CBDT releases clarification, vide circular dated 7 August 2019, laying down the procedure for cases concerning startup companies selected for scrutiny by the tax department. The summary of the clarification issued is as under
|Where the start-up company has been recognized by the DPIIT but the case is selected under "limited scrutiny" on the single issue of applicability of Sec 56 (2)(viib)||
|Where the start-up company has been recognized by the DPIIT but the case is selected under "limited scrutiny" with multiple issues or under "complete scrutiny" including the issue u/s 56(2)(viib)||
|Where the start-up company has not got DPIIT approval and the case is selected for scrutiny||
The CBDT, vide Notification No. 13/2019 dated 5 March 2019, had clarified that startup companies which fulfil the conditions specified in para 4 of the Notification issued by the Ministry of Commerce ('MCA') and the Department for Promotion of Industry and Internal Trade ('DPIIT') dated 19 February 2019 would not be subjected to rigors of 56(2)(viib). However, scrutiny notices have been issued in many instances. Hence, the question was how the matter would be dealt with by the Assessing officers in such cases. This present circular puts to rest doubt about the assessment with respect to the angel tax issue.
For DPIIT recognized startups, the CBDT has clearly laid that no enquiries shall be made with respect to the valuation requirements u/s. 56(2)(viib). Even with respect to other issues, the same can be pursued only after approval from supervisory officers. This is certainly a welcome clarification in terms of giving effect to the intentions right away.
It is pertinent to note here, that startups not recognized by DPIIT or start ups that do not meet the condition specified in para 4 of DPIIT notification (being threshold of aggregate share capital and share premium of 25 Crores) will not enjoy the above reliefs and will have to still substantiate that the share premium received by the company is not in excess of the "fair market value" as defined u/s 56(2)(viib) of the Income Tax Act. But even these cases would be under the observation of the superior officers.
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