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Relief For Startups: CBDT Lays Out Procedure For Pending Angel Tax Assessment Cases

Giving a relief to startups, the government has laid out a procedure to address pending angel tax assessments under which action would be taken only after approval of a supervisory officer. The Central Board of Direct Taxes (CBDT), in a circular, said that no verification will be done by an assessing officer if a startup has been recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and the case is selected under limited scrutiny.

Similarly, it said the applicability of angel tax would not be pursued during the assessment proceedings and “inquiry or verification with regard to other issues in such cases shall be carried out by the assessing officer only after obtaining approval of his/her supervisory officer”. If a startup is not recognised by the DPIIT, then too the inquiry would be carried out after the approval of a supervisory officer.

The circular followed the announcement made by Finance Minister Nirmala Sitharaman in Budget. She proposed a host of incentives, including a special arrangement for resolution of pending assessments of income tax cases, with a view to encouraging startups.

“To resolve the so-called ‘angel tax’ issue, the startups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums,” she had said. The issue of establishing the identity of the investor and source of his/her funds will be resolved by putting in place a mechanism of e-verification.

Commenting on the issue, Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP said that CBDT has come out with a framework to tackle pending tax assessments. This clarification will help startups which are facing questioning in their assessments and will also give a clear direction to assessing officers on what to do in such cases, he said. 

Contention of startups having DPIIT recognition will be accepted on section 56(2)(viib) of Income tax act and therefore, there would not be any tax adjustment additions on this account,” he said. He added that startups which do not have DPIIT recognition will still have to substantiate the valuations of the assessing office, if they question them.

After claims being made by several startups that they were receiving tax notices under section 56(2)(viib) of the Income Tax Act, 1961 to pay taxes on angel funds received by them, the DPIIT in consultations with CBDT resolved the issue. Section 56(2)(viib) of the I-T Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.

Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in startup ventures. More than 540 startups have received an exemption from angel tax so far.

 

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