Taxpayers Get Choice in Valuing Startup Investments (Angel Tax)

The Delhi High Court ruled in favor of taxpayers, allowing them to select the method for valuing investments received from angel investors. This comes after a disagreement between a company (Agra Portfolio) and the Income Tax Department (IT Department) regarding the valuation of shares issued to an angel investor.

What is Angel Tax?

Angel tax refers to the tax levied on the difference between the fair market value (FMV) of shares allotted to an angel investor and the amount the investor paid for them.

The Case:

Agra Portfolio used the Discounted Cash Flow (DCF) method to determine the FMV of the shares. DCF estimates an investment’s value by considering its projected future cash flows. The IT Department, however, rejected this valuation and used the Net Asset Value (NAV) method instead. NAV calculates the value per share by dividing the company’s net assets (assets minus liabilities) by the total number of shares.

Court’s Decision:

The Court clarified that while the IT Department can question a taxpayer’s valuation report, it cannot impose a different valuation method. The Court emphasized that the Income Tax Act and Rules grant taxpayers the sole authority to choose the valuation method.

The IT Department can still scrutinize the report and conduct its own valuation (using the taxpayer’s chosen method) to challenge the taxpayer’s assessment.

Outcome:

The Court ordered the IT Department to re-evaluate Agra Portfolio’s case using the DCF method as chosen by the company.

This decision offers greater flexibility to startups and investors when determining the FMV of shares for angel investments.