DPIIT Recognized Start-Ups Will Not Face Angel Tax Scrutiny : Cbdt Clarifies
Section 56(2)(viib) of the Income-tax Act, 1961 stipulates that where a company (other than a public listed company) receives consideration for shares which exceeds the fair market value (“FMV”) of the shares, the excess consideration would be chargeable to income tax, under the head “Income from other sources”. This is commonly referred to as “Angel Tax”. While earlier, consideration received from non-residents was exempt from the ambit of the Angel Tax provisions, the above provision was amended through the Finance Act, 2023, which brought the issue of shares to non-resident investors within the ambit of the aforesaid section.
However, post the amendment several representations were made before the Central Board of Direct Taxes (“CBDT”) regarding potential hardships being faced by companies and non-resident investors, pursuant to which the CBDT issued two notifications in May, 2023, exempting:
(a) consideration received by Department For Promotion of Industry and Internal Trade (“DPIIT”) recognized startups, which also meet the other stipulated conditions, from both residents and non-residents; and
(b) entities of three specified categories, being residents of any of the specified twenty one countries.
Additionally, in light of the multiple instances of DPIIT recognized start-ups being served with notices for scrutiny/assessment by the Income Tax Department (“Department”), the CBDT has issued a much-needed directive to its field officers dated October 10, 2023, stating such start-ups shall be immune from any proceedings relating to the Angel Tax provisions.
As per the circular, upon any DPIIT recognized start-ups being served with assessment notices by the Department on matters relating to the Angel Tax provisions, no further verification shall be done by the assessing officers and contention of such start-ups shall be summarily accepted. However, in case such start-ups being served with notices which involve multiple issues, including the Angel Tax provisions, the issue of applicability of Angel Tax shall not be pursued during the assessment proceedings.