ITAT Delhi deletes ₹49 lakh Section 68 addition and quashes Section 56(2)(viib) adjustment in Rivet Health Club case

Background

The Delhi ‘F’ Bench of the Income Tax Appellate Tribunal has allowed the appeal filed by Rivet Health Club Pvt. Ltd. for Assessment Year 2015–16, setting aside multiple additions sustained by the Commissioner of Income Tax (Appeals), Faridabad.

The Tribunal first condoned a 49-day delay in filing the appeal, accepting the assessee’s explanation that the delay occurred due to the serious medical condition of its earlier Chartered Accountant. On merits, the appeal arose from an assessment framed under Section 143(3) of the Income Tax Act, 1961, wherein the Assessing Officer had treated share capital and share premium aggregating to ₹94 lakh as unexplained, making an addition of ₹49 lakh under Section 68, and further made a protective addition of ₹26.39 lakh under Section 56(2)(viib) by rejecting the assessee’s valuation of shares. Additional disallowances were also made towards business expenditure and alleged mismatch with Form 26AS.

Outcome

The Tribunal noted that the assessee had discharged its initial onus under Section 68 by furnishing PAN details, ROC records, audited financials, bank statements and confirmations from investors. Relying on the Supreme Court’s decisions in PCIT v. Rohtak Chain Co. (P) Ltd. and CIT v. Lovely Exports (P) Ltd., the Bench held that once identity, creditworthiness and genuineness are established, no addition can be sustained merely on the ground of high share premium. The addition of ₹49 lakh was accordingly deleted. On Section 56(2)(viib), the Tribunal held that the Assessing Officer and CIT(A) erred in rejecting the valuation done under the Discounted Cash Flow (DCF) method as prescribed under Rule 11UA, observing that tax authorities cannot substitute their own valuation in the absence of contrary material.

The Bench also struck down the enhancement of income without issuing a mandatory show cause notice under Section 250(1), allowed business expenditure under Section 37, and deleted the addition arising from an incorrect reading of Form 26AS. The appeal was allowed in full.