Delhi HC Stays INR 1,140 Cr Angel Tax Demand Against OYO

In a major reprieve for OYO, the Delhi High Court (HC) has reportedly stayed the recovery of tax demand worth nearly INR 1,140 Cr from the hospitality giant under the erstwhile angel tax regime. 

As per Economic Times, the demand notice, which pertained to assessment year 2021-22, was issued after OYO Hotels & Homes issued compulsorily convertible preference shares (CCPS) to its holding company Oravel Stays. 

It is pertinent to note that the National Company Law Tribunal (NCLT) approved a scheme of demerger between Oravel Stays and OYO Hotels & Homes in 2019. 

The Income Tax (I-T) department argued that Oravel’s investment into OYO Hotels & Homes in lieu of the shares was an income, and was taxable. However, OYO contested the claim and contended that the infused funds were “capital” in nature and not income. Thus, the hospitality major claimed that this “capital” should not attract tax under the angel tax provisions. 

During the hearing, OYO told the division bench of the HC that the National Faceless Assessment Centre, as per a December 2022 order, had assessed its income at around INR 3,142 Cr while the company clocked a “returned loss” of over INR 859 Cr after making “disallowances/additions” of over INR 4,001 Cr. 

The company said that despite the loss, it received a huge and illegal tax demand of around INR 1,140 Cr while it had nil tax liability and tax refund claim of little over INR 3 Cr as per its return of income. 

Appearing for OYO, senior counsel Ajay Vohra and Manuj Sabharwal, argued that the principal commissioner of income tax had, in February last year itself, granted the stay on the entire demand, and the same was extended from time to time. 

The advocates further argued that no unfavourable event had occurred since the grant of stay to “occasion” the vacation of stay or for denial or withholding of extension of the stay. They further contended that this denial in granting stay was averse to existing rules.

“… 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 INR 3,142 Cr (nearly) leading to a tax demand of INR 1,140 Cr (approximately) as against returned loss of INR 859 Cr,” Sabharwal stated in the petition filed on behalf of OYO. 

After hearing both sides, the division bench, comprising Justices Vibhu Bakhru and Tejas Karia, stayed the tax demand. 

The erstwhile angel tax, governed primarily by Section 56(2)(viib) and Section 68 of the Income Tax Act, deemed investments in startups above fair market value as “income from other sources”, making them liable for taxation at corporate tax rates. The dreaded tax had also mandated a tax rate of up to 78% for misuse and distribution of undocumented funds. The angel tax was abolished last year. 

However, there still appears no clarity on whether existing angel tax notices against companies that raised capital in previous years would stand. In this regard, Mohandas Pai, former CFO of Infosys and partner at Aarin Capital, last year called for quashing all the pending cases under the annulled tax regime.

That said, while the temporary stay offers some relief to OYO, any adverse order could put considerable financial strain on the hospitality major, which only tasted profitability in FY24.

OYO founder and CEO Ritesh Agarwal earlier this year told employees during a townhall meeting that the company’s net profit jumped 172% to INR 623 Cr in the fiscal year 2024-25 (FY25) from INR 229 Cr in the previous fiscal year. OYO’s top line grew 20% to INR 6,463 Cr from INR 5,388.7 Cr in FY24.