The Central Board of Direct Taxation (CBDT) has issued a consolidated circular dated 30 August 2019 with respect to tax assessment of start-ups. This circular consolidates all earlier circulars issued by CBDT on the applicability of section 56(2)(viib) of the Income Tax Act 1961 to angel investors and makes a few additional clarifications. These clarifications have been issued in view of the Department for Promotion of Industry and Internal Trade (DPIIT) notification dated 19 February pertaining to exemption of recognised startups from angel tax liability.

The final position and procedure with respect to applicability of section 56(2)(viib) is as below:

• Startups recognised by the DPIIT which have filed declaration in Form-2 and whose cases are under “limited scrutiny” on the single issue of applicability of section 56(2)(viib), their contention will be summarily accepted. All such assessments should preferably be completed by the AOs by 30 September 2019
• Startups recognised by the DPIIT which have filed Form-2 and whose cases are under scrutiny for multiple issues, including applicability of 56(2)(vii)(b), inquiry in such cases will not be carried out under section 56(2)(viib) by the AO but will be carried out with respect to all other issues after obtaining approval of the supervising authority. All such assessments should be taken on priority and preferably be completed by the AOs by 31 October 2019.
• Startup companies who have not filed Form 2 but have been selected for scrutiny, inquiry will be carried out only after obtaining approval of the supervising Authority. All such assessments should be taken on priority and preferably be completed by the AOs by 31 October 2019
• Section 56(2)(viib) will not apply in respect of assessments made before 19 February 2019 if the startup has filed Form 2. Where an addition is made under section 56(2)(viib) in an assessment order passed before 19 February 2019, if an appeal against such assessment is pending before the CIT(A), the appellate order should be passed on or before 31 December 2019. If the case is pending before the ITAT, the Department will not press the ground relating to the addition made under section 56(2)(viib). All other income-tax demands may be pursued only after confirmation by the ITAT.
• A start-up cell, comprising of five ex-officio members, dedicated to redressing grievances and mitigating tax-related issues has been constituted on 30 August 2019.