Also several investors have posed a similar query inquiring whether the provisions of the section (and the consequent tax evasion contention) would be applicable to just the first dividend declared or also to any subsequent dividends paid thereafter. We shall examine all these issues with the help of case studies. But first, for those who came in late, a bit of the background.

The method of dividend stripping was an extremely popular "tax planning" tool prior to 2001 (when the law was amended to curb it) and was extensively used to save tax on short-term gains.

This practice involved buying MF units on or just prior to the record date for declaration of dividend, pocketing the dividend amount and selling the units at the ex-dividend NAV thereby incurring a short-term capital loss. This capital loss could be used to set off other capital gain on which tax would otherwise have been payable.

In time, the exchequer figured out what was happening and promptly plugged it by introducing Section 94(7) w.e.f. AY 2002-03.

As per this provision, if any person buys any securities, shares or units within a period of three months prior to the record date and sells such investment within a period of three months after the record date and the dividend or income on such investment is exempt from tax, then any loss arising on account of the transaction of purchase and sale (to the extent it does not exceed the amount of dividend) shall be ignored for the purposes of computing income chargeable to tax.

The new circular
Assessing officers frown upon the practice of dividend stripping and basically have sought to classify it as tax evasion (thereby invoking interest, fines and penalties).

This is blatantly unfair on investors, large or small. Tax planning is the right of the assessee. Since the intention of any taxpayer is to minimise the tax payable, towards this end, he/she would be justified in using any legal means available. As long as any law is not being contravened, the investor is well within his rights to use the existing framework to minimise tax.

That said, let's see how is Section 94(7) to be applied in a scenario where there is more than one dividend.

Multiple dividends
Many of my readers have asked whether the section would be applicable for subsequent dividends after the first one. Some contend that the condition of holding period needs to be satisfied for the dividend first declared after the purchase of the units and what happens thereafter should not concern the section.

I am afraid that is not the case. The language of Section 94(7) is clear and unambiguous. It has to be examined whether each individual dividend declared satisfies the conditions of the section.

Nowhere is it specified that the said section is only applicable to the first dividend etc. Therefore, in the absence of such a specification, the provisions of law would apply to each individual case independently.

Let's take an example. Mr Mishra has invested in an MF scheme. His date of investment and dividends earned are given in Table 1. Here, the applicability of Section 94(7) has to be examined vis-à-vis each dividend separately and independently.

Table 1: Mr Mishra's example
Date of investment	15-Oct-03
Number of units purchased	1,000
Purchase rate	Rs 16 per unit
Total investment cost	Rs 16,000
Date of first dividend	24-Oct-03
Dividend paid @30%	Rs 3,000
Date of second dividend	24-Dec-03
Dividend paid @30%	Rs 3,000
Redemption date	2-Jan-04
Sale value per unit	Rs 12
Total sale proceeds	Rs 12,000
Short-term	loss Rs 4,000

It is clearly seen that the provisions of Section 94(7) are applicable to each of the dividends and hence the entire loss of Rs 4,000 would not be available for set-off to Mr Mishra.

Another case
Let's examine another case where one of the dividends escapes the claws of Section 94(7) and understand how much if any would indeed be available for set-off (Table 2).

How much of the Rs 10,000 short-term loss would be available for set-off?

It is clear that the first dividend escapes Section 94(7) as the redemption date being February 25, 2004, is beyond three months of the record date. However, such is not the case for the next dividend. Ergo, Rs 8,000 would be available for set-off but not the Rs 5,000.

Also, you have to be careful not to make the mistake of selecting the available amount first. For instance, in the above example, just because the first dividend escapes disallowance, it does not mean that Rs 8,000 would be allowed from the actual loss of Rs 10,000 thereby limiting the disallowance to only Rs 2,000.

The correct way of calculating would be to first take into account the disallowed portion of Rs 5,000. Therefore, of the total loss of Rs 10,000, since Rs 5,000 would be disallowed, only the balance Rs 5,000 will be available for set-off.

Table 2: Another case
Date		Amount
16.9.03	Invested amount	60,000
30.9.03	Dividend declared @80%	8,000
05.12.03	Dividend declared @50%	5,000
25.02.04	Redemption proceeds	50,000
	Short-term loss	10,000

Provisions applicable in spite of dividend distribution tax
Some assessees have argued that since the dividends received by them are subject to dividend distribution tax of 12.8125 per cent, the condition that the income received be exempt for applicability of Section 94(7) is not being met.

While in practical terms this is true, technically, it is the MF which pays the tax and therefore, the income when it is received by the investors is indeed tax-free in their hands.

To sum
Whichever way you look at it, the tax authorities have plugged the dividend stripping route. And in some cases, where investors have sold their investment close to the expiration of the three month cut-off date, they have become unintentional victims being trapped in the net.

Such persons can take advantage of Notification F.NO,\.175/32/2003-IT Act, where it is clearly specified that motive of tax avoidance has to be clearly established viewing the relevant facts of each case and no conclusion can be arrived at just because the transactions seem to suggest dividend stripping.

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