only in respect of units and not shares
• doesn’t apply if all additional units are transferred before the original units are sold

As mentioned above, all the conditions have to be cumulatively satisfied in order to attract section 94(8). Hence, in the following situations, section 94(8) will not apply:

Situation 1

• units bought or acquired before a period of three months prior to the record date;
• bonus units on such units obtained during the intervening period ; and
• original units sold or transferred within a period of nine months after the record date.

Situation 2

• units bought or acquired within a period of three months prior to the record date;
• bonus units on such units obtained during the intervening period ; and
• original units sold or transferred after a period of nine months from the record date.

Situation 3

• units bought or acquired within a period of three months prior to the record date;
• no bonus units are allotted during the intervening period ; and
• original units are sold or transferred within a period of nine months after the record date.

Indexed cost of acquisition- Since the loss is considered to be the cost of acquisition of the bonus units held on the date of sale, the benefit of indexation should be available on such deemed cost of acquisition.

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