In a significant relief to hospitality technology firm OYO Hotels and Homes Pvt Ltd (OYO), the Delhi bench of the income tax appellate tribunal (ITAT) has deleted a tax addition of ₹3,885.51 crore made under the Income Tax Act's angel tax provisions in relation to share premium received from its parent company, Oravel Stays Ltd.
The ruling was delivered by a bench comprising accountant member S Rifaur Rahman and judicial member Vimal Kumar in appeals relating to the assessment year (AY) 2021-22. The tribunal held that tax authorities had exceeded their powers by discarding the valuation carried out by qualified valuers and substituting it with their own assessment.
"The tax authorities have gone beyond their jurisdictions in reevaluation of value of each share even though the same was valued by the registered valuers or merchant banker. It is complex and technical and assessing authorities does not possess such expertise," the tribunal observed.
The dispute arose after OYO issued compulsorily convertible preference shares (CCPS) to its parent company, Oravel Stays, following the demerger of OYO's India hotel business from Oravel, approved by the national company law tribunal (NCLT). During the year, Oravel subscribed to CCPS issued at substantial premiums, resulting in a total capital infusion of about ₹3,902.9 crore.
The assessing officer (AO) questioned the valuation adopted by the company, noting that OYO had a negative net worth and a history of losses. The officer concluded that the projections used in the discounted cash flow (DCF) valuation were excessively optimistic, particularly given the impact of the Covid-19 pandemic on the hospitality sector. Based on those findings, the officer rejected the DCF valuation and treated ₹3,737.99 crore as taxable excess share premium under Section 56(2)(viib) of the Income Tax Act. An additional ₹147.52 crore was added on account of the conversion of CCPS into equity shares, taking the total addition to ₹3,885.51 crore.
The commissioner of income tax (appeals) (CIT(A)) subsequently upheld the additions, agreeing with the tax department's objections to the valuation process.
Before the tribunal, OYO argued that Section 56(2)(viib) is enacted as an anti-abuse measure to prevent the circulation of unaccounted money and was not intended to apply to capital infusions by a holding company into its subsidiary. The company also maintained that the DCF method adopted for valuing the shares was a recognised method under the Income Tax Rules and could not be replaced by the tax department's preferred net asset value (NAV) approach.
ITAT accepted these arguments. It noted that the shares had been subscribed by the parent company and existing shareholders following a reorganisation approved by the NCLT. The tribunal observed that Oravel's shareholding reduced from 100% to 99.6% only because shares were allotted to existing shareholders under the demerger scheme and not due to any third-party capital infusion.
According to the tribunal, the transaction could not be viewed as an attempt to introduce unaccounted money into the system. It emphasised that the purpose of the provision was to curb the circulation of unaccounted funds and not to penalise genuine capital raising by existing shareholders seeking to support a loss-making company.
The bench further observed that the share valuation had been carried out by qualified valuers and that tax authorities were not entitled to substitute their own valuation merely because they disagreed with the assumptions adopted.
ITAT also noted that the investment had been made by a foreign-owned and controlled company in compliance with the Foreign Exchange Management Act (FEMA) regulations and, therefore, could not be characterised as unaccounted money.
In addition, ITAT held that the tax department was not justified in taxing ₹147.52 crore arising from the conversion of CCPS into equity shares during the relevant year. It said Section 56(2)(viib) could not be invoked in relation to a transaction that did not pertain to the issuance of shares in the assessment year under consideration.
Accordingly, the tribunal deleted both additions made under Section 56(2)(viib), allowing OYO's appeal.
While granting substantial relief on the share premium dispute, the tribunal did not provide a final ruling on OYO's challenge to a separate addition of ₹9.21 crore relating to management fee income.
The bench observed that OYO had claimed the amount represented a year-end reversal of excess accruals but had not produced adequate supporting evidence before the tax authorities. It therefore remanded the matter to the AO for fresh verification after giving the company an opportunity to present supporting documents.
As a result, OYO's appeal was partly allowed, while the management fee issue will now be reconsidered by the tax department.
(ITA No5718/Del./2025 AY21-22 Date: 4 June 2026)
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