Delhi HC stays Rs 1,140 crore tax demand against Oyo
Jul 11, 2025
Synopsis
The demand was raised under Section 56(2)(viib) of the Income Tax Act on account of the addition to the income after the assessee had issued compulsorily convertible preference shares to its holding company Oravel Stays. This investment by Oravel, according to the department, into its Indian subsidiary was an income, thus taxable. However, Oyo's stand is that the funds injected by Oravel into its subsidiary were capital in nature, not income, and thus should not attract tax under the angel tax provisions.
In a big relief to OYO Hotels & Homes, the Delhi High Court has stayed the recovery of tax demand of Rs 1,140 crore raised under provisions of the so-called angel tax for the assessment year 2021-22 (Apr-Mar).
The demand was raised under Section 56(2)(viib) of the Income Tax Act on account of the addition to the income after the assessee had issued compulsorily convertible preference shares to its holding company Oravel Stays. This investment by Oravel, according to the department, into its Indian subsidiary was an income, thus taxable.
However, Oyo's stand is that the funds injected by Oravel into its subsidiary were capital in nature, not income, and thus should not attract tax under the angel tax provisions.
A Division Bench comprising Vibhu Bakhru and Tejas Karia stayed the recovery of the tax demand after OYO challenged the "inaction" of the department in extending the stay on recovery of demand amounting to Rs. 1139,93,05,320 pursuant to a high-pitched assessment.
Oyo told the court that as per the December 2022 assessment order, the National Faceless Assessment Centre had assessed income of Oyo at around Rs 3142 crore as against the returned loss of over Rs 859 crore after making disallowances/additions of over Rs 4001 crore which had resulted into a huge and illegal tax demand of around Rs 1140 crore as against nil tax liability and tax refund claim of little over Rs three crore as per return of income.
Senior counsel Ajay Vohra and counsel Manuj Sabharwal, appearing for OYO, argued that the Principal Commissioner of Income-tax had itself in February last year granted the stay of the entire demand and the same was extended from time to time. Since the date of grant of stay of demand, no unfavourable event had occurred till date to occasion the vacation of stay or for further denial or withholding of extension of stay of demand, they contended.
"...denial in granting stay on recovery of demand is completely contrary to CBDT Instruction No. 95 of August 21, 1969 on high pitched assessments. In the instant case, the assessment is unreasonably high pitched and excessive as income of the petitioner (Oyo) has been assessed at Rs 3,142 crores (approx.) leading to a tax demand of Rs 1,140 crores (approx.) as against returned loss of Rs. 859 crore," Sabharwal stated in the petition filed on behalf of Oyo.
The National Company Law Tribunal had approved a scheme of demerger between Oravel Stays and Oyo Hotels in 2019.
Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm said that “While the Finance Act, 2024 has completely abolished the angel tax provision under Section 56(2)(viib), legacy cases continue to be litigated at various forums. The quantum of tax demand in such cases is often substantial, placing considerable financial strain on companies asked to pay upfront or secure stay orders. This stay order is thus a significant relief for OYO, and also sends a broader message on the judicial sensitivity toward the hardships faced by startups and growth-stage companies as a result of aggressive valuation-related tax interpretations.”
[The Economic Times]
