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Income Tax Department’s Scrutiny of Startup Investors’ ITRs Sparks Controversy and Calls for Legal Clarity

The I-T department has announced that income tax officials may initiate inquiries into the ITRs filed by startup investors. They aim to ascertain whether the amount invested aligns reasonably with the income reported on their ITRs. Additionally, the I-T department highlights the Finance Act of 2012’s requirement for investors to explain the source of funds from a resident shareholder in a startup. This clarification is in response to a post by former BharatPe co-founder Ashneer Grover on X last Friday. Furthermore, Grover expressed concerns about multiple startups receiving tax notices that seek details about their shareholders.

On September 8, Grover wrote on the social media platform X, which replaced Twitter, that “In the last one month, a number of startups (a few in my portfolio as well) have received Income Tax notices asking to furnish information about shareholders.”

“Bahut interesting hai (it is very interesting) – they are asking start-up companies to furnish a 3 year ITR [income tax return] of all shareholders.”

He continued by enquiring as to how and why a startup would have ITR of shareholders. Why would a shareholder or individual give a private corporation access to their ITR?

Moreover, he continued by saying that the goal is to ‘establish the creditworthiness of shareholders.’ “Why?,” he questioned. He emphasized that the company’s shareholders do not receive loans. Instead, they invest their own capital into the business. He called for a deeper investigation by the Union Ministry of Finance.

The Income Tax Department responded to him by posting on X that, “Section 68 of Income-tax Act, 1961 (the Act) under which the Assessing Officer (AO) has made the enquiry about creditworthiness of the shareholder/investor, places initial onus on the assessee-company to prove the following: a) Identity of the investor, b) Creditworthiness of the investor and c) Genuineness of the transaction.”

It continued by saying that the “Finance Act, 2012 mandated that the nature and source of any sum credited as share capital, share premium, etc., in the books of a closely-held company (excluding Venture Capital Fund or a Venture Capital Company registered with SEBI) shall be treated as explained u/s 68 only if the source of funds from a resident shareholder is also explained by investor.”

In response to Grover’s scenarios, they elaborated that in the present situation, the Assessing Officer (AO) is probing the authenticity of the transaction and the source of the shareholder-investor’s investment. Additionally, their objective is to verify whether the amount invested aligns with the income depicted in the investors’ ITRs.

Alternatively, the AO asked investors to provide their permanent account numbers, or PANs. This was requested as a means to verify their income tax reports.

“This has been the practice,” it continued.

Mohandas Pai, a co-founder of Infosys and an investor, chimed in to call this “misleading”.

He first commented on Grover’s initial post, “sir tax terrorism is increasing! This is against what you have stood for. Please intervene,” and then tagged Prime Minister Narendra Modi and the Prime Minister’s Office (PMO).

Among the politicians and ministers he tagged in that post were the national president of the BJP Yuva Morcha and MP Tejasvi Surya, along with BJP’s Bengaluru Central MP P C Mohan.

Subsequently, he reposted the message after the Income Tax Department clarified the situation. This clarification indicated that providing the PAN of the investors is an alternative to submitting three years’ worth of income tax returns.

He called out Prime Minister Narendra Modi, Finance Minister Nirmala Sitharaman, and the Union Ministry of Finance, saying, “Again this is misleading.” “Asking for the PAN is the law. But how can you also ask for 3 year tax returns of the investor from the start up? Does the law permit this. @IncomeTaxIndia itself says that Pan is sufficient. Why this overreach?,” he questioned.

Grover reposted Pai’s X post.

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