Exemption to Start Ups from the provisions of Sec 56(2)(viib) of IT Act,1961
Exemption has been given to Start Ups for the purpose of clause (viib) of sub-section (2) of section 56 of the Act. CBDT through Notification No. 13/2019 granted exemption to startup companies from angel tax w.e.f. 19.02.2019 if such companies fulfill the conditions specified in para 4 of the notification number G.S.R. 127(E), dated the 19th February, 2019 which are as follows.
A Startup shall be eligible for exemption from the provisions of that clause,if it fulfils the following three conditions:
(i) it has been recognised by DPIIT under para 2(iii)(a) of the notification G.S.R. 127(E) or as per any earlier notification on the subject
(ii) Aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, twenty five crore rupees.
Provided that in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of twenty five crore rupees in respect of shares issued to any of the following persons shall not be included:
(a) a non-resident; or
(b) a venture capital company or a venture capital fund;
Provided further that considerations received by such startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the aggregate amount of paid up share capital and share premium of twenty five crore rupees.
(iii) It has not invested in any of the following assets:
(a) building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
(b) land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
(c) loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
(d) capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
(g) jewellary other than that held by the Startup as stock-in-trade in the ordinary course of business;
(h) any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.
Provided the Startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium;
A startup fulfilling conditions mentioned above in point (i) and (ii) shall file duly signed declaration in Form 2 to DIPP that it fulfills the conditions mentioned above. On receipt of such declaration, the DPIIT shall forward the same to the CBDT.
Notification referred above shall apply irrespective of the dates on which shares are issued by the Start up from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2)(viib) of the Act has been made in an assessment order made under the Act before the date of issue of the notification.
In case the Startup which has furnished declaration in Form-2 invests in any of the assets specified in point (iii) before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.
A very important judgement related to encourage the start ups is Rameshwaram Strong Glass (P.) Ltd. v. ITO (ITAT Jaipur) where it was held that DCF method essentially based on the projections (estimates) only and hence these projections cannot be compared with the actuals to expect the same figures as were projected. The valuer has to make forecast on the basis of some material but to estimate the exact figure is beyond its control.
The projections are affected by various factors hence in the case of company where there is no commencement of production or of the business, does not mean that its share cannot command any premium. For such cases, the concept of start-up is a good example and as submitted the income-tax Act also recognized and encouraging the start-ups.”
Many measures have been taken to encourage new start ups and relaxing and easing the compliances in order to make Self Reliant India.