Tribunal rules tax authorities cannot revalue shares when valuation done by registered valuers per Rule 11UA; clarifies payments to joint venture for hotel transformation services are revenue expenses, not capital, and disallowance under Section 40A(2)(b) is unwarranted.
In a significant ruling dated June 4, 2026, the Income Tax Appellate Tribunal (ITAT), Delhi Bench 'G', adjudicated the appeals filed by OYO Hotels and Homes Private Limited and the Revenue concerning contentious issues of share valuation and management fee payments for Assessment Year 2021-22.
The case revolved primarily around the taxation of share premium amounting to approximately INR 3,885 crore received by OYO on issuance of Compulsory Convertible Preference Shares (CCPS) to its holding company, Oravel Stays Limited (OSL). The tax authorities invoked Section 56(2)(viib) of the Income Tax Act, 1961, contending that the excess consideration over the fair market value (FMV) of shares should be treated as income and taxed accordingly.
OYO contended that the issuance was to its holding company and existing shareholders post a scheme of arrangement sanctioned by the National Company Law Tribunal (NCLT), Gujarat, and therefore Section 56(2)(viib) was inapplicable. The company had obtained valuation reports for the CCPS from registered valuers and merchant bankers employing the Discounted Cash Flow (DCF) method in compliance with Rule 11UA(1)(c)(c) of the Income Tax Rules, 1962.
The Assessing Officer (AO) disagreed, observing that OYO was incurring continuous losses and its net worth was negative as on valuation dates. The AO found the valuation unrealistic, primarily due to overly aggressive growth projections that did not factor in the COVID-19 pandemic impact. The AO further rejected the DCF valuation reports as unreliable, substituting them with the Net Asset Value (NAV) method and making additions on account of alleged excess share premium. The AO also levied penalties for underreporting.
On appeal, the Commissioner of Income Tax (Appeals) upheld the AO’s findings, noting discrepancies in valuation inputs, including the use of unaudited balance sheets and ignoring the pandemic's effect. The CIT(A) stressed that the valuation was a technical exercise, but the projections lacked credibility and were not satisfactorily substantiated by the assessee.
Before the ITAT, OYO reiterated that Section 56(2)(viib) is an anti-abuse provision meant to curb unaccounted money circulation and should not apply to intra-group share issuances, especially when existing shareholders subscribe in proportion to their holdings and valuation is done by RBI-approved registered valuers. OYO submitted that once the DCF valuation method is chosen and reports obtained from prescribed experts, tax authorities have no jurisdiction to substitute it with another method such as NAV. They also argued that aggressive projections are permissible as valuation is a forward-looking exercise and cannot be invalidated based on hindsight. OYO further claimed that the share premium addition on conversion of CCPS to equity shares during the year was unjustified.
The Revenue countered that no exemption exists in the Act for inter-company transactions under Section 56(2)(viib). The AO and CIT(A) were correct in rejecting the DCF valuation based on aggressive and unsupported projections, failure to consider the pandemic impact, and use of unaudited financials. The Revenue also submitted that the shares were not 100% held by OSL post-demerger, thus the exemption precedents did not apply.
The ITAT observed that the shares were issued to existing shareholders and holding company in compliance with a NCLT-approved scheme and the valuation reports were obtained from registered valuers as per Rule 11UA of the Income Tax Rules. The Tribunal emphasized that the tax authorities cannot review or substitute the valuation method chosen by the assessee. The Tribunal relied on precedents from the Delhi High Court and Supreme Court affirming that valuation of shares is a complex technical exercise best left to experts and that once the prescribed method is followed, tax authorities cannot arbitrarily reject the valuation report.
Regarding management fees paid by OYO to Mypreferred Transformation & Hospitality Pvt. Ltd. (MTH), a joint venture between OSL and Softbank, the AO disallowed excess interest payments (above 9%) under Section 40A(2)(b), treating the payments as interest on loans. OYO submitted that these payments were for transformation and advisory services, including capital expenditure incurred by MTH on properties owned by third parties, and thus were revenue expenditure for services rendered, not interest or capital expenditure.
The ITAT upheld the CIT(A)'s findings that the payments represented service charges for business support and transformation services and did not result in acquisition of capital assets by OYO. The Tribunal ruled that the payments were revenue expenditure deductible under Section 37 and that Section 40A(2)(b) disallowance was inapplicable as the payments were not interest. The Tribunal also noted that the capital expenditure benefits accrued to hotel owners, not OYO.
Consequently, the ITAT partly allowed OYO's appeal by deleting the additions under Section 56(2)(viib) relating to share premium and conversion of CCPS, while remanding the valuation issue for fresh determination based on DCF method with due opportunity to the assessee. The Tribunal dismissed the Revenue's appeal on disallowance of management fees.
This ruling underscores the sanctity of expert valuation reports under Rule 11UA and limits the tax authorities' power to challenge valuation methods chosen by the assessee. It also clarifies the tax treatment of payments to joint ventures for transformation services as revenue expenditure rather than capital or interest payments.
Bottom line:-
Income Tax Act, 1961 - Section 56(2)(viib) - Tax authorities cannot review share valuation performed by registered valuers or merchant bankers as per Rule 11UA of the Income Tax Rules. Additions made under Section 56(2)(viib) disallowed when shares are issued to existing shareholders post-reorganization in compliance with statutory rules and approved by authorities.
Statutory provision(s):
Income Tax Act, 1961 Section 56(2)(viib), Section 40A(2)(b), Section 37, Rule 11UA(1)(c)(c), Rule 11UA(2)(b) of the Income Tax Rules, 1962
OYO Hotels and Homes Private Limited v. DCIT, (ITAT)(Delhi Bench 'G') : Law Finder Doc id # 2916363
