The Central Board of Direct Taxes (CBDT), recently clarified that no action will be taken against Start Ups if its valuation report of unquoted shares is rejected by the Assessing Officer.
As per section 56(2)(viib) of the Income-tax Act, where a closely held company issues its shares at a price which is more than its fair market value, the amount received in excess of fair market value will be charged to tax in the hands of the company as income from other sources. The Explanation to this provision speaks about various methods for valuation of the fair market value of shares of the closely held company. Among the various options for valuation of fair market value, one of the methods prescribed is based on fair market value of the unquoted equity shares as determined by a merchant banker or an accountant as per the Discounted Free Cash Flow Method.
The circular issued on Tuesday pointed out that section 56(2)(viib) of the Act is being invoked in case of ‘Start Up’ companies by the Assessing Officers which has otherwise raised a genuine investment on the basis of their ‘idea’, It has been submitted that in tax-assessments, ‘Start Up’ companies invariably submit a valuation report from a merchant banker or an accountant based on Discounted Free Cash Flow Method as prescribed in Rule llUA(2)(b) of Income-tax Rules, 1962.
“However, in assessments, such reports are not being accepted and rejected/modified by the Assessing Officers by treating them as based upon abnormal valuations resu lting in additions being made u/s 56(2)(viib) of the Act in cases of ‘Start-Up’ companies,” the circular said.
It was therefore, clarified that “in case of ‘Start-Up’ companies which fall within the definition given in Notification of DIPP, Min. of Commerce & Industry, in G.5.R. SOlIE) dated 23.05.2017, if additions have been made by the Assessing Officer under section S6(2)(viib) of the Act after modifying/rejecting the valuation so furnished under Rule l1UA(2), no coercive measure to recover the outstanding demand would be taken. Further, in all such cases which are pending with the Commissioner (Appeals), necessary administrative steps should be taken for expeditious disposal of appeals, preferably by 31″ March 2018.”
