Do you really need to worry about media reports that “Angel Tax Haunts Startups again”?

Do you really need to worry about media reports that “Angel Tax Haunts Startups again”

The start-up community is again buzzing about notices from the Income Tax Department and yesterday there were media reports stating, “Angel Tax Haunts Startups Again”. As per the media reports, the CBDT and the Income Tax Departments has again started issuing notices to the Start-up Companies and investors who have raised Angel Investment in the Company.

This makes us to write about ‘Angel Tax’ once again. Angel Tax is referred to section 56 (2) (viib) of the Income Tax Act, which was brought in the year 2012 by the then Finance Minister Mr. Pranab Mukherjee to tax, issuance of shares by Companies at a premium which exceeds the Fair Market Valuation (FMV) of the shares of the Company. This provision was introduced by the government with an intention to curb black money generation, as share premium was being widely used to generate black money by use of complex multi-layered routes and inflated shares price of Sham Companies.

The report says that the provision is out-right against the start-up valuation system.

The government through various amendments in the law and notifications, have kept the SEBI recognized VC firms out of this provision. The foreign investors are also outside the purview of this provision. This provision does not apply even to government recognized start-ups, under the start-up India Initiative (Recognized as eligible start-up to claim income tax benefit).  Thus, only the start-ups who are not eligible for income tax benefits under the start-up India initiative and who have raised funds from un-recognized India based non-VC investors (Basically Angel Investors) are feeling the heat of this provision.


However, our view in the matter is very clear. The law is not behind the Companies who are able to prove the Identity of Investors, genuineness of transaction and creditworthiness of the Investors. Also, the law clearly provides that such companies who raise funds at a premium, should have a valuation report from a merchant banker and earlier even from a CA, to support such higher valuation based on Discounted Cash Flow (DCF) method of valuation, which is based on future projections and Estimates.

So, if it’s a genuine transaction from a genuine investor, backed by proper projections and valuation report, which has been prepared as per the available guidelines on the matter, the Income Tax Department in most of the cases shall only scrutinize such transaction and close the assessment accepting the same and without making any additional demand. It depends on how the facts of the case and matter involved is presented before the assessing authorities and how well the documentation and valuations have been prepared at the time of raising funds.


We are glad to announce that this year we have been able to successfully handle and close assessments of more than 20 companies, who have raised funds and issued shares at a premium (Some even high-ticket series A/B level investments), without any additional demand.

Here we can safely infer that even though the notices from the department and questioning on this front may be an additional work involving time and money, but if presented properly, is not creating any additional tax demands on the Companies in most of the cases.






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