Medhavi Professional Services Pvt. Ltd. vs. ACIT: Deletion of Addition Under Section 56(2)(viib) for Assessment Year 2016-17

Medhavi Professional Services Pvt. Ltd. vs. ACIT: Deletion of Addition Under Section 56(2)(viib) for Assessment Year 2016-17

The Income Tax Appellate Tribunal (ITAT) of Delhi Bench “Friday/A”, consisting of Shri G.S. Pannu, Hon’ble Vice President, and Shri Sudhanshu Srivastava, Judicial Member, adjudicated on the case between Medhavi Professional Services Pvt. Ltd., New Delhi, and the Assistant Commissioner of Income Tax, Circle-16(2), New Delhi, for the assessment year 2016-17. The appeal, numbered ITA No. 6454/DEL/2019, was filed by the assessee on 1st August 2019, challenging the order passed by the Commissioner of Income Tax (Appeals) [CIT(A)] on 22nd May 2019. The final tribunal order was pronounced on 30th September 2019, which ruled in favor of the assessee by deleting the addition made under Section 56(2)(viib) of the Income-tax Act, 1961.

Background of the Case

Medhavi Professional Services Pvt. Ltd. filed its return of income declaring a total loss of Rs. 1,01,29,628/- for the assessment year 2016-17. The case was selected for limited scrutiny due to the large share premium received during the year, triggering a verification of the applicability of Section 56(2)(viib) of the Income-tax Act, 1961. The assessment was subsequently completed with an addition of Rs. 1,04,87,398/-, being the share premium received in excess of the premium as per the balance sheet of the company. The Assessing Officer (AO) invoked the provisions of Section 56(2)(viib) to make this addition, resulting in a revised taxable income of Rs. 3,57,770/-.

Dissatisfied with the assessment, Medhavi Professional Services Pvt. Ltd. appealed to the CIT(A), who upheld the assessment order, thereby dismissing the appeal. The assessee then approached the ITAT, seeking the deletion of the addition made by the AO.

Arguments Presented

The learned Authorized Representative (AR) for the assessee, Shri Gaurav Jain, argued that Medhavi Professional Services Pvt. Ltd. is a recognized start-up company, duly approved by the Department of Industrial Policy and Promotion (DIPP) through a certificate dated 7th January 2019. He further submitted that the necessary declaration in Form 2, dated 9th March 2019, and the required certificate dated 20th March 2019, issued by the Central Board of Direct Taxes (CBDT), to claim exemption from the applicability of Section 56(2)(viib) were in the possession of the assessee and had been duly communicated to the Department.

The AR also highlighted that the issue at hand is covered in favor of the assessee by Notification GSR 127E, dated 19th February 2019, issued by DIPP under clause (ii) of the proviso to Section 56(2)(viib). This notification exempts a start-up company, duly notified by the Central Government, from the applicability of the said provision. The AR contended that, as per the notification, a start-up is eligible to claim exemption if the declaration in Form No. 2 indicates that the start-up fulfills the conditions mentioned in the notification and that the assessment order has not been passed before 19th February 2019.

It was further submitted by the AR that the CIT(A) had incorrectly upheld the assessment order by holding that the provisions of the notification were not applicable since the assessment order was dated 24th December 2018, which was prior to the date of the notification. The AR emphasized that the CBDT had clarified the issue through Circular Order F. 173/354/2019–ITA-1, dated 9th August 2019, which categorically provided that the provisions of Section 56(2)(viib) would not apply to any start-up registered with DIPP that had submitted the declaration in Form 2, fulfilling the conditions mentioned in the Notification dated 19th February 2019, irrespective of the date of the assessment order.

The AR also referred to Circular No. 22/2019, dated 30th August 2019, which is a consolidated circular for the assessment of start-ups, stating that where a case relating to an addition under Section 56(2)(viib) is pending before the ITAT, the tax department should not press the ground relating to such an addition.

Department’s Response

The learned Senior Departmental Representative (DR), Ms. Nidhi Sharma, supported the orders of the lower authorities but could not refute the fact that the assessee’s case was covered by the aforementioned two circulars.

Tribunal’s Findings and Judgment

After hearing both parties and considering the submissions and the applicable circulars, the ITAT ruled in favor of Medhavi Professional Services Pvt. Ltd. The Tribunal acknowledged that the addition made under Section 56(2)(viib) did not survive in light of the CBDT’s Circular Order F. 173/354/2019–ITA-1 and Circular No. 22/2019.

The Tribunal noted that these circulars clarified that the provisions of Section 56(2)(viib) would not apply to start-ups that met the conditions specified in the DIPP notification, irrespective of the date of the assessment order. The Tribunal thus set aside the order of the CIT(A) and directed the AO to delete the impugned addition of Rs. 1,04,87,398/- made under Section 56(2)(viib).

Conclusion

In conclusion, the ITAT allowed the appeal of Medhavi Professional Services Pvt. Ltd., emphasizing the importance of recognizing and adhering to the exemptions and reliefs provided to start-ups under the Income-tax Act. The ruling underscored the significance of CBDT circulars and DIPP notifications in protecting the interests of start-ups, which are crucial for fostering innovation and entrepreneurship in the country.

Order Pronounced in the Open Court on 30th September 2019

Signed by:
Judicial Member: Shri Sudhanshu Srivastava
Vice President: Shri G.S. Pannu

Date of Pronouncement: 30th September 2019

Medhavi Professional Services Pvt. Ltd. vs. ACIT: Deletion of Addition Under Section 56(2)(viib) for Assessment Year 2016-17