Tax deducted from bank accounts of start-ups; I-T department clarifies

The CBDT clarified that the additions in tax demands have been made using provisions of Section 68 of the I-T Act

Two start-ups, TravelKhana and Babygogo, have claimed that the income-tax (I-T) department withdrew lakhs from their bank accounts for angel tax it feels they are liable to pay.

The department had allegedly frozen four bank accounts of TravelKhana (Duronto Technologies) and withdrew about Rs 33 lakh on investments raised by the company from angel investors in 2015-16. Babygogo got an SMS alert from its bank showing a negative balance of Rs 72 lakh, but it did not have much in its account.

In the case of TravelKhana, its founder and Chief Executive Officer (CEO) Pushpinder Singh has said the Central Board of Direct Taxes (CBDT) took coercive action by freezing its bank account and withdrawing money despite assurances from the government that no action would be taken.

He said their requests for abeyance sent to the tax department were unheeded to.

Countering these claims, the CBDT clarified later in the evening that the additions in tax demands have been made using provisions of Section 68 of the I-T Act, which deals with unexplained cash credits to companies, and not Section 56, which dwells on tax on share premiums.

The CBDT said TravelKhana failed to substantiate the source of some cash deposits, which resulted in a tax demand of nearly Rs 2.22 crore. It said it had requested for confirmation of persons making the deposits from the food-on-the-go start-up.

“Wherever confirmations were submitted, the same were accepted and no tax addition was made. However, where no confirmations were furnished, the assessing officer made the addition after issuing a show-cause notice and obtaining a reply,” the CBDT said in their official release.

While TravelKhana’s accounts have been unfrozen, the money has not been returned. This is despite the finance minister assuring start-ups that no coercive action would be taken against them.

The I-T Act requires start-ups to pay taxes on the money they have raised from angel investors — popularly known as angel tax — which is typically at a premium to their fair market valuation using traditional methods.

The government had invited investors and start-ups earlier this week to take their feedback and resolve the issue of angel tax. TravelKhana employed 60 people and indirectly impacted 2,000 other jobs.

“We had raised investment from several angel investors in FY16. Since the past several months, the I-T department has been asking questions over the amount, including the validity of the investors under Section 68. We were duly answering their questions and complying with the legal process, including sharing that we were a start-up, being pioneers of our field, and having some very reputed and respected investors,” Singh told Entrackr, a media platform for start-ups and technology enthusiast.

Despite the ongoing process, an I-T officer passed an assessment order asking TravelKhana to pay taxes on the angel money received.

“We had appealed against the order and put in multiple requests for abeyance with the assessment officer on January 15 and again on February 4. Without accepting or denying our abeyance request and totally against the principles of natural justice and government assurances, the I-T department froze our bank accounts and withdrew all the money in all the accounts in various banks, striking a death blow to the company,” Singh told Entrackr.

The department had asked TravelKhana to pay Rs 2.33 crore as angel tax.

“Following the assessment order, we appealed to I-T department for relief. We also requested the assessment officer to keep the order in abeyance on January 15,” said Singh. Around 20 days later, Singh appealed against the assessment order through a lawyer outlining that matter was very critical and was a question of survival for the firm.

“The very next day, I-T department froze one State Bank of India and three ICICI Bank accounts containing Rs 33 lakh,” said Singh.

Following the freezing and deduction of amount from bank accounts, Singh and his team approached senior I-T officials. “However, they denied any immediate relief and asked them to appeal, which we had anyway started the process. Appeal in normal times takes at least a year to resolve,” said Singh.

The only relief Singh and his company received from the CBDT is that bank accounts are operational and an early hearing of the appeal has been promised. But even that might take three to six months.

In the meanwhile, the company does not have any money to pay salaries or make other payments.

‘‘If it is true, it is shocking beyond words. That the I-T dept actually froze a start-up’s bank account and withdrew money for the #AngelTax demand,’’ tweeted Amit Ranjan, founder of Slideshare and architect of DigiLocker.

‘‘Yes — it’s true. This was my own reaction on Tuesday evening when it happened. The bank manager said four I-T inspectors came and forced the bank manager to make DDs from all accounts. The bank manager said that this is commonplace these days,’’ Pushpinder Singh of TravelKhanna responded on Twitter.

What tax department says

• The assessee did not obtain any stay in respect of the demand raised, says the dept

• The tax dept said that TravelKhana did not seek a “stay” in respect of the tax demand the former had raised under Section 68 of I-T Act. 

• “Since there was no stay against recovery and the demand had become due, the department recovered Rs 36 lakh after attaching the bank accounts of the assesse,” its release said. 

• It also said that TravelKhana did not submit the mandatory certification from the department of industrial policy and promotion that would prove its status as a start-up

• This makes the food start-up ineligble to get the benefit of the December 24 notification that promised that coercive action would not be taken, CBDT said