EDITORIAL NOTE TO v2

v2 of Volume IV-Expanded Other Sources deletes the fictional case Vaani Estates v. CIT (Karnataka HC) which v1 had cited as authority for 1961 s. 56(2)(viib) angel-tax valuation. On Stage-1C verification, no such case exists. The angel-tax DCF-valuation principle is correctly anchored on the Delhi ITAT decision in Cinestaan Entertainment (P.) Ltd. v. ITO, (2019) 177 ITD 809 (Del Trib).

SECTION 92 — CHARGE OF INCOME-TAX UNDER 'OTHER SOURCES'

BLOCK 1 — TEXT OF SECTION 92

(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in section 13(a) to (d).

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes shall be chargeable to income-tax under the head 'Income from other sources':

(a) dividends [other than those exempt under any other provision of this Act];

(b) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;

(c) any sum received as interest on securities;

(d) any sum received under a Keyman Insurance Policy including the bonus thereon.

BLOCK 2 — 1961 COUNTERPART (Section 56)

BLOCK 3 — COMMENTARY

STATUTORY ARCHITECTURE

Section 92 establishes the residuary charge — anything that is income but not chargeable under the other four heads (Salaries / HP / PGBP / CG) falls here. The s. 92(2) enumeration is illustrative, not exhaustive. The corresponding deductions are in s. 93.

SECTION 92(2)(m) — RECEIPTS WITHOUT OR WITH INADEQUATE CONSIDERATION

BLOCK 1 — TEXT (key extract)

Where any person receives, in any tax year, from any person or persons—

(a) any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;

(b) any immovable property—(i) without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property; (ii) for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees or 10 per cent of the consideration whichever is higher, the difference;

(c) any property other than immovable property— (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the difference.

BLOCK 2 — 1961 COUNTERPART (Section 56(2)(x))

Section 92(2)(m) of the 2025 Act carries forward 1961 s. 56(2)(x) (originally s. 56(2)(vii)/(viia)). The exclusions (relative, marriage, will/inheritance, contemplation of death, local authority, registered non-profit organisation, specified non-transfer transactions, trust for relatives, prescribed classes) are in s. 92(3).

BLOCK 3 — COMMENTARY

ANGEL TAX — 1961 Section 56(2)(viib) [history: applied up to AY 2024-25; no counterpart in the 2025 Act]

** EDITORIAL CORRECTION FOLDED IN ** — In v1, the angel-tax valuation principle was attributed to Vaani Estates v. CIT (Karnataka HC) — a case which does not exist in any reporter. The correct authority is the Delhi ITAT decision in Cinestaan Entertainment, which has become the leading case on angel-tax DCF-methodology challenge.

CORRECT CITATION: Cinestaan Entertainment (P.) Ltd. v. ITO, (2019) 177 ITD 809 (Del Trib) | ITA No. 8113/Del/2018, dec. 27-05-2019.

FACTS: Cinestaan Entertainment, a startup, issued shares at a premium based on a Discounted Cash Flow (DCF) valuation report. The AO rejected the DCF valuation on the ground that actual subsequent performance fell short of projections, and substituted a Net Asset Value (NAV) computation, treating the differential as taxable u/s 56(2)(viib).

ISSUE: Whether the AO can substitute the assessee's choice of DCF valuation method (one of the prescribed methods under Rule 11UA) with NAV solely on the basis that subsequent actual performance fell short of projected DCF cash flows.

HELD: The Delhi ITAT held that Rule 11UA gives the assessee an OPTION between DCF and NAV for 1961 s. 56(2)(viib) valuation. Once the assessee makes a bona fide election supported by a registered-valuer report and the choice is one of the prescribed methods, the AO cannot substitute his own preferred method. The AO can examine the bona fides of the inputs but cannot reject the methodology itself. Subsequent actual underperformance does NOT, by itself, vitiate a contemporaneous DCF valuation prepared in good faith.

"The Assessing Officer cannot adopt his own valuation method when the assessee has chosen one of the methods prescribed under Rule 11UA. Once the option of method is exercised, only the inputs to that methodology can be examined; the methodology itself is not open to substitution. Mere fact that the projected cash flows did not materialise in the actual subsequent years does not, by itself, render the DCF valuation suspect." (¶ 27)

DEPARTMENTAL PRACTICE

CBDT Notification No. 24/2018 dated 24-05-2018 (DPIIT-recognised Startup Carve-out) and the subsequent Notification No. 13/2019 (Para 4 exemption) provided the angel-tax exemption for DPIIT-recognised startups subject to specified conditions (paid-up capital + share premium ≤ ₹25 crore aggregate; no investment in specified asset classes). DPIIT recognition is the gateway to this exemption for a startup facing angel-tax exposure.

PRACTICAL POINTS & LITIGATION DEFENCE

(i) For share-premium issues up to AY 2024-25, DCF could be adopted over NAV where projected growth justified it; under Rule 11UA(2)(b) the DCF value had to be determined by a merchant banker, with documented assumptions and sensitivity analysis. (ii) The board resolution approving the share issue at the chosen valuation, with minutes referencing the methodology, records the basis. (iii) On AO challenge, Cinestaan ¶¶ 24-29 applies, and the question is the assessee's compliance with the Rule 11UA(2) options. (iv) Where an assessee was DPIIT-recognised, Notification 13/2019 gave outright exemption.

s. 92(3)(a) — Specified Relative Exemption

The definition of 'relative' in s. 92(5)(g) (1961: Explanation to s. 56(2)(vii), applied by s. 56(2)(x)) covers the spouse; brother or sister; brother or sister of the spouse; brother or sister of either parent (so an aunt or uncle is a relative); any lineal ascendant or descendant of the individual or of the spouse; and the spouse of any of these persons. It applies to gifts within the family.

s. 92(3)(b) — Marriage Gift Exemption

All gifts received on the occasion of one's own marriage are exempt — irrespective of relationship of the donor. The gift must be received 'on the occasion of marriage'. The statute fixes no time window; whether a gift is connected with the marriage is a question of fact.

SECTIONS 93-95 — DEDUCTIONS | SET-OFF / EXCLUSIONS

STATUTORY ARCHITECTURE

Section 93 provides for deduction of expenses incurred wholly and exclusively for earning the OS income. Section 94 lists deductions specifically NOT allowable (personal expenses, capital expenditure save certain repair, etc.). Section 194 provides the special-rate carve-out for s. 92(2)(b) winnings — flat 30% (Table: Sl. No. 2) (1961 s. 115BB).

JUDICIAL EVOLUTION — Interest on Borrowings

CIT v. Smt. Rajendra Prasad Moody, (1978) 115 ITR 519 (SC) — held that interest on borrowings is allowable u/s 57(iii) (now s. 93) even where no income actually accrues from the investment; the test is purpose, not productivity.

HELD: It is not necessary that for the deduction of interest under section 57(iii), the income should have actually accrued. The test is whether the borrowing was for the purpose of making or earning the income. Interest paid on funds borrowed for buying shares which yielded no dividend in the year of charge is still allowable. (per Rajendra Prasad Moody ¶ 9).

PRACTICAL POINTS

(i) For OS interest deduction, the borrowing purpose is shown by loan documentation referencing the investment. (ii) For lottery / gambling winnings, the s. 194 flat 30% applies; no basic exemption / rebate u/s 156 (s. 87A equivalent) is available. TDS u/s 393 (1961 s. 194B) at 30% — the 30% TDS is reflected in Form 26AS. (iii) For dividend income post FA 2020, normal slab rates apply (s. 92(2)(a)) but s. 156 rebate IS available for resident individuals.

CLOSING NOTE — VOL IV OS v2

Volume IV-Expanded Other Sources v2 carries deletion of the fictional Vaani Estates citation and substitution with Cinestaan Entertainment (Del Trib) for the angel-tax DCF-valuation principle. v1 is withdrawn.