Startup gets section 56(2)(viib) immunity, but share premium addition tested under section 68; revenue partly succeeds

ITAT Mumbai held that the assessee, being a DPIIT-registered start-up, is entitled to immunity from applicability of section 56(2)(viib) in view of the CBDT circular and DPIIT notification. However, the Tribunal clarified that such immunity does not extend to proceedings under section 68, and therefore allowed the revenue's ground on this legal issue. On merits of the addition under section 68, ITAT upheld the CIT(A)'s deletion of the share premium addition, noting that the assessee had discharged its onus by proving identity, creditworthiness and genuineness of investors, and the AO was given adequate opportunity in remand. The revenue's appeal was thus partly allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether exemption granted to DPIIT-recognised start-ups under the CBDT circular dated 10.10.2023 and DPIIT notification dated 19.02.2019, in respect of section 56(2)(viib), also bars examination of share premium receipts under section 68 of the Act.

1.2 Whether the deletion of the addition of Rs. 1,04,79,916/- made under section 68, on account of share premium received by the assessee-company, was justified on the basis of the evidences produced and the conduct of the Assessing Officer.

1.3 Whether the legal ground raised in the assessee's cross-objection required adjudication after disposal of the revenue's appeal on merits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Scope of immunity to DPIIT-recognised start-ups and applicability of CBDT circular to section 68

Legal framework (as discussed)

2.1 The Tribunal noted the reliance placed on: (i) DPIIT notification dated 19.02.2019, and (ii) CBDT Circular No. F.No.173/149/2019-ITA-1 dated 10.10.2023, which provide that in the case of DPIIT-recognised start-ups, the applicability of section 56(2)(viib) is not to be examined by the Assessing Officer in respect of share premium.

Interpretation and reasoning

2.2 The Tribunal accepted that the assessee, being a DPIIT-recognised start-up, is entitled to immunity from the applicability of section 56(2)(viib) in view of the above circular and notification.

2.3 At the same time, the Tribunal held that such immunity is confined to proceedings under section 56(2)(viib), i.e., to the issue of taxation of share premium as income under that specific provision.

2.4 The Tribunal held that the CBDT circular and DPIIT notification do not extend to or prohibit examination of the nature and source of share capital/share premium under section 68, and therefore do not bar the Assessing Officer from invoking section 68 where conditions for that section are otherwise attracted.

Conclusions

2.5 The assessee is exempt from scrutiny under section 56(2)(viib) in respect of share premium by virtue of DPIIT recognition and the CBDT circular; however, this exemption does not extend to section 68 proceedings.

2.6 The revenue's ground challenging the Ld. CIT(A)'s view on the applicability of the CBDT circular to section 68 was allowed.

Issue 2: Justification for deletion of addition under section 68 on account of share premium

Legal framework (as discussed)

2.7 The Tribunal proceeded on the settled principle under section 68 that the assessee must establish: (i) identity of the creditor/subscriber, (ii) creditworthiness, and (iii) genuineness of the transaction. Once prima facie evidence is furnished by the assessee, the onus shifts to the Department to rebut the same through enquiry.

Interpretation and reasoning

2.8 It was noted that the addition of Rs. 1,04,79,916/- was made by the Assessing Officer treating the share premium received during the year as unexplained cash credit under section 68, primarily on the ground that the assessee had not produced, during assessment, complete evidences of identity, creditworthiness, and genuineness of the subscribers.

2.9 Before the appellate authority, the assessee furnished additional evidences, including: full particulars and PANs of subscribers, bank statements of the assessee showing receipt through banking channels, ITRs and bank statements of several subscribers, valuation reports as per Rule 11UA (DCF method) substantiating the share premium, and an explanation that three subscribers were NRIs who had invested through NRE accounts.

2.10 The Ld. CIT(A) repeatedly called for remand reports from the Assessing Officer on the additional evidences (with multiple written reminders), but no remand report or rebuttal was furnished by the Assessing Officer. The Tribunal observed that adequate opportunity had been given to the Assessing Officer to examine the additional evidences.

2.11 The Tribunal took note that the findings of the Assessing Officer regarding layering of funds, temporary credits in subscribers' bank accounts, low returned income of some subscribers, and fund movement from the director's account to a subscriber's account remained mere suspicions, and were not supported by any further independent enquiry, statements, or cross-verification of the subscribers.

2.12 On the overall material, the Tribunal agreed with the Ld. CIT(A) that the assessee had discharged its initial onus under section 68 by submitting documentary evidence establishing the three essential ingredients, and that the burden had shifted to the Department.

2.13 Since the Assessing Officer neither conducted any meaningful enquiry nor rebutted the evidences even during remand opportunity, the Tribunal found no basis to disturb the Ld. CIT(A)'s finding that the addition under section 68 was unsustainable.

Conclusions

2.14 The assessee was held to have established, prima facie, the identity of the share subscribers, their creditworthiness, and the genuineness of the share premium transactions through documentary evidence.

2.15 In the absence of any effective enquiry or remand report from the Assessing Officer to dislodge such evidence, the Ld. CIT(A)'s deletion of the addition of Rs. 1,04,79,916/- under section 68 was upheld.

2.16 The revenue's ground against deletion of the section 68 addition was dismissed.

Issue 3: Necessity to adjudicate the assessee's cross-objection

Interpretation and reasoning

2.17 The assessee had filed a cross-objection raising a legal ground. After deciding the revenue's appeal on merits-partly allowing it on the limited issue of the scope of the CBDT circular but upholding the deletion of the section 68 addition-the Tribunal considered the cross-objection.

2.18 The Tribunal observed that, in view of the decision on the substantive issues in the revenue's appeal, the legal ground in the cross-objection did not survive for separate adjudication and was rendered merely academic.

Conclusions

2.19 The cross-objection filed by the assessee was dismissed as infructuous, without adjudication on the merits of the legal ground.

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