Angel tax refers to income tax payable on capital raised by unlisted firms by issuing shares where the share price is considered in excess of the fair market value.
The excess realisation is treated as income and hence taxable under Section 56 (2) (viib) of the Act. The government had earlier exempted companies tagged as start-ups by the Department of Promotion of Industry and Internal Trade (DPIIT).
However, many companies which were yet to be considered start-ups were under I-T scrutiny. The present clarification makes the rules clear for these companies with regards to angel tax.
The tax department issued the circular on Wednesday laying down procedures to be followed by assessing officers in case of start-ups which were recognised by DPIIT in the middle of an I-T scrutiny. Procedures have been also issued for unrecognised start-ups.
"The tax department has issued the procedures to be followed by tax officers. So, if a case is related to a company which was recognised as a start-up later on, the tax officer will not pursue the demand in respect of Section 56(2) (viib) which is Angel Tax," a tax consultant said.
As per the circular, a start-up which has not got DPIIT approval and the case is selected for scrutiny on grounds of applicability of Section 56 (2) (viib) or any other issue, inquiry or verification in such cases shall be carried out by the assessing officer as per due procedure and approval of the supervisory officer.
"Directions of the CBDT (Central Board of Direct Taxes) that the tax officer will have to summarily accept the contentions of the start-up on valuation of its shares shall provide the relief intended to be provided to the start-ups," said Rakesh Nangia, Managing Partner, Nangia Advisors.
"While the recognised start-ups stand relieved, the ones that are yet to receive a nod from the DPIIT may still have to face the inquiry from tax officers and the procedure to be followed by the tax officers in such cases would be crucial to note," he said.
The tax department had earlier come out with a set of rules to provide relief to start-ups from tax demands under Section 56 (2) (viib) of the Income Tax Act.
The tax department in its circular on August 7 said that there have been instances of notices being sent under Section 143(2) /147 by assessing officers to startup companies before the DPIIT notification since February this year which are currently pending for disposal.
( With inputs from IANS )