CBDT simplifies the process of assessment in respect of Startups:

As announced by the Finance Minister Nirmala Sitharaman in her budget speech on 5th July 2019, that Startup’s will get relaxation with regard to their assessment and the same has been documented by a press release Dt. 10th August 2019. Link to the press release. //www.pib.nic.in/PressReleseDetail.aspx?PRID=1581755

The details of the Press release are as under:

The Finance Ministry has simplified the process of assessment in the case of Startup entities.

In cases where scrutiny assessments of Startup entities are pending, the CBDT has decided that:

  1. i) In case of Startup Companies recognized by DPIIT which have filed Form No. 2 and whose cases are under “limited scrutiny” on the single issue of applicability of section 56(2)(viib),the contention of the assessee will be summarily accepted.
  2. ii) In case of Startup Companies recognized by DPIIT which have filed Form No. 2 and whose cases have been selected under scrutiny to examine multiple issues including the issue of section 56(2)(viib),this issue will not be pursued during the assessment proceedings and inquiry on other issues will be carried out by the Assessing Officer only after obtaining approval of the supervisory authority.

iii) In case of Startup Companies recognized by the DPIIT, which have not filed Form No. 2, but have been selected for scrutiny, the inquiry in such cases also will be carried out by the Assessing Officer only after obtaining approval of the supervisory authorities.

In addition to the above, the Central Government has further decided to relax Para-6 of the DPIIT notification No.127 (E) dated 19.02.2019 and make it clear that this notification will also be applicable to Startup Companies where addition under section 56(2)(viib) has been made and the assessee has been recognized by DPIIT and subsequently filed Form No. 2. The Circular to this effect in F.No 173/149/2019-ITA-1 of CBDT dated 8th August, 2019”

It directs the assessing officer that if a limited scrutiny has been initiated for a start-up with regard to section 56(2)(viib) or a complete scrutiny has been initiated with 56(2)(viib) as one of the grounds then such limited scrutiny should be dropped or in case of complete scrutiny such point should be dropped provided such start-up is registered with DPIIT and has filed Form no. 2. Also if the scrutiny has been completed and addition made under section 56(2)(viib) of the Income tax Act, then such addition should be deleted provided the Start-up is registered with DPIIT and has filed Form No. 2.

Now let’s see what is Form No. 2 which is required to be filed:

Link to download Form No. 2 is as under:

//www.startupindia.gov.in/content/dam/invest-india/Templates/public/Form%202%20_%20Declaration%20for%20Section56.pdf

This Form is a declaration form the owner or authorized signatory of the Start-up that he has not invested and shall not invest for a period of seven years from the end of the latest financial year in which shares are issued at premium by the said company in any of the assets specified in para 4(iii) of the notification.

The notification mentioned above is //dpncindia.com/blog/wp-content/uploads/2019/02/DIPP-Notification-dated-19-Feb-2019.pdf

In the above notification exemption has been granted if the start-up doesn’t invest in the assets specified in para 4(iii) of the notification which are as under:

  • “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;
  • 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;
  • 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;
  • Capital contribution made to any other entity;
  • Shares and securities;
  • 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;
  • Jewellary other than that held by the Startup as stock-in-trade in the ordinary course of business;
  • 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.”

Thus, if a Start-up fulfills above conditions and files Form No. 2 then no addition can be made on it u/s 56(2)(viib) of the Income Tax Act.

Do you think this step would really support Start-up. Do comments your thought below.