Income tax officials can request information from startup investors regarding their income tax returns (ITRs) to ensure that the amount they invested is consistent with the income they reported in their personal ITRs. This is in accordance with the Finance Act of 2012, which requires resident shareholders in startups to provide an explanation of the source of funds. Several startups have recently received tax notices asking for details about their shareholders.
The assessing officer is looking into the authenticity of the transaction and the source of investment made by the shareholder. The Tax Department want to confirm if the amount invested matches the income reported in the investors’ tax returns. Alternatively, if the company shares the investors’ PAN numbers with the assessing officer, they can verify their tax returns.
According to section 68 of the Income Tax Act, the startup (in this case) is responsible for providing evidence to prove the identity and credibility of the investor and the authenticity of the transaction.
Further the IT department said, “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.”