TaxTMI 
TaxTMI 
TaxTMI 
2026 (3) TMI 227
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....ny engaged in the business of credit information services. For A.Y. 2011-12, the assessee had filed its return declaring NIL income and claiming loss. The return was processed under section 143(1) and the case was selected for scrutiny. The assessment was originally completed under section 143(3) on 19.03.2014 determining total income at Rs. 14,25,89,390/- inter alia by making (i) disallowance of business loss, (ii) disallowance/adjustment relating to payments to a related party and (iii) addition of share capital under section 68 of Rs. 12,25,00,000/-. In the first round, learned CIT(A) had granted relief on certain aspects; however, in further appeal, the Tribunal had, inter alia, set aside and restored the issue of addition under section 68 for denovo examination because the matter of creditworthiness and supporting financials required proper verification, and it was noticed that the issue could not have been concluded merely on the basis of regulatory approvals. Similar, on the issue touching section 40A(2)(b), the Tribunal had remitted the issue for factual verification, particularly in the context of the controversy as to whether ESS was a "related party" under the then preva....
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....", and therefore the creditworthiness and genuineness required deeper verification. Secondly, in the set-aside proceedings, EFX, in 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....
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....r group entity (Equifax Luxembourg), and the bank statements related to a period as old as 10 years, and therefore extraction/production of certain statements took time; however, the audited cash flow statement forming part of the financials evidences the source and movement of funds. It has also been urged that the Assessing Officer's narrative, suggesting that the assessee is a sham or that banks/RBI have taken on record investment whose source is unknown, is wholly misconceived in the backdrop of established regulatory compliance and the presence of 51% domestic institutional shareholders whose capital induction has been accepted. 10. 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, genuineness and capacity. In a case of share subscription by a holding/investment company, the "capacity" is not to be tested by looking only at its profit and loss account as if it were required to have operation....
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....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. 13. 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 ....
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....soning 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. 17. 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, shows the break-up aggregating to Rs. 14,29,1....
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....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 pricing, service benefit analysis, or any demonstrable excess. In the present case, the disallowance sustained by the Assessing Officer is not founded on any such fair market value analysis; rather, it appears to have been sustained largely on the perceived mismatch and on a broad assertion about lack of substantiation. Once the mismatch is reconciled, the substratum of the disallowance is rendered infirm. 20. 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 re....