IT Department to investigates Startup Investments to ensure Transparency in Startup Funding

The Income Tax Department sends notices to certain startups, including those in Ashneer Grover’s portfolio, requesting information about their shareholders and attempting to check their creditworthiness.

This is done to guarantee that the amount invested in these startups matches the income declared by the investors, as required by Section 68 of the Income-tax Act of 1961.

Ashneer Grover expressed surprise and concern about this requirement, particularly the request for three-year income tax returns (ITR) from shareholders. He questioned why shareholders would need to share their ITR with a private corporation, given that owners normally invest equity rather than seek loans.

The Income Tax Department clarified that Section 68 of the Income Tax Act requires the startup (assessee-company) to submit documentation of:

• The identity of the investor means that the startup must establish the identity of the individuals or companies who have invested in the company.
• The investor‘s creditworthiness is required to establish that the investors have the financial ability or creditworthiness to make the claims they have made.
• The transaction’s genuineness must demonstrate that the investment transaction is legal and not a means of evading taxes or indulging in financial fraud.

In summary, the Income Tax Department is conducting these investigations to guarantee that startups are following tax regulations and that investments in them are legitimate and reflect the financial capacity of the investors. The burden of providing this information first falls on the startup, which is obligated to provide the tax authorities with the essential details about their investors.