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CBDT Says TravelKhana Accounts Emptied But Not Under Angel Tax Provision

Two Indian startups claimed that the Central Board of Direct Taxes emptied their coffers by deducting angel tax. TravelKhana, a Noida-based food delivery startup, claimed that the CBDT froze the company’s four accounts on Feb. 5 and withdrew the entire Rs 33 lakh from them. Another startup founder Siddhartha Ahluwalia of Babygogo said the taxman deducted Rs 72 lakh from their account. To be sure, it did not have that much balance then.

Now, the CBDT has issued a statement that TravelKhana’s account was emptied for case made under the Section 68 of the Income-tax Act—that pertains to unexplained cash credits—and not under Section 56(2)(viib), which is the angel tax provision.

During TravelKhana’s assessment, the startup failed to substantiate the source of some deposits resulting in demands worth nearly Rs 2.22 crore, CBDT said. The startup also did not obtain any stay on the demand raised.

Had the stay been obtained, recovery proceedings would not have been instituted by the department. Since there was no stay against recovery and the demand had become due, the department recovered Rs 36 lakh after attaching the bank accounts of the assessee. Thereafter, all the bank accounts were released.
CBDT Statement

Also read: Angel Tax: Will The Wicked Consume The Righteous?

TravelKhana or its director had not submitted any certificate from the Department of Industrial Policy and Promotion (now Department for Promotion of Industry and Internal Trade) that indicated its status of being a startup, the taxman said. “Had such a certificate been furnished, this situation would not have arisen.”

Hence, the tax authority said TravelKhana’s case was not covered under the CBDT notification from Dec. 24 last year that said no coercive action would be taken against any of the startups that had received demand orders from the income tax office.

CBDT said entrepreneurs must be given the benefit of the doubt. However, when even after “repeated reminders” the record of funds are not provided, then it is left with “no other choice”, it said.

Angel tax has become a contentious issue for Indian startups. The tax is triggered when a startup raises funding more than its “fair valuation”. A survey by LocalCircles and the Indian Private Equity & Venture Capital Association had found over 73 percent of 2,500 startups that raised capital between Rs 50 lakh and Rs 2 crore have received angel tax notices.

The government said it will form a working group to suggest changes in taxing the angel funds received by startups, two weeks after it issued a notification that attempted to assuage their worries over raising such investments.

Meanwhile, TravelKhana Founder Pushpinder Singh described the difficult experience with the revenue department in a tweet.

Also read: Angel Tax: Revised Provisions Have No Real Substance