Delhi Tribunal holds 10% safe harbor, under angel tax new valuation rules, to be retrospective in nature

In the case of Sakshi Fincap Pvt. Ltd. (Taxpayer)[1] before the Delhi Income Tax Appellate Tribunal (Tribunal), the issue before Tribunal was whether safe harbor limit of 10%, introduced by Central Board of Direct Taxes (CBDT)[2]  in amended angel tax valuation rules, is curative in nature to be applied retrospectively. 

In the tax year 2014-15, the Taxpayer had issued shares at premium over face value to resident shareholders. The issue price was in excess of fair market value (FMV) determined as per normative valuation rules by a nominal difference of 2.1%. The Tax Authority sought to make addition for such nominal difference of 2.1% in hands of the Taxpayer under angel tax provisions for issue of shares at premium (section 56(2)(viib) of the Income-tax Act). 

Pursuant to amendment by Finance Act 2023 expanding the angel tax provision to issue of shares to non-residents, the CBDT amended the valuation rules on 25 September 2023, inter alia, prescribing a safe harbour or tolerance limit of 10% between the valuation as per amended rule and issue price. 

The Delhi Tribunal held that the new valuation rules which prescribe safe harbor of 10% for the issue price is applicable in retrospective manner. Placing reliance, inter alia, on the ratio of Supreme Court ruling in the case of Allied Motors Pvt. Ltd v. CIT[3], it held that the safe harbor limit introduced in amended valuation rules is intended to remove unintended hardship encountered by the taxpayers and provide reasonable interpretation in light of difficulty arising in the main provision. Hence, although the amended rule is effective from 25 September 2023, it can be applied to past tax years as well.

_{[1] ITA No. 8389/Del/2019
[2] The apex body for administration of direct taxes in India
[3] (1997) 224 ITR 677 (SC)}