A recent communication from the Government of India’s Ministry of Finance, Department of Revenue, Central Board of Direct Taxes (CBDT) sheds light on the assessment of startup companies and the application of section 56(2)(viib) of the Income-tax Act, 1961. The announcement provides insights into important amendments and clarifications, with a specific focus on startups that have received recognition from the Department for Promotion of Industry and Internal Trade (DPIIT).
1. Background on DPIIT Recognition: The document begins by highlighting DPIIT’s role in exempting recognized startup companies from the provisions of section 56(2)(viib) of the Income-tax Act, 1961. The exemption applies to startups that meet specific conditions outlined in DPIIT’s notification, with reference to para 4(i) and 4(ii) of the said notification. This exemption seeks to support and encourage the growth of startups in India.
2. CBDT Notifications: To reinforce the exemption provided by DPIIT, the CBDT issued notifications in the past. These notifications stated that the provisions of section 56(2)(viib) would not be applicable when a company received consideration for issuing shares that exceeded the face value of those shares, provided the consideration came from a resident. The conditions specified in DPIIT’s notification were a prerequisite for this exemption. The CBDT also released Circular No. 16/2019 in support of these notifications.
3. Amendment to Section 56(2)(viib): The document highlights a crucial amendment made through the Finance Act 2023. It removed the requirement that the consideration should come from “a resident.” This amendment is effective from April 1, 2024, and signifies a significant change in the application of section 56(2)(viib).
4. Assessment of Recognized Startup Companies: The document outlines the assessment procedure for recognized startup companies, focusing on section 56(2)(viib) of the Act:
- Single Issue Scrutiny: In cases where a recognized startup is selected for scrutiny, specifically for the applicability of section 56(2)(viib), assessing officers are instructed not to conduct any additional verification during the proceedings under section 143(2) or section 147/143(2). The contentions of these startups regarding the application of the section should be summarily accepted.
- Multiple Issue Scrutiny: When recognized startup companies are selected for scrutiny with multiple issues to be addressed, the assessment proceedings should not pursue the applicability of section 56(2)(viib). Instead, attention should be directed toward resolving other issues relevant to the case.
5. Conclusion: The communication from the Ministry of Finance’s CBDT provides vital insights into the assessment process of recognized startup companies concerning section 56(2)(viib) of the Income-tax Act, 1961. The recent amendment, which omits the requirement that consideration must come from a resident, is a notable change. The CBDT’s clarifications ensure that the assessment process is carried out efficiently, considering the exemption criteria set forth by DPIIT.
These guidelines aim to promote a favorable environment for startups in India by simplifying the assessment process and supporting the growth of innovative businesses. Startups that meet the specified conditions can now anticipate more straightforward procedures when it comes to assessments, ultimately encouraging entrepreneurship and innovation in the country.
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F. No. 173/149/2019-ITA-1
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi,
Dated the 10th October, 2023
To,
All Pr. Chief Commissioners of Income-tax/ Chief Commissioners of Income-tax
All Pr. Director Generals of Income-tax/Director Generals of Income-tax.
Madam/Sir,
Sub: Assessment of Startup Companies involving application of section 56 (2)(viib) of the Income-tax Act, 1961 -reg.
Kindly refer to the subject mentioned above.
2. In this regard, the undersigned is directed to state that the Department for Promotion of Industry and Internal Trade (DPIIT) vide notification no. G.S.R. 127(E) dated 19.02.2019 provided for exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Income-tax Act, 1961 (the Act) for Startup company. By this notification, it has been provided that provisions of section 56 (2)(viib) of the Act shall not apply to Startup Companies which have been recognized by the DPIIT and fulfils the conditions mentioned in para 4(i) and 4(ii) of the said notification.
3. In pursuance to the above, the Central Board of Direct Taxes (CBDT) had issued notification no. 13/2019/F. No. 370142/5/2018-TPL(Pt.) dated 05.03.2019 notifying that the provisions of clause (viib) of sub-section (2) of section 56 of the Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the said consideration has been received from a person, being a resident, by a company which fulfils the conditions specified in para 4 of the notification no. G.S.R. 127(E) dated 19.02.2019 issued by DPIIT. The same was reiterated by CBDT Circular No. 16/2019 dated 07.08.2019.
3.1 In this context, it is brought to notice that the Finance Act 2023 has amended clause (viib) of sub-section (2) of section 56 of the Act and the words “being a resident” have been omitted w.e.f. 01.04.2024.
4. Instances of cases of Startups having been picked up for scrutiny under CASS have been reported. In the light of the above, the procedure as laid down with regard to the assessment of such Startup companies which have been recognized by the DPIIT and fulfilling the conditions mentioned in para 4(i) and 4(ii) of the DPIIT notification referred in para 2 above (hereinafter ‘such Startup Companies’) involving the issue of section 56(2)(viib) of the Act, is being re-iterated and it is clarified that;
(i) Where the case of such Startup Company is selected under scrutiny on the single issue of applicability of section 56 (2) (viib) of the Act, no verification on such issues shall be done by the Assessing Officers during the proceedings u/s 143 (2) or u/s 147/143(2) of the Act and contention of such recognized Startup Companies on the issue will be summarily accepted.
(ii) Where the case of such Startup Company is selected under scrutiny with multiple issues including the issue u/s 56 (2) (viib) of the Act, the issue of applicability of section 56 (2)(viib) of the Act shall not be pursued during the assessment proceedings of such Startup Company. Due procedure be followed about other issues for which the case has been selected.
-sd-
(Ashwani Kumar)
DCIT(OSD)-I, ITA-I, CBDT
Copy to:
1. PS to FM/ OSD to FM/PS to MoS(R)/OSD to MoS(R)
2. PS to Secretary (Finance) / (Revenue)
3. The Secretary, DPIIT
4. The Chairman, CBDT & All Members, CBDT
5. All Joint Secretaries / CsIT, CBDT
6. The C&AG
7. The CIT(M&TP), Official Spokesperson of CBDT
8. 0/o DGIT (Systems) with request to upload on the departmental website
9. Addl. CIT, Data-Base Cell for uploading on IRS officer’s website.
DCIT(OSD)-I, ITA-I, CBDT
