2021 (7) TMI 358 - AT - Income Tax

Addition u/s 56(2)(viib) - excess premium collected on issue of equity shares from resident individuals - HELD THAT - We find that the CBDT, after considering hardships faced by startup companies with regard to application of section 56(2(viib) of the Act, as per Gazette Notification dated 19.02.2019, has issued clarificatory notification dated 9th August, 2019 and clarified that said notification will be applicable to startup companies also where addition u/s. 56(2(viib) of the Act has been made in an assessment order before 19.02.2019, provided the assessee has subsequently submitted declaration in Form No.2 that it has satisfied conditions mentioned. In this case, the assessee has filed Form No.2 in pursuance of para 5 of Notification dated 19.02.2019 on 23rd August, 2019 and in response, the CBDT vide its notification dated 28th August, 2019 has clarified that assessee is a recognized startup from DPIIT and further, the provisions of section 56(2(viib) of the Act shall not apply to the assessee on the amounts received as consideration for issue of shares. We are of the considered view that there is no merit in arguments of the DR that the assessee is outside scope of Gazette Notification dated 19.02.2019 and hence, share premium issued on issue of shares is covered u/s. 56(2(viib). In this view of the matter and considering facts and circumstances of the case, we are of the considered view that assessee is a recognized startup from DPIIT, Ministry of Commerce Industry, Govt. of India and hence, it is outside scope of the provisions of section 56(2(viib) of the Act, in respect of consideration received for issue of shares at premium. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer. Hence, we are inclined to uphold findings of the learned CIT(A) and dismiss appeal filed by the Revenue.

Summary

Issues Involved:
1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961.
2. Condonation of delay in filing the cross objection by the assessee.
3. Genuineness and creditworthiness of the subscribers.
4. Validity of the valuation method used for determining the share premium.
5. Relevance of the CBDT and Gazette Notifications in the context of the assessee's case.

Detailed Analysis:

1. Applicability of Section 56(2)(viib) of the Income Tax Act, 1961:
The primary issue was whether Section 56(2)(viib) applies to the assessee, a recognized startup company. The Assessing Officer (AO) invoked this section, arguing that the share premium charged by the assessee was excessive and not justified under Rule 11UA(2)(b) of the Income Tax Rules, 1962. However, the CIT(A) and the Tribunal concluded that since the assessee is a recognized startup by the Department of Industrial Policy and Promotion (DIPP), it falls outside the purview of Section 56(2)(viib) as per the CBDT and Gazette Notifications.

2. Condonation of Delay in Filing the Cross Objection by the Assessee:
The assessee filed a cross objection 20 days late, citing the illness of its Authorized Representative as the reason. The Tribunal condoned the delay, considering it a reasonable cause under the Act, and admitted the cross objection for adjudication.

3. Genuineness and Creditworthiness of the Subscribers:
The AO questioned the genuineness and creditworthiness of the subscribers, asserting that the assessee failed to provide sufficient documentation. However, the CIT(A) did not find any specific findings from the AO on this matter and focused on the applicability of Section 56(2)(viib) instead.

4. Validity of the Valuation Method Used for Determining the Share Premium:
The AO rejected the valuation method (discounted cash flow method) used by the assessee, stating it did not comply with Rule 11UA(2)(b). The CIT(A), however, held that this issue becomes irrelevant once it is established that Section 56(2)(viib) does not apply to the assessee, a recognized startup.

5. Relevance of the CBDT and Gazette Notifications:
The CIT(A) and the Tribunal relied heavily on the CBDT Notification No. 45/2016 and Gazette Notification GSR 127(E) dated 19.02.2019. These notifications exempt recognized startups from the ambit of Section 56(2)(viib), provided they meet certain conditions. The Tribunal also noted a clarificatory notification dated 9th August 2019, which extended this exemption to startups even if the addition under Section 56(2)(viib) was made before the date of the notification, provided a declaration in Form No.2 was submitted.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the assessee, being a recognized startup, is exempt from the provisions of Section 56(2)(viib) of the Income Tax Act. The appeal filed by the Revenue was dismissed, and the cross objection filed by the assessee was deemed infructuous. The Tribunal emphasized the importance of the CBDT and Gazette Notifications in providing relief to recognized startups from the stringent provisions of Section 56(2)(viib).