The income-tax (I-T) department has issued showcause notices under Section 68 of the Income-Tax Act to several startups over funds routed through Singapore, seeking explanations for investments received over the past five years, people familiar with the development said.

The department is questioning the source, identity, and creditworthiness of overseas investors in these transactions, they said.

In addition, the notices are also being served on Non-Resident Indians (NRIs) holding bank accounts in Singapore.

“These are not routine inquiries, but formal show-cause notices.

“Companies are being asked to justify the inflow of capital, even from the past years, by furnishing detailed investor documentation,” a person familiar with the matter said.

Section 68 of the Income-Tax Act, 1961, allows the department to question unexplained credits in a taxpayer’s books.

The notices require companies to establish the identity of the foreign investor, their creditworthiness and the genuineness of the transaction.

“If the response satisfies the department, the case is closed. But several startups are struggling to gather such granular data, especially for legacy transactions,” said a source.

According to sources, the crackdown is being driven by data received under the Automatic Exchange of Information framework and bilateral tax treaties.

“When information about a taxpayer’s foreign accounts or investments received through treaty partners doesn’t reconcile with their income-tax returns, it triggers automated scrutiny,” an official said.

“In particular, transactions are being scrutinised under the Principal Purpose Test, an anti-abuse provision included in bilateral tax treaty, to assess whether the primary intent of routing funds through Singapore was to unlawfully claim treaty benefits or avoid taxes,” the source said.

“Investments lacking commercial substance, involving inflated valuations, or structured solely for tax avoidance are being examined for possible violations of the Income-Tax Act, Fema (Foreign Exchange Management Act) and anti-abuse provisions introduced under the India-Singapore tax treaty,” the source added.

An email sent to the Central Board of Direct Taxes (CBDT), which governs the income-tax department, remained unanswered until the time of going to press.

According to experts, a significant challenge arises from the retrospective nature of such inquiries, often targeting transactions that were conducted 4-5 years ago.

This creates practical hurdles for taxpayers, since retrieving old financial records or reconstructing transaction trails becomes difficult.

The outcome depends on the subjective interpretation of the Assessing Officer, who may contest explanations even if documentation appears complete.

The overuse of Section 68 risks increasing litigation and appeals, burdening taxpayers and the system.

“While Section 68 is an important tool to unearth black money and fight tax evasion, excessive use of the same will only lead to more litigation.

“Taxpayers are advised to keep proper trail and documents of all the transactions pertaining to share premium receipt and lending/borrowing of funds,” said Amit Maheshwari, partner with AKM Global.

According to Punit Shah, partner with Dhruva Advisors, Section 68 of the Income-Tax Act, 1961 is an anti-avoidance provision.

It cannot be used routinely.

“Section 68 should be used by the tax authorities sparingly only in extreme suspicious circumstances of tax evasion and where the source cannot be determined or identified or explained at all.

“Using it against genuine foreign investors and taxing their funds infusion would be abuse of the provision and should be avoided,” Shah added.

ON THE RADAR

• Showcause notices issued to startups under Section 68 for capital raised over the past five years, demanding documentation on foreign investments
• NRIs with Singapore accounts also under scrutiny
• Revival of Section 68 reflects tighter enforcement focus on unexplained share premiums and fund inflows
• Data from AEOI and treaties triggered scrutiny where foreign assets did not match tax returns
• Experts flag overreach, warning of rising litigation and impact on genuine investors