2020 (11) TMI 273 - AT - Income Tax

Assessment of Startups - Procedure for addition made u/s. 56(2)(viib) in the past assessment - Time limit for Completion of pending assessments of the Startups - HELD THAT - All assessment referred to in 2(i) should preferably be completed by the AOs by 30th September, 2019. The assessments referred to in 2(ii) 2(iii) should be taken up on priority and should be preferably completed by 31st October, 2019. Addition made U/s. 56(2)(viib) - The clarification issued on 9th August, 2019 provided that the provisions of the section 56(2)(viib) of the Act shall also not be applicable in respect of assessment made before 19th February, 2019 if a recognised Startups has filed declaration in Form No. 2. In case the appeal against the assessment is pending before the Commissioner of Income-tax (Appeal) CIT(A) , the appellate order should be passed by CIT(A) on or before 31st December, 2019 after taking into account the fact that the Startup has filed declaration in Form No. 2 and hence the provisions of section 56(2)(viib) of the Act are not applicable for the addition made under section 56(2)(viib) of the Act before 19th February, 2019. The Department shall not file further appeal on the issue of addition made under section 56(2)(viib) of the Act; Income-tax demand - It is reiterated that the outstanding income-tax demand relating to additions made under section 56(2)(viib) shall not be pursued and no communication with the assessee in respect of outstanding demand shall be made for this purpose. In respect of other income-tax demand, it is decided that the income-tax demand shall not be pursued unless the demand is confirmed by the ITAT. Constitution of Startup cell - In order to redress grievances and to address various tax related issues in the cases of Startups, a Startup Cell is constituted on 30th August, 2019. We are of opinion that the issue deserves to be remanded to Ld.CIT(A) to verify the issue in light of above circular. Ld.CIT(A) shall verify fulfilment of necessary criterias as required by the said circulars for its applicability to its fullest. Ld.CIT(A) is directed to grant proper opportunity of being heard to assessee in accordance with law. Ld. CIT(A) is also directed to pass reasoned order after carrying out necessary verification/investigations. Assessee is directed to file all requisite details/information is as called for by Ld. CIT(A) to consider the issue in light of the circulars.

Summary

Issues:
1. Valuation of shares based on Discounted Cash Flow (DCF) method.
2. Jurisdiction of assessing officer beyond valuation report by a Chartered Accountant.
3. Applicability of Circulars issued by CBDT for start-ups under section 56(2)(viib) of the Income Tax Act.

Valuation of Shares Based on DCF Method:
The appellant issued preference and equity shares during the financial year 2013-14 and valued them using the Discounted Cash Flow method. However, the assessing officer (AO) rejected this valuation, stating that the DCF method lacked shareholder perspective, projections were irrational, and lacked verification by the Chartered Accountant. Consequently, the AO used the Net Asset Value Method (NAV) and determined the fair market value per share at a negative value. The AO added the excess value over face value as income under section 56(2)(viib) of the Act.

Jurisdiction of Assessing Officer:
The appellant contended that the assessing officer had no jurisdiction to go beyond the valuation report issued by the Chartered Accountant. However, both the AO and the Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the appeal before the tribunal.

Applicability of Circulars for Start-ups:
The appellant raised an additional ground citing Circulars issued by the CBDT regarding start-ups and section 56(2)(viib) of the Act. The Circulars exempted certain start-ups from the provisions of section 56(2)(viib) subject to fulfilling specified conditions. The tribunal admitted this additional ground, noting that the Circulars were not presented before the lower authorities during the proceedings. The tribunal decided to remand the issue back to the Commissioner of Income Tax (Appeals) for verification in light of the Circulars, granting the appellant a proper opportunity to be heard and submit necessary details.

In conclusion, the tribunal allowed the appeal for statistical purposes, directing the Commissioner of Income Tax (Appeals) to re-examine the issue considering the Circulars issued by the CBDT for start-ups. The appellant was instructed to provide all required information for the assessment in accordance with the Circulars.