The Income Tax Appellate Tribunal (ITAT) has deleted a ₹3,885.51 crore angel tax addition levied on OYO Hotels and Homes Private Limited in connection with the share premium received by it from its parent company Oravel Stays Limited [Oyo Hotels Vs DCIT].
A Bench of Accountant Member S Rifaur Rahman and Judicial Member Vimal Kumar held that the tax authorities exceeded their jurisdiction by rejecting the valuation method adopted by OYO 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 Delhi Bench of ITAT said.
The case concerned the assessment year 2021-22. OYO had issued Compulsorily Convertible Preference Shares (CCPS) to Oravel Stays Limited after a scheme of arrangement under which the India hotel business was demerged from Oravel Stays into OYO Hotels and Homes.
The assessing officer questioned the share premium charged by OYO, noting that the company had negative net worth and was incurring losses. The officer also found that the projections used for valuation were aggressive and did not adequately account for the impact of the COVID-19 pandemic on the hospitality sector.
Therefore, the assessing officer rejected the discounted cash flow (DCF) valuation adopted by OYO and taxed ₹3,737.99 crore as excess share premium under Section 56(2)(viib) of the Income Tax Act, popularly known as the angel tax provision.
A further ₹147.52 crore was added in relation to conversion of CCPS into equity shares, taking the total addition to ₹3,885.51 crore.
The Commissioner of Income Tax (Appeals) upheld the addition while agreeing with the assessing officer that there were discrepancies in the valuation process.
Before the ITAT, OYO argued that Section 56(2)(viib) is an anti-abuse provision meant to curb circulation of unaccounted money and could not be applied to a capital infusion by a holding company into its subsidiary.
It also submitted that the DCF method was specifically permitted under Rule 11UA and could not be replaced by the tax department with the net asset value method.
The tribunal accepted OYO’s arguments. It noted that the transaction was between a parent company and subsidiary and that the reduction of Oravel Stays’ holding from 100 percent to 99.6 percent arose only because of the demerger scheme.
The ITAT also held that downstream investment of foreign funds, made in compliance with FEMA regulations, could not be treated as unaccounted money.
However, it remanded OYO’s challenge to a ₹9.21 crore management fee addition to the assessing officer for fresh verification.
Senior Advocate Ajay Vohra along with advocates Manuj Sabharwal, Devvrat Tiwari and Manish Kumar appeared for OYO.
Commissioner of Income Tax (Departmental Representative) Mahesh Kumar appeared for the tax department.
[Read Judgment]