Recognised Start-ups will not face verification on account of angel taxation in case they are picked up for scrutiny. The Central Board of Direct Taxes (CBDT) has issued an instruction to follow the same.
There are 99,380 start-ups recognised by the DPIIT (Department for Promotion of Industry and Internal Trades). CBDT is the apex policy-making body for Income Tax.
Angel tax (income tax at the rate of 30.6 per cent) is levied when an unlisted company issue shares to an investor at a price higher than its fair market value (FMV). Earlier, it was imposed only on investments made by a resident investor, but Finance Act, 2023, brought in an amendment to bring consideration received from non-residents for the issue of shares by an unlisted company within the ambit of section 56(2)(viib) of the Income-tax Act, 1961. This section prescribes that if such consideration for the issue of shares exceeds the Fair Market Value (FMV) of the shares, it shall be chargeable to income tax under the head ‘Income from other sources’. This will come into effect from Assessment Year 2024-25.
DPPIT-recognized start-ups now exempted from section 56 (2) (viib) of IT Act
In latest communication, CBDT highlighted that as DPPIT-recognised startups are exempted from section 56(2)(viib) of the Income Tax Act, it is necessary to clarify the action in case such a start-up is picked up for scrutiny under CASS (Computer-Assisted Scrutiny Selection). The communication said: “Where the case of such start-up company is selected under scrutiny on the single issue of the applicability of section 56(2)(viib), no verification on such issues shall be done by the Assessment Officers under the proceedings under section 143(2) or 147/143(2) of the Income Tax Act and contentions of such recognized start-up companies on the issues will be summarily accepted.”
When the income tax department finds discrepancies, minor or major, in an income tax return, a notice is issued under Section 143(2). The discrepancies can be under-reporting income or over-reporting losses. Under section 147, If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or reassess such income and also any other income chargeable to tax.
New rule
The communication further said that where the case of such start-up company is selected under scrutiny with multiple issues including the issue under section 56(2)(viib), “the issue of applicability of this section shall not be pursued during the assessment proceedings of such start-up company.”
Earlier, CBDT notified final rules outlining valuation methods for non-resident and resident investors under the new angel tax mechanism in the Finance Act 2023 for start-ups not recognised by DPIIT. Besides the rules mentioned in the draft issued in May, the notification has introduced an additional sub-clause addressing Compulsorily Convertible Preference Shares (CCPS). Besides the discounted cash flow (DCF) method for resident investors, the new rule prescribes five methods for non-resident investors - comparable company multiple methods, probability-weighted expected return method, option pricing method, milestone analysis method, and replacement cost methods.