Many taxpayers often wonder if the Income Tax Department can ask for details about the income tax returns (ITRs) of start-up investors. However, a recent tweet from the Department has confirmed that it can ask for investors’ income details to find out if the amount they invested is in sync with the income they had exhibited in the ITRs they filed.
The debate surrounding the Department’s intent to identify income details from ITRs came to light after the former co-founder of BharatPe Ashneer Grover pointed out how many startup companies had received notices from the I-T Department seeking income details of their investors.
The furore surrounding verifying shareholders’ credibility started with a tweet from Grover on September 08, 2023, on X (erstwhile, Twitter) tagging the Ministry of Finance to look into why the Department has been sending out notices to shareholders and asking them to furnish information.
Grover had tweeted, “In the last 1 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 - they are asking start-up companies to furnish 3-year ITR of all shareholders. 1) How and why will companies have ITR of shareholders! 2) Why would a shareholder/individual share their ITR with a private company? And reason likha hai ‘to establish creditworthiness of shareholders’? Kyun? Company shareholder ko loan thode nahi de rahi? Ulta shareholder ne company mein equity daal rakhi hai. Request FinMinIndia to please look at it.”
In response to his tweet, the Income Tax Department listed on “X” the various sections under the Income Tax Act, 1961 explaining why it was right to send out the notices and the Acts that allow assessing officers to verify the validity of the transactions between the shareholders and the company.
In its tweet that garnered more than 5 lakh views, the I-T Department responded, “Dear Ashneer Grover
- Section 68 of the Income-tax Act, 1961 (the Act) under which the Assessing Officer (AO) has made the enquiry about the creditworthiness of the shareholder/investor, places the 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
2. 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.”
Though it is quite likely that the Department officials could have easily sought details of the income of the shareholders by simply putting in PAN Card details, they preferred to send out notices to the shareholders investing in various start-up companies.
The Department tweeted, “In the present case, it appears that the AO has sought to examine the genuineness of the transaction and source of investment by the shareholder-investor, to verify if the amount invested is commensurate with the income shown in the ITRs of the investors,” explaining, “Alternatively, if the PANs of the investors are shared with the AO by the Company, he can verify the ITRs of the investors. This has been the practice as reflected in various tweets in the thread.”