CBDT has recently issued Circular No. 16/2019 dated August 7, 2019 providing clarification on assessment of start-up companies involving application of Section 56(2)(viib) of the Income Tax Act, 1961. The clarification provides procedure with regard to assessment of such startup entities:
- Start-ups recognized by Department for Promotion of Industry and Internal Trade (DPIIT) and the case is selected under ‘limited scrutiny’ on single issue of application of Sec 56(2)(viib) – No verification will be done by Assessing Officers (AOs) during proceedings u/s 143 (3)/147 and contention of such recognized start-ups on the issue will be summarily accepted.
- Recognized start-up case selected under “limited scrutiny” with multiple issues or under “complete scrutiny” including the issue under Section 56(2)(viib) – Issue of applicability of Section 56 (2)(viib) will not be pursued during the assessment proceedings and inquiry or verification with regard to other issues in such cases shall be carried out by AO, only after obtaining approval of supervisory officer.
- Start-up which has not got DPIIT approval and the case is selected for scrutiny on the grounds of applicability of Section 56(2)(viib) or any other issue – Inquiry or verification in such cases shall be carried out by AO as per due procedure, only after obtaining approval of supervisory officer.
While this is a welcome step, the due procedure to be followed in cases falling under Situation (3) above would be crucial to note.
Copy of the circular is attached for your reference.