ITAT Deletes Share Capital & Share Premium Additions; Upholds DCF Valuation and Business Expense Claim

Rivet Health Club Pvt. Ltd. filed its return for AY 2015-16, declaring income of Rs. 2.15 lakh. In the relevant year, it issued 2.35 lakh equity shares at Rs. 40 per share (face value of Rs. 10 + a premium of Rs. 30), raising Rs. 94 lakh from five corporate investors. During a limited scrutiny assessment under Section 143(3), the Assessing Officer treated the share capital and premium as unexplained under Section 68, made a protective addition under Section 56(2)(viib) by rejecting the DCF valuation, disallowed business expenses, and added interest income based on Form 26AS.

The CIT(A) partly upheld the additions and enhanced income without issuing a specific show-cause notice, prompting the assessee’s appeal before the Tribunal.

Issue Before Tribunal: Whether share capital and premium received from corporate investors were liable to addition under Section 68 and Section 56(2)(viib), and whether the CIT(A) could enhance income and sustain disallowances without following due process.

Tribunal’s Decision: The Bench allowed the appeal in full. It held that the assessee had discharged the onus under Section 68 by furnishing complete evidence establishing the identity, creditworthiness, and genuineness of the investors. In the absence of any contrary material, the addition under Section 68 was deleted.

The Tribunal further held that the DCF valuation carried out by a qualified expert could not be rejected merely on subjective grounds or hindsight, and therefore, the protective addition under Section 56(2)(viib) was unsustainable. The disallowance of business expenses was deleted on the ground that once a business is set up, routine expenses are allowable even during periods of low activity. The addition based on Form 26AS mismatch was also deleted.

To Read Full Judgment, Download PDF Given Below