Income Tax dept relaxes assessment and scrutiny norms for start-ups

In cases where start-ups are recognised by the DPIIT but scrutiny involves wider issues, the I-T dept has asked its field formations not to pursue the issue of angel tax during assessment proceedings

The income tax (I-T) department has relaxed its assessment and scrutiny norms for start-ups.

In a circular it directed its officers not to raise additional tax demands for start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT).

This will be done in cases where scrutiny is limited to Section 56 (2) (viib) of the Income Tax Act, or what is called in popular parlance angel tax.

Angel tax refers to income tax payable on capital raised by unlisted firms by issuing shares where the share price is considered more than the fair market value.

“No verification on such issues will be done by the AOs (assessing officers) during the proceedings and the contention of such recognised start-up companies on the issue will be summarily accepted,” the circular said.

In cases where start-ups are recognised by the DPIIT but scrutiny involves wider issues, the I-T Department has asked its field formations not to pursue the issue of the angel tax during the assessment proceedings.

So far as other issues are concerned, the AO can go ahead with his or her inquiry or verification after the approval of supervisory officers. In a situation where start-ups are not recognised by the DPIIT, assessing officers have been asked to seek the approval of their supervisory officers to go for inquiry or verification about any issue.

“This clarification will help start-ups that are facing questioning and will also give a clear direction to assessing officers on what to do in such cases,” Amit Maheshwari, partner Ashok Maheshwary & Associates, said.

Rakesh Nangia, managing partner at Nangia Advisors (Andersen Global), said while the recognised start-ups were relieved, the DPIIT might still have to face inquiries from tax officers and the procedure to be followed by tax officers would be crucial.

After protests by start-ups, the government had raised the threshold for availing of angel tax exemption for these companies, besides widening their definition. Consideration of shares issued or proposed by start-ups has been hiked to Rs 25 crore from Rs 10 crore for getting exemption from the angel tax. Also, consideration received by eligible start-ups for shares issued or proposed to be issued to a listed company having a net worth of Rs 100 crore, or a turnover of at least Rs 250 crore, was also exempted.