Startup recognition and deduction u/s 80-IAC and exemption u/s 56(2)(VIIB) of the act

Points to Remember

To promote new startup and make in India, government has taken several initiatives to give benefit to startup and attract fresh fund in startup business. Hereby, we are trying to consolidate all the provision that provide exemption to startups under section 80IAC of the Income Tax Act, 1961. We will discuss who are the eligible startup as per latest government notification, what form person need to file to claim exemption u/s 80IAC of the Income Tax Act, 1961, what details needs to be provided in Form 1 and Form 2 for startup exemption u/s 80IAC and 56(2)(viib) of the Income Tax Act, 1961 respectively.

We will discuss step wise procedure as under

The First step is to get recognized from DPIIT as a Start-up. The criteria is as under:

An entity shall be considered as a Start-up:

• Upto a period of ten years from the date of incorporation/registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
• Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
• Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a 'Startup'.

Explanation: An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds one hundred crore rupees.

The process of recognition of an eligible entity as startup shall be as under

• A Startup shall make an online application over the mobile app or portal set up by the DPIIT.
• The application shall be accompanied by -

(a) a copy of Certificate of Incorporation or Registration, as the case may be, and

(b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

3. The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, -

(a) recognise the eligible entity as Startup; or

(b) reject the application by providing reasons.

Once it has been recognized as Start Up by Department for Promotion of Industry and Internal Trade (DPIIT) the entity is eligible for deduction u/s 80IAC of the Income Tax Act, 1961 after fulfilling independent conditions as mentioned in the said section. The entity may also get exemption u/s 56(2)(viib) of the Income Tax Act, 1961 after fulfilling the independent conditions as mentioned in the said section.

Conditions for claiming deduction u/s 80IAC and how deduction u/s 80IAC of the Income Tax Act, 1961 will be claimed

Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100% of the profits and gains derived from such business for 3 consecutive assessment years.

The deduction specified in (1) above, may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of ten years beginning from the year in which the eligible start-up is incorporated.

This section applies to a start-up which fulfils the following conditions, namely:

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

For the purpose of this section –

1. "eligible business" means a business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services or a scalable business model with a high potential of employment generation or wealth creation;]
2. "eligible start-up" means a company or a limited liability partnership engaged in eligible business which fulfils the following conditions, namely:

(a)  it is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2025;

(b) the total turnover of its business does not exceed Hundred crore rupees in the previous year relevant to the assessment year for which deduction under sub-section (1) is claimed; and

(c)  it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government;

If conditions are fulfilled then an application in Form No. 1 along with documents specified therein may be filed to the Board and the Board may, after calling for such documents or information and making such enquires, as it may deem fit

• grant the certificate
• reject the application by providing reasons

Form-1

Application for certificate for the purposes of section 80-IAC of the Income-tax Act, 1961

1. Name of the Startup - .......................................
2. Date of incorporation/ registration of Startup - .......................................
3. Incorporation No./ registration No. .......................................
4. Address and business location- .......................................
5. Nature of business .......................................
6. Contact details of Startup (Phone No. and Email)- .......................................
7. Permanent Account No. .......................................
8. Existing/ proposed activities - .......................................
(Enclose copy of Memorandum of Association, LLP/partnership Deed, Board Resolution)

Declaration I/ We hereby certify that the above information furnished by me is true and no relevant information has been concealed.

For (Name of the Startup)
(Name of the authorised signatory) Designation
Place: __________
Date: __________

This form shall be accompanied by the following documents (if applicable)-

1. Annual Accounts of the startup for the last three financial years
2. Copies of income-tax returns for the last three financial years

Conditions for claiming exemption u/s 56(2)(viib) and how exemption u/s 56(2)(viib) of the Income Tax Act, 1961 can be claimed

1. It has been recognized by DPIIT as Start Up
2. Paid up capital and Share Premium should not exceed Rs. 25 Crores

Provided that in computing the aggregate amount of paid up share capital, the amount of paid up share capital and share premium of twenty five crore rupees in respect of shares issued to any of the following persons shall not be included -

(a) a non-resident; or

(b) a venture capital company or a venture capital fund

(c) Listed Companies having a net worth of Rs. 100 crores or turnover of atleast Rs. 250 crores provided that its shares are frequently traded as per SEBI Regulations, 2011.

iii. It has not invested in any of the following assets –

• building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
• land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in trade, in the ordinary course of business;
• loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is substantial part of its business;
• capital contribution made to any other entity;
• shares and securities;
• a motor vehicle, aircraft, yacht or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing or as stock-in-trade, in the ordinary course of business;
• jewellery other than that held by the Startup as stock-in-trade in the ordinary course of business;
• any other asset, whether in the nature of capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

Provided the startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at premium.

Explanation – for the purposes of this paragraph, –

the expressions “venture capital company” and “venture capital fund” shall have same meanings as respectively assigned to them in the explanation to clause (viib) of sub section (2) of Section 56 of the Act.

Declaration if conditions u/s 56(2)(viib) are fulfilled

A startup fulfilling conditions mentioned above shall file duly signed declaration in Form 2 to DIPP that it fulfills the conditions mentioned in para 4. On receipt of such declaration, the DPIIT shall forward the same to the CBDT.

Form 2

Declaration by a Startup for exemption under Section 56(2)(viib) of the Income Tax Act, 1961

I, _____________________________ Son/ Daughter of ______________________ having Permanent Account Number (PAN) __________________________ in my capacity as __________________ of ________________________ (Company’s Name) _________________ having DPIIT recognition number____________________________ and Permanent Account Number (PAN) ________________________ hereby certify and declare that the said company has not invested and shall not invest for a period of seven years from the end of the latest financial year in which shares are issued at premium by the said company in any of the assets specified in para 4(iii) of the notification number _______ dated _________ issued by Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry.

2. I understand that failure to comply with the above declaration will result in revocation of exemption with retrospective effect.

Place: _______________
Date: _______________

*Signature: _________________________
Name: _____________________________
Designation: ________________________

*This declaration is to be signed by a person who is authorized to verify the return of income under section 140 of the Act.

REVOCATION OF CERTIFICATE GRANTED

The DPIIT can revoke the certificate granted in following scenarios:

1. In case it is found that any certificate u/s 80IAC of the Act has been obtained on the basis of false information, the Board reserves the right to revoke such certificate or approval.
2. Where the certificate or approval has been revoked under subpara (1), such certificate or approval shall be deemed never to have been issued or granted by the Board.

In case the Startup which has furnished declaration in Form-2 invests in any of the assets specified above before the end of seven years from the end of the latest financial year in which the shares are issued at premium, the exemption provided under section 56(2)(viib) of the Act shall be revoked with retrospective effect.