No Income Tax scrutiny for Recognised Startups u/s 68 Says CBDT:

No Income Tax scrutiny for Recognised Startups u/s 68 Says CBDT The Central Board of Direct Taxes (CBDT) has stated that startups, which are officially recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and have followed the required legal declarations, will not have to go through the investigation under Section 68 of the Income Tax Act, 1961, for foreign investments. Therefore, such investments will not be questioned or investigated regarding tax-related questions. Section 68 of the Income Tax, 1961, asks taxpayers to give an explanation for the amount credited into their account, and the said explanation should be valid, satisfying the Assessing Officer. In case the assessee does not give any explanation or his/her explanation is not satisfactory for the Assessing Officer, the credited amount is considered as an undisclosed income. Replying to a tax lawyer's post on platform X (Earlier known as Twitter), CBDT said that, "Recognised startups that fulfil the conditions laid down in Notification No. G.S.R. 127(E) of DPIIT dated February 19, 2019, and the file declaration in Form-2 are eligible for various tax exemptions and deductions under the Income-tax Act, 1961. Investments made in such companies are eligible for benefits and are not subject to scrutiny,". However, the tax department further added that the investments in companies that do not qualify for the required conditions may be scrutinized, depending on the risk management strategy adopted by the department. The explanation from CBDT comes after income tax notices were being sent to startups for foreign funding through Singapore. The issue grabbed the attention after a tax expert mentioned a report highlighting the department's use of Section 68 to ask for investor documentation for investments made over the last five years. Industry experts have warned that the excessive use of Section 68 could discourage foreign investors and increase litigation, particularly in cases involving older funding transactions.