OYO Hotels and Homes Pvt. Ltd. vs DCIT (ITAT Delhi): ₹3,885 Crore Share Premium Addition Deleted — Section 56(2)(viib) Not Applicable to Holding-Subsidiary Capital Infusion

Background and Context

The Delhi Income Tax Appellate Tribunal recently delivered a landmark ruling in the case of OYO Hotels and Homes Private Limited vs. DCIT (ITAT Delhi) concerning Assessment Year 2021-22, involving one of the largest additions ever made under Section 56(2)(viib) of the Income Tax Act, 1961. The Tribunal was called upon to adjudicate cross-appeals filed by both the assessee and the Revenue against the order of the Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, dated 10.09.2025.

At the heart of the dispute was a massive addition of ₹3,885.52 crore made by the Assessing Officer on account of share premium received by the assessee on issuance of Compulsorily Convertible Preference Shares (CCPS) to its holding company, Oravel Stays Limited (OSL). The ruling has far-reaching implications for corporate restructuring transactions, startup valuations, and the boundaries of Section 56(2)(viib) in the context of intra-group capital infusions.

Corporate Structure and Transaction Background

OYO Hotels and Homes Private Limited is primarily engaged in marketing, managing, and operating hotels, long-stay and short-stay homes, guest houses, and allied accommodation services. The assessee also provides technical know-how, operational training, and management services to hotels and lodging establishments.

Pursuant to a scheme of arrangement demerging the India hotel business from OSL into the assessee company, approved by the NCLT, Gujarat Bench vide order dated 26.09.2019, shares of the assessee were allotted to shareholders of OSL on a 1:1 basis, without any cash consideration. Subsequently, the assessee made a fresh issue of CCPS to its holding company, OSL, in two tranches:

The Fair Market Value (FMV) for both tranches was supported by valuation reports — one from M/s TIPSONS Consultancy Services Pvt. Ltd., a SEBI-registered Category I Merchant Banker, and another from a Chartered Accountant registered as a Registered Valuer — both adopting the Discounted Cash Flow (DCF) methodology under Rule 11UA of the Income-tax Rules, 1962.

Assessing Officer's Action and Findings

Rejection of DCF Valuation

The Assessing Officer conducted detailed scrutiny of the valuation reports and identified the following alleged deficiencies:

• The projections used were excessively aggressive, with revenue growth rates of 41%, 60%, 60%, and 45% for the April 2020 valuation, and 77%, 36%, 24%, 23%, and 19% for the November 2020 valuation
• The valuation for the April 2020 tranche did not factor in the COVID-19 pandemic despite the share subscription agreement having been signed on 16.04.2020, by which time the global impact of COVID-19 on the hospitality and tourism sector was already well known
• The assessee had negative net worth — (-) ₹3,66,630.36 million as on 31.03.2020 and (-) ₹3,765.75 million as on 31.03.2021 — and had been incurring continuous losses from FY 2018-19 to FY 2021-22
• The assessee's balance sheets used for valuation purposes did not correspond to the actual dates of share issuance
• Projections relied upon unaudited management-certified financials rather than audited statements

On these grounds, the Assessing Officer rejected the DCF valuation, substituted the Net Asset Value (NAV) method under Rule 11UA(2)(a), and concluded that the shares had negligible or negative value. The entire share premium of ₹3,737.99 crore was taxed under Section 56(2)(viib) as income from other sources.

Additional Taxability on CCPS Conversion

During the year, 1,63,91,430 CCPS carrying a face value of ₹100 each were converted into equity shares of face value ₹10 each. The difference of ₹90 per share, aggregating ₹147.52 crore, was transferred to the securities premium account. The Assessing Officer held that this differential amount also constituted taxable share premium under Section 56(2)(viib), making the total addition ₹3,885.51 crore.

Note: Penalty proceedings under Section 270A of the Act were also initiated by the Assessing Officer, alleging under-reporting of income constituting misreporting under Section 270A(9).

CIT(A) Order — Upholding the Addition

The NFAC, Delhi upheld the Assessing Officer's conclusions, finding merit in the detailed technical analysis of the valuation discrepancies. The CIT(A) observed that: