Income Tax Department issues notices to certain startups, including those in Ashneer Grover's portfolio, requesting information about their shareholders and seeking to verify the creditworthiness of those investors. This is done to ensure that the amount of investment made in these startups is in line with the income declared by the investors, as per Section 68 of the Income-tax Act, 1961.
Ashneer Grover expressed surprise and concern about this requirement, particularly regarding the request for shareholders' three-year income tax returns (ITR). He questioned why shareholders would need to share their ITR with a private company, as shareholders typically invest equity in a company rather than seeking loans.
In response, the Income Tax Department clarified that Section 68 of the Income-tax Act places the initial responsibility on the startup (assessee-company) to provide proof of:
- Identity of the investor: This means the startup must establish the identity of the individuals or entities who have invested in the company.
- Creditworthiness of the investor: The startup is required to demonstrate that the investors have the financial capacity or creditworthiness to make the investments they claim to have made.
- Genuineness of the transaction: The startup needs to show that the investment transaction is legitimate and not a means of evading taxes or engaging in financial fraud.
In summary, the Income Tax Department is conducting these inquiries to ensure that startups are complying with tax regulations and that investments made in them are legitimate and reflect the financial capabilities of the investors. The burden of providing this information initially falls on the startup itself, which is required to furnish the necessary details about their investors to the tax authorities.
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