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Facts
The Revenue appealed the CIT(A)'s order allowing the assessee's appeal against an assessment order that made an addition under Section 56(2)(viib) of the Income Tax Act for the Assessment Year 2017-2018. The key issue was whether the assessee, recognized as a startup, was eligible for exemption under Notification No. G.S.R. 127(E) dated 19.02.2019, as the assessment order was passed before the assessee obtained startup recognition.
Held
The Tribunal held that the relevant date for considering the applicability of Notification No. G.S.R. 127(E) is the date of the notification's issuance (19.02.2019), not the date of startup recognition. Since the assessment order was passed before the notification's issuance, and the addition under Section 56(2)(viib) was made after this date, the assessee was entitled to the exemption.
Key Issues
Whether the exemption under Notification No. G.S.R. 127(E) for startups applies when the assessment order is passed before the startup is officially recognized but after the notification's issuance date.
Sections Cited
56(2)(viib), 143(3), 250
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
order : 29.01.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member:
1. 1. The present appeal preferred by the Revenue is directed against the order, dated 21/06/2024, passed by the National Faceless Appeal Centre (NFAC), New Delhi [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had allowed the appeal against the Assessment Order, dated 27/12/2019, passed under Section 143(3) of the Act for the Assessment Year 2017-2018.
2. The Revenue has raised following grounds of appeal : “1. Whether on the facts and circumstances of the case and in law, the CIT(A) erred in considering the date of the notification mentioned in para-6 read with para-4 of the Department for Promotion of Industry and Internal Trade (DPIIT) notification Assessment Year 2017-2018 No.G.S.R.127(E) dated 19.02.2019 as the relevant date instead of date of the CBDT notification F.No.173/147/2019- ITAT dated 21.04.2020 wherein it has been certified that the assessee is a recognized start up as per DPIIT. The CIT(A) failed to appreciate that the addition under Section 56(2)(viib) of the Income Tax Act in the case of the assessee was made vide an assessment order dated 27.12.2019, prior to the issuance of the aforementioned CBDT notification and hence the exemption under section 56(2)(viib) of the Income Tax Act is not available to the assessee for the 2017-18 under consideration.
2. Whether on the facts and circumstances of the case and in law, the CIT(A) erred in not considering that the assessee company was not recognized as a start-up until after the completion of the assessment proceedings under section 143(3) of the Act for A.Y. 2017-18 since the assessee filed its application before the DPIIT on 30.01.2020 only after the assessment order was passed on 27.12.2019. The assessee never raised the contention of being a star-up or sought exemption from addition under section 56(2)(viib) of the Income Tax Act during the assessment proceedings.
3. Whether on facts and circumstances of the case and in law, the CIT(A) erred in not considering the merit of the addition made under section 56(2)(viib) of the Income Tax Act in respect of inflated and highly exorbitant share premium of Rs.2,023/- per share on fact value of Rs.1/- and deciding the appeal on the basis of assessee’s incorrect claim of exemption from addition under the CBDT notification dated 05.03.2019.
4. The appellant prays that the order of the CIT(A) on the grounds be set aside and confirm the order of the Assessing Officer.”
3. The short issue involved in the present appeal is whether in the facts and circumstances of the present case the Assessee was entitled to claim the benefit of exemption from the applicability of provisions contained in Section 56(2)(viib) of the Act in terms of Notification No.G.S.R.127(E), dated 19/02/2019, issued by the Department of Promotion of Industry and Internal Trade (DPIIT).
The facts relevant for adjudication of the issue raised for 2 Assessment Year 2017-2018 consideration are that the Assessee filed return of income of Assessment Year 2017-2018 on 31/10/2017 declaring loss of INR.2,33,36,285/-. The case was selected for scrutiny. The assessment under Section 143(3) of the Act was completed vide Assessment Order, dated 27/12/2019, passed under Section 143(3) of the Act after making addition of INR.9,74,54,500/- under Section 56(2)(viib) of the Act in respect of share premium. The Assessee filed appeal against the aforesaid Assessment Order before the CIT(A). The CIT(A) allowed the appeal of the Assessee holding that the Assessment Order, dated 27/12/2019, was passed after issuance of Notification No. G.S.R. 127(E), dated 19/02/2019, issued by DPIIT, and therefore, the Assessee was eligible to claim exemption from the applicability of provisions contained in Section 56(2)(viib) of the Act in terms of Paragraph 6 of the aforesaid notification. Being aggrieved, the Revenue has preferred the present appeal before the Tribunal.
When the appeal was taken up for hearing none was present on behalf of the Assessee. We have heard the Learned Departmental Representative, perused the material on record and have examined the position in law.
According to the Revenue the relevant date for considering the applicability or otherwise of the Notification No. G.S.R. 127(E) issued by DPIIT, is the date on which the notification recognizing the Assessee as a start-up was issued (i.e. 21/04/2020) and not the date on issuance of Notification No. G.S.R. 127(E) (i.e. 19/02/2019). Paragraph 6 of Notification No. G.S.R. 127(E) provided that in case the assessment order has been passed before the issuance of ‘the notification’, the Assessee would not be able to claim exemption from the applicability of provisions contained in Section 56(2)(viib) of the Act. The contention of the Revenue is that in the present case the Assessment Order, dated 27/12/2019, was passed before the 3 Assessment Year 2017-2018 issuance of notification, dated 21/04/2020, whereby the Assessee- Company was recognized as a start-up by DPIIT, the benefit of Notification No. G.S.R. 127(E), dated 19/02/2019, issued by DPIIT, could not have been extended to the Assessee in terms of Paragraph 6 of the said notification. Therefore, the Assessee was not eligible to claim exemption from the applicability of provisions contained in Section 56(2)(viib) of the Act.
7. Before dealing with the merits of the submission made on behalf of the Revenue we deem it appropriate to visit the context in which the Notification No. G.S.R. 127(E) was issued by DPIIT. Section 56(2)(viib) of the Act was introduced by way of Finance Act, 2012 and provided for, inter alia, taxation of issuance price in excess of fair market value [determined as per the method prescribed], in the hands of the company issuing shares as income under the head ‘Income from Other Sources’. With the aim of fostering Indian start- ups, Notification No. G.S.R. 127(E) was issued by the DPIIT on 19/02/2019. The aforesaid notification facilitated investments in Indian companies recognized as ‘Start-up’ by DPIIT by allowing issuance of shares at a premium without triggering the provisions of Section 56(2)(viib) of the Act. The relevant extract of Notification No. G.S.R. 127(E), dated 19/02/2019, issued by the DPIIT reads as under: “MINISTRY OF COMMERCE AND INDUSTRY (Department for Promotion of Industry and Internal Trade) NOTIFICATION New Delhi, the 19th February, 2019 G.S.R.127(E) – This notification is being issued in supersession of the Gazette Notification No.G.S.R.364(E) dated April 11, 2019 as modified vide Gazette Notification No.G.S.R.34(E) dated January 16, 2019. Definitions 1. xx xx 4 Assessment Year 2017-2018 Explanation xx xx Recognition 2. xx xx Certification for the purposes of Section 80-IAC of the Act. 3. xx xx Exemption for the purpose of clause (viib) of sub-section (2) of section 56 of the Act 4. A Startup shall be eligible for notification under clause (ii) of the proviso to clause (vib) of sub-section (2) of section 56 of the Act and consequent exemption from the provisions of that clause, if it fulfills the following conditions:
(i) it has been recognised by DPIIT under para 2(iii)(a) 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 5 Assessment Year 2017-2018 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; Explanation. For the purposes of this paragraph,- (i) "specified company" means a company whose shares are frequently traded within the meaning of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of financial year preceding the year in which shares are issued exceeds one hundred crore rupees or turnover for the financial year preceding the year in which shares are issued exceeds two hundred fifty crore rupees
(ii) the expressions "venture capital company" and "venture 6 Assessment Year 2017-2018 capital fund" shall have the same meanings as respectively assigned to them in the explanation to clause (vib) of sub Section(2) of Section 56 of the Act. Declaration 5. A startup fulfilling conditions mentioned in para 4 (i) and para 4 (ii) shall file duly signed declaration in Form 2 to DIPP that it fulfills the conditions mentioned in para 4. On receipt of such declaration, the DPIIT shall forward the same to the CBDT Scope 6. Notification referred in para 4 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.
Notification referred to in para 4 shall be applicable only in respect of applicability of the provisions of section 56(2)(viib) of the Act to the Startup and shall not grant any exemption in respect of applicability of other provisions of the Act, Revocation 8. (1) In case it is found that any certificate referred to para 3 has been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval. (2) Where the certificate or approval has been revoked under sub-para (1), such certificate or approval shall be deemed never to have been issued or granted by the Board.
9. In case the Startup which has furnished declaration in Form-2 invests in any of the assets specified in para 4(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.
7 Assessment Year 2017-2018 Effect 10. This notification shall come into effect on the date of its publication in the Official Gazette. The Government will carry out a review of this notification on or before 31.03.2021.” (Emphasis Supplied) 8. A bare perusal of the above would show that Paragraph 4 of the Notification No. G.S.R. 127(E) deals with issuance of notification providing exemption from the applicability of Section 56(2)(viib) of the Act. The aforesaid notification has been referred to as ‘Notification referred to in para 4’ in the Notification No. G.S.R. 127(E). Whereas, Notification No. G.S.R. 127(E) has been referred to as ‘the notification’ or ‘this notification’. Paragraph 6 of Notification No. G.S.R. 127(E) uses both the expressions - ‘Notification referred to in para 4’ as well as ‘the notification’. In case we substitute ‘the notification’ used in paragraph 6 of Notification No. G.S.R. 127(E), the same shall read as under:
Notification referred in para 4 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 Notification No. G.S.R. 127(E).
Thus viewed, it becomes clear that the ‘Notification referred to in para 4’ of the Notification No. G.S.R. 127(E) shall apply except for the shares issued in respect of which an addition under Section 56(2viib) of the Act has been made in an assessment order made before the date of issuance of Notification No. G.S.R.127(E). Therefore, the relevant cut-off date is 19/02/2019 [and not the date on which Notification is issued in terms of Paragraph 4 of Notification No. G.S.R. 127(E)].
In view of the above, we reject the contention of the Revenue and 8 Assessment Year 2017-2018 hold that the relevant date for considering the applicability or otherwise of the Notification No. G.S.R. 127(E) issued by DPIIT, the date on issuance of Notification No. G.S.R. 127(E) (i.e. 19/02/2019) and not the date on which the notification recognizing the Assessee as a start-up was issued (i.e. 21/04/2020).
Our above view also draws support from Notification No. 13/2019 [F.No.370142/5/2018-TPL (Pt.)], dated 05/03/2019, issued by the Central Board of Direct Taxes (CBDT) which reads as under:
“S.O. 1131(E).— In exercise of the powers conferred by clause (ii) of the proviso to clause (viib) of sub-section (2) of section 56 of the Income-tax Act, 1961 (43 of 1961) and in supersession of the notification of Government of India in the Ministry of Finance, Department of Revenue, Central Board of Direct Taxes published in the Gazettee of India, Extraordinary, Part-II, Section (3), Sub- section (ii) vide number S.O. 2088(E) dated 24th May, 2018, except as respect things done or omitted to be done before such supersession, the Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said 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 number G.S.R. 127(E), dated the 19th February, 2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade and published in the Gazette of India, Extraordinary, Part-II, section 3, Sub-Section (i) on 19th February, 2019 and files the declaration referred to in para 5 of the said notification of the Department for Promotion of Industry and Internal Trade.
This notification shall be deemed to have come into force retrospectively from the 19th February, 2019” (Emphasis Supplied)
9 Assessment Year 2017-2018
The above Notification No. 13/2019 was issued on 05/03/2019. However, the same was deemed to have come into effect retrospectively from 19/02/2019. In our view, the intent was (a) not to disturb the assessments concluded prior to 19/02/2019 [i.e. the date of issuance of Notification No. G.S.R. 127(E)] wherein addition was made under Section 56(2viib) of the Act, and (b) to extend the benefit of Notification No. G.S.R. 127(E) to all assessments which did not stand concluded as on 19/02/2019. This also becomes clear on perusal of Circular No.16/2019 [F.No.173/149/2019-ITA-I] dated 07/08/2019 issued by CBDT.
In the present case the Assessee was recognised as a start-up by DPIIT [Recognition Number DIPP52261]. CBDT, vide Notification No. F.No. 173/147/2019-ITA-I, dated 21/04/2020, had notified that provision of Section 56(2)(viib) of the Act shall not apply to the Assessee on the amounts received as consideration for issue of shares subject to the fulfillment of conditions as specified in the Notification No. G.S.R. 127(E), dated 19/02/2019. It is admitted position that in the present case, the Assessee had fulfilled all the conditions prescribed in Paragraph 4 of the Notification No. G.S.R. 127(E), dated 19/02/2019. It is also admitted position that the Assessment Order, dated 27/12/2019, was passed before 19/02/2019 [i.e. the date of issue of Notification No. G.S.R. 127(E)]. Since the addition under Section 56(2)(viib) of the Act was not made in the Assessment Order passed before 19/02/2019, the Assessee was entitled to claim the benefit of exemption from the applicability of the Provision of Section 56(2)(viib) of the Act in terms of Paragraph 6 of Notification No. G.S.R. 127(E) dated 19/02/2019.
In view of the above, we do not find any infirmity in the order passed by CIT(A) deleting the addition of INR.9,74,54,500/- made by the Assessing Officer under Section 56(2)(viib) of the Act.
10 Assessment Year 2017-2018 Accordingly, Ground Nos.1 to 4 raised by the Revenue in the present appeal are dismissed.
In result, the appeal preferred by the Revenue is dismissed.