TravelKhana, an award-winning start-up, riding high on profits and bullish on expansion till last December, is now wondering whether it will exist in the next six months.
The Noida-based start-up, a pioneer in delivering food to passengers travelling by train, was slapped with an ‘angel tax’ order of Rs 2.30 crore on 21 December. On 5 February, the Central Board of Direct Taxes (CBDT) froze the company’s four company accounts and withdrew the entire sum of Rs 33 lakh from them.
After desperate pleas by company founder Pushpinder Singh, CBDT un-froze the accounts but has left them penniless. Stung by this unprecedented behaviour, Singh is now questioning the company’s survival. “The question is really of our existence right now,” Singh told The Quint on Thursday.
This incident not only illustrates the existential distress caused by ‘angel tax’, but serves also as an indictment of the government’s pet initiatives like Start-up India.
Singh has been running from pillar to post to have his company’s bank balance restored but he says all he has got so far are empty responses from senior tax officials.
“We went to the income tax officers, to the assistant commissioner of income tax who is the assessment officer. We went to his senior and eventually to the principal commissioner of income tax. No one gave us any assurance. All that they said was a standard government reply.”Pushpinder Singh, founder and CEO, TravelKhana
‘How Do I Run a Company with Rs 0?’
Singh said that tax officials had been posing many questions about the capital he had raised in Financial Year 2015-16. He was slapped with an angel tax order on 21 December 2018 during the same time that he was asked to comply with the tax queries. The charge was made under section 68 of the Income Tax Act which deals with unaccounted cash credits.
Singh had made two abeyance requests to the CBDT, the second one made on 4 February. The very next day he found out that tax officials had frozen all four of his company’s accounts. Upon approaching the senior tax officers he said that the CBDT did acknowledge that it was “an error on their part and against natural justice”. While they did unfreeze TravelKhana’s accounts but that was hardly a balm on the company’s wounds.
Singh realised that even though the accounts had been restored, the combined total of the four accounts, amounting to Rs 33 lakh had been withdrawn by the tax department. CBDT withdrew the amount on the pretext of tax liability on investments raised by the company from angel investors.
“CBDT accepted that this was an error, this was against the principles of natural justice and they got the accounts unfrozen. So, the accounts are now unfrozen but how do we really run the business with zero money in the accounts?”Pushpendra Singh, founder and CEO, TravelKhana
Singh said he feels that tax assessment officers are unwilling to “look at the fact that we are a start-up, we are someone who are known in the field. They just acted assuming that we are criminals, who are into money laundering.” He said that despite everything being done legally including the issuance of shares, the filings with the ministry of corporate affairs done and filings with RBI.
Hounded By ‘Angel Tax’
What has happened with TravelKhana is an issue that the start-up community has been pleading desperately with the government to address.
Just 20 days before the company’s entire bank balance was wiped clean, a group of 70 start-ups from across India had submitted an appeal letter to Prime Minister Narendra Modi imploring him to do away with the arbitrary tax.
“Start-ups are in distress and many feel victimised mainly due to the subjectivity, cost and arbitrariness involved in the implementation of this anti-evasionary measure which treats every assessee as guilty until proven innocent.”Excerpt from a letter by start-ups to PM Modi on 16 January
On the evening the same day that the letter was submitted to the PMO, the Ministry of Commerce, headed by Suresh Prabhu, issued a notification announcing changes to section 56 (2) (vii b) of the Income tax Act, which imposes the ‘angel tax’.
However, the relief among start-ups was tempered by the feeling that provisions of the notification did little to address the real concerns of India’s start-up ecosystem.
Apprehensive of further backlash from the start-up ecosystem, on Monday, 4 February, the Department for Promotion of Industry and Internal Trade (DPIIT), under the aegis of the Ministry of Commerce, organised a round table with start-ups, investors and CBDT officials to find an agreeable way forward.
However, just a day after ministry and CBDT officials provided assurances to start-ups about addressing their core ‘angel tax’ issues, assessment officials froze TravelKhana’s accounts and wiped it clean.
What is ‘Angel Tax’ ?
“Angel Tax”, at the heart of the discontent among start-ups, under Section 56(2) (viib) of the Income Tax (I-T) Act, taxes any investments made by an Indian entity in an unlisted Indian company above fair market value as income. It treats investment as income.
The other relevant provision in this regard is section 68 under this section that Singh’s company was charged. CBDT, in a press release said “on ascertaining the facts it is seen that the additions in the case were made u/s 68 of the Income-tax Act, 1961 on account of unexplained cash credits and not u/s 56(2)(viib) on account of premium on shares, as has been alleged.”
This valuation done arbitrarily and by income tax officials with no domain knowledge lies at the heart of the unrest and distress within the community.
“The tax inspectors only understand the asset-based evaluation of companies, whereas what should be followed is the Discounted Cash Flow (DCF) method, which takes into account future growth prospects. This is much more accurate for asset-light technology start-ups.”Sreejith Moolayil, Founder, TrueElements - a health-snack start-up
“We are really wondering why did we set up the company in this country because if it were to really deal with the government authorities all the time and deal with this kind of a scenario, we could’ve gone to Singapore we could’ve gone to some other country and founded the company.”Pushpendra Singh, founder and CEO, TravelKhana
Central Board of Direct Taxes Challenges Singh
In a press release late on Friday, CBDT issued the following clarification.
During the assessment proceedings, the assessing officer requested for confirmation of the persons from whom deposits had been received. Wherever confirmations were submitted, the same were accepted by the assessing officer and no addition was made.
However, where no confirmations were furnished by the assessee, the assessing officer made the addition after issuing proper show-cause notice and obtaining reply in the matter. Thus, the addition was made only when the taxpayer failed to substantiate the source of the deposit resulting in demand of Rs. 2.22 crore approximately.
The assessee did not obtain any stay in respect of 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 assesse. Thereafter, all the bank accounts were released.
It may also be noted that neither the assessee nor its Director submitted any certificate from DIPP to indicate its status of being a startup, either during the assessment proceedings or thereafter, which is a mandatory requirement as per extant instructions in the matter. Had such a certificate been furnished, this situation would not have arisen.
Thus, it is clear that the case of Travel Khana is not covered by the instruction issued by CBDT dated 24th December, 2018 prohibiting coercive measures for enforcing recovery of outstanding demand in Angel Tax cases as the addition was made under section 68 of the IT Act and not under section 56(2)(viib).
Singh, however, has challenged the claims made by CBDT in its press release. He has said that he has complied with all the requests for documents and investor related information. While CBDT has claimed that no stay was obtained, Singh has said that they did request for a stay on 15 January but his accounts were sealed without any information provided on the stay request.
(Update: The story was updated with CBDT’s response at 11:30 pm on 8 February.)