A rare case, when I-T withdrew money from start-up accounts

It’s not unusual for the tax departments to freeze bank accounts and there have been instances of the authorities recovering the outstanding from the bank, though such course of action is not common.

Illustration: Dominic Xavier/Rediff.com

The income-tax (I-T) department’s aggressive action against two start-ups - TravelKhana and Babygogo - due to ‘unexplained cash’ has taken the industry by surprise.

The department took money out of their accounts - something that is quite rare.

Tax experts say that such measures are taken only when the company is on the verge of liquidation.

However, tax experts say that companies need to be pro-active and approach the right authorities to avoid such situations as soon as a notice is issued.

“In most such cases, the authorities either ask to go in appeal and pay 20 per cent of the amount in dispute or the least they do is allow the demand to be payable in instalments, depending on the start-ups’ case and the course of action it wants to adopt,” says Suresh Surana, Founder, RSM Astute Consulting Group.

Pranay Bhatia, partner (tax and regulatory services) at BDO India, suggests the same.

“A start-up should challenge the order immediately and make use of remedies that suit them under the tax laws,” says Bhatia.

It’s not unusual for the tax departments to freeze bank accounts and there have been instances of the authorities recovering the outstanding from the bank, though such course of action is not common.

“Depending on the case and timeline, the department has the right to recover the dues by freezing bank accounts.

"They even have powers to ask debtors of the company concerned to make payment directly to the department,” says Surana.

But such drastic steps are taken only in specific cases, such as when the company is undergoing liquidation.

Usually, the assessing officer only writes to the bank to freeze the bank account, instructing that there should not be any payout until the dues are settled.

In this case, the income-tax department has used Section 68 of the I-T Act.

The section is an anti-abuse measure meant to question private companies that receive abnormal amounts into their accounts.

Tax experts say besides angel tax, many start-ups are also receiving notices to comply with the tax deduction at source (TDS).

It’s common for start-ups to be struggling for cash during their initial years.

They may miss the deadline of depositing the TDS.

The department is taking these misses seriously.

Those who are collecting cash are acting as an agent of the I-T department.

The authorities expect them to act accordingly, tax experts said.

If a start-up has received a notice for TDS, it is best that the company pay the demand within the stipulated time of the notice, failing which the tax department can take strict measures.

In the case of TravelKhana and Babygogo, the income-tax department had issued notices for outstanding tax demand and then seized their bank accounts to recover the outstanding dues, leaving them with no funds.

While the specifics of these cases is not known, tax experts say that similar situation can be avoided if start-ups take little caution and act in time.

Experts say that during the end of a financial year, income tax officers become aggressive because they have to meet their annual targets.

But most of the time even taxpayers that don’t act in time or take that leads to strict action against them.