EQUIFAX CREDIT INFORMATION SERVICES PVT LTD,MUMBAI vs. INCOME TAX OFFICER WD-9(2)(1), MUMBAI

Pursuant to the directions of the Tribunal, the Assessing Officer framed the set-aside assessment under section 143(3) read with section 254. In the said assessment order, the Assessing Officer reiterated two principal adjustments for A.Y. 2011–12, namely: (a) disallowance of Rs. 4,30,91,544/- in relation to payments to M/s Equifax Software Systems Pvt. Ltd. (“ESS”) under section 40A(2)(b) and allied reasoning about genuineness/quantum; and (b) addition of Rs. 12,25,00,000/- under section 68 in respect of share capital subscribed by M/s EFX Holdings Ltd., a Mauritius-based entity. The assessee carried the matter in appeal. The learned CIT(A), by the impugned order dated 30.06.2025, confirmed both the additions/disallowances. It is this confirmation which is assailed before us.

We have heard the rival submissions and perused the material placed on record, including the impugned orders, earlier appellate directions, and the paper book containing the audited financial statements, reconciliation workings, RBI

So far as the addition under section 68 is concerned, the factual canvas is largely undisputed. The assessee had issued share capital aggregating to Rs. 25 crores, out of which Rs. 12,25,00,000/- was subscribed by EFX Holdings Ltd. (“EFX”). It is also borne out that EFX held 49% stake in the assessee company, while the remaining 51% shareholding was held by various domestic financial institutions. Even after induction of additional capital, the shareholding of EFX remained intact and continued at 49%. The Assessing Officer did not dispute that the funds were received through banking channels and were supported by FIRC and RBI acknowledgements in the sense of reporting/filing under the foreign investment regime; nevertheless, he treated the subscription by EFX as unexplained cash credit.

The Assessing Officer’s reasoning, as emanating from the set-aside assessment order, proceeds on a few specific planks. First, he notes that in the earlier round, the Tribunal had remitted the issue de novo because, according to the Tribunal, “in the absence of financial statement, only RBI approval alone cannot be said to have fully proved creditworthiness of the party”, and therefore the creditworthiness and genuineness required deeper verification. Secondly, in the set-aside proceedings, EFX, in Equifax Credit Information Services Pvt. Ltd. response to notice under section 133(6), furnished its financial statements for the years ended 31.12.2009, 31.12.2010 and 31.12.2011. On perusal thereof, the Assessing Officer observed that the said financials showed either negligible or NIL income and, in certain years, losses. Based on this, he concluded that EFX did not have income of its own to justify such large subscription, and therefore its “financial capacity” stood in doubt. Thirdly, the Assessing Officer also noticed that some confirmations/annexures furnished were not signed and certified, and hence he regarded them as unauthenticated. He further recorded that certain statutory/supporting documents were not furnished to his satisfaction, such as certificate of residence issued by Mauritius authorities, resolution passed in board meetings of the assessee for issue and allotment of shares to EFX, cogent evidence of source of funds in the hands of share applicant which had been used to subscribe the shares, and certified/authenticated copies of supporting documents. The Assessing Officer then proceeded to state, in substance, that receipt of money through banking channels is not sacrosanct by itself and cannot be accepted at face value without requisite documentary evidence establishing the three ingredients, namely, identity, creditworthiness and genuineness. He also placed reliance on various judicial pronouncements mentioned in the assessment order and held that the assessee failed to discharge its burden under section

The learned CIT(A) has affirmed this approach and has confirmed the addition under section 68. From the impugned appellate order, it is evident that the learned CIT(A) proceeded on the premise that the Assessing Officer’s doubts were justified because the assessee, despite opportunities, did not furnish certain documents in an authenticated and verifiable manner, and because the financial statements of the foreign investor showed negligible income/consistent losses which, according to the learned CIT(A), impaired the capacity/creditworthiness of the investor to infuse such amount. The learned CIT(A) also held, in effect, that mere filing of papers or routing through banking channels is not sufficient unless the assessee establishes the foundational requirements to the satisfaction of the Assessing Officer, and therefore the addition deserved to be sustained.

The assessee before us has, however, vehemently contested the above, and has pointed out both from the paper book and from the scanned submissions that the Assessing Officer ignored the substance of the materials. It has been reiterated that EFX is an investment holding entity, which, by its very nature, is not set up to earn operational income like a trading or service company; such entities typically act as conduits for investments, funded through shareholder

Having examined the entire factual matrix, we are unable to subscribe to the conclusions drawn by the Assessing Officer and affirmed by the learned CIT(A). The reason is simple: the touchstone of section 68 is not the profitability of the creditor, but the explanation regarding the nature and source of the credit coupled with identity,

Another pivotal fact, which the lower authorities have not evaluated in the correct perspective, is that from a bare perusal of EFX’s audited financial statements, the investment/shares subscribed in the assessee company is duly disclosed and reflected in the balance sheet. This disclosure is not a mere self-serving assertion; it is part of global audited accounts, and the investment is shown as an asset. The Assessing Officer’s approach of discrediting the financials because some annexures or confirmations were allegedly not signed, without appreciating that the audit report and the financial statements are audited and certified

It is also significant that the assessee is a joint venture entity with 51% holding by domestic financial institutions. The Assessing Officer has accepted the induction of capital by domestic institutions, but has singled out the foreign investor’s proportionate contribution, despite the shareholding remaining constant and despite the inflow being through banking channels supported by FIRC and RBI reporting. If, as was insinuated, the entire arrangement was a sham, it would be difficult to reconcile such insinuation with the accepted participation of reputed domestic financial institutions. The addition under section 68 cannot rest on suspicion, conjecture or mere rhetorical doubt; it must rest on cogent material demonstrating that the explanation offered is false or that the transaction is not genuine.

We also note that the Tribunal in the earlier round had remitted the matter because it found that in the absence of financial statements, RBI approval alone could not prove creditworthiness. That remand was to enable proper factual examination. In the set-aside proceedings, financial statements were produced. The Assessing Officer was expected to examine them holistically capital structure, shareholder funds, cash flow, and disclosures. Instead, the Assessing Officer has primarily emphasised NIL income and questioned the authenticity of annexures/confirmations, without bringing any affirmative material to demonstrate that the funds did not emanate from the stated source or that the transaction is non-genuine. Once the assessee has demonstrated identity (EFX is an existing corporate entity), genuineness (funds received through banking channels with regulatory reporting) and capacity by audited financial statements disclosing the investment, the burden shifts; and it is for the Revenue to rebut the explanation with tangible material. Mere reference to the fact that funds were routed through Mauritius, or broad remarks about “tax havens”, without correlating such remarks to any incriminating material showing falsity of the transaction, does not meet the standard of reasoning required to sustain an addition under section 68.

In view of the above, we hold that the addition of Rs. 12,25,00,000/- under section 68 cannot be sustained. The Equifax Credit Information Services Pvt. Ltd. assessee has furnished the primary evidences to explain the nature and source of the share capital, and the Revenue has not brought any material on record to dislodge the same except to rely on the NIL income aspect and alleged non- authentication of some annexures, which, in the facts of this case, cannot override the substantive evidences. Accordingly, the addition under section 68 is directed to be deleted.

Now, coming to the disallowance under section 40A(2)(b) in respect of payments to ESS. The Assessing Officer, in the set-aside order, has proceeded to disallow Rs. 4,30,91,544/- on the premise that the payment to ESS was unsubstantiated/excessive and also by drawing an inference from a mismatch between what was reflected in Form 26AS of ESS and what was booked by the assessee in its books. The Assessing Officer recorded that as per Form 26AS of ESS for the relevant period, gross receipt from the assessee was Rs. 14.45 crores, whereas in the assessee’s books/return, aggregate payment to ESS stood recorded at only Rs. 9.07 crores (comprising hardware/software maintenance, hosting charges and professional fees). On this basis, he inferred that there was an unexplained discrepancy of Rs. 5.38 crores which, according to him, cast serious doubt on genuineness of the assessee’s accounts and admissibility of the payments, and therefore, the payment of Rs. 4,30,91,544/- remained unsubstantiated and was disallowed. In further reasoning, the Assessing Officer also took a view that the Tribunal’s

The learned CIT(A) has confirmed the Assessing Officer’s action. The appellate order proceeds on the reasoning that (i) the Assessing Officer had found discrepancy on the basis of Form 26AS and books; (ii) reconciliation was not satisfactorily produced/verified; (iii) the Assessing Officer was within his jurisdiction to examine genuineness/quantum in the set- aside proceedings; and (iv) in the absence of convincing explanation and corroborative evidence, the disallowance deserved to be upheld. The learned CIT(A) also made reference to case law and held, in essence, that the tax authorities are entitled to examine the substance of the transaction and are not required to accept the assessee’s explanation merely on the basis of form.

The assessee, on the other hand, has filed a detailed reconciliation also reflected in the scanned reconciliation document demonstrating that the Assessing Officer’s inference of mismatch was factually flawed because the assessee had not merely booked Rs. 9.07 crores; rather, a substantial portion of invoices raised by ESS had been capitalised as intangible assets/WIP and therefore did not pass through the profit and loss account. The related party transaction schedule from audited financials, as produced,

We have considered the above rival positions and perused the reconciliation placed on record. The first and foremost aspect which emerges is that the Assessing Officer’s conclusion of mismatch was drawn by comparing Form 26AS gross receipts in the hands of ESS with only the revenue expenditure debited by the assessee to profit and loss account, without appreciating that certain invoices were Equifax Credit Information Services Pvt. Ltd. capitalised. Once capitalisation is demonstrated from audited schedules, the comparison becomes incomplete unless the capitalised components are also brought into the reconciliation. The assessee has precisely done that by producing the related party transaction schedule and the reconciliation. The reconciliation is not a mere oral claim; it is a structured working supported by audited disclosures, showing that the total transactions with ESS aggregate to Rs. 14.29 crores, which is very close to Form 26AS gross receipts of Rs. 14.45 crores, and after tax/provision adjustments the difference is reduced to a nominal figure.

In such circumstances, the Assessing Officer’s inference that the assessee’s accounts are unreliable or that payments remained unsubstantiated cannot stand. Furthermore, section 40A(2) is not a deeming provision for disallowance on mere relationship. The statutory mandate is that where an assessee incurs expenditure in respect of which payment has been made to a specified person, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods/services/facilities, or the legitimate needs of the business, or the benefit derived, then so much of the expenditure as is considered excessive/unreasonable may be disallowed. Thus, the sine qua non is formation of an opinion based on some objective material and a comparative yardstick either market benchmarking, comparable uncontrolled

Even on the jurisdictional aspect, we note that the Tribunal had remitted the matter for factual verification. The assessee’s grievance, as reflected in the earlier proceedings, was that the Assessing Officer had not examined the factual matrix properly. A remand for factual verification does not mean that additions/disallowances can be sustained on conjectures; it only means that the authority must examine the facts fully and decide in accordance with law. Here, once the assessee produced reconciliation and audited schedules showing capitalisation and total transaction values, the Assessing Officer was required to test the same by calling for ledger extracts, fixed asset schedules, invoice-wise mapping, or by making limited verification. Instead, the conclusion of unsubstantiated payment appears to have been drawn without properly demolishing the reconciliation. Therefore, the confirmation by learned CIT(A) also cannot be sustained because the appellate confirmation rests on the same basic premise of mismatch and inadequate explanation, which

Accordingly, on the totality of facts and in view of the material on record, we hold that the disallowance of Rs. 4,30,91,544/- sustained under section 40A(2)(b) cannot survive and is directed to be deleted.

Since similar issue relating to disallowance under section 40A(2)(b) arises in A.Y. 2012–13 and the factual matrix is stated to be identical, our findings rendered hereinabove for A.Y. 2011–12 on this issue shall apply mutatis mutandis to A.Y. 2012–13 as well. Consequently, the disallowance in A.Y. 2012–13 on this count also stands deleted.

In the result, the appeal for A.Y. 2011–12 is allowed, and the appeal for A.Y. 2012–13 is also allowed in terms of our findings recorded above.