Section 56(2)(viib) pertains to the taxation of consideration received for the issuance of shares when the total consideration surpasses the fair market value of the shares. Previously, this section applied exclusively when the consideration came from a resident individual.
However, the Finance Act of 2023 made changes to Section 56(2)(viib) by removing the phrase “being a resident,” thus broadening the scope to include consideration received from any individual, including non-residents.
Additionally, through Notification No. 13/2019, startup companies (recognized by the DPIIT and meeting specified conditions) were granted an exemption from this provision if the consideration originated from a resident individual. Following this amendment, several startup companies came under scrutiny through CASS to determine the applicability of this section.
The Central Board of Direct Taxes (CBDT) has issued a clarification regarding the assessment of startup companies subsequent to the Finance Act, 2023 amendments .
According to the clarification, if a startup company’s case has been selected for scrutiny on the issue of the applicability of section 56(2)(viib), no verification of such an issue shall be done by the Assessing Officer (AO) during the proceedings under Section 143(2) or Section 147 of the Act.
The contention of the startup company will be summarily accepted .If a startup company’s case has been selected for scrutiny with multiple issues, including the applicability of section 56(2)(viib), the issue of applicability of this section shall not be pursued during the assessment proceedings. However, due procedure is to be followed for other issues for which the case was selected
