Delhi High Court Stays Rs 1,140 Crore Angel Tax Demand On OYO

Delhi High Court Stays Rs 1,140 Crore Angel Tax Demand On OYO

The Delhi High Court has granted major relief to OYO Hotels & Homes and its parent company, Oravel Stays Pvt. Ltd., by staying a significant Rs 1,140 crore tax demand raised under the controversial “angel tax” provision. The stay was granted in response to OYO’s petition challenging the validity of the demand raised by the Income Tax Department for the assessment year 2020–21.

OYO Hotels & Homes, a global hospitality brand founded in India, is known for offering affordable and mid-range accommodations through a technology-driven platform. Operated by Oravel Stays Pvt. Ltd., OYO partners with independently owned hotels and homes, enabling them to deliver consistent quality through standardized amenities, dynamic pricing, and seamless digital booking solutions.

The “angel tax” provision refers to Section 56(2)(viib) of the Income Tax Act, introduced in 2012. It taxes capital raised by unlisted companies—typically startups—through the issue of shares if the share price exceeds the fair market value of the company. The excess amount received over FMV is treated as “income from other sources” and taxed accordingly.

In OYO’s case, the dispute revolves around this provision, which the department invoked to tax investments made by Oravel into its Indian subsidiary. The tax authorities deemed the excess over fair market value as taxable income, triggering the large demand now under judicial scrutiny. OYO has consistently argued that the funds received were capital receipts and not taxable income, rendering the angel tax provision inapplicable.

The National Faceless Assessment Centre earlier assessed OYO’s income at around Rs 3,142 crore, against the company’s declared loss of Rs 859 crore. This huge difference resulted in the Rs 1,140 crore demand, which OYO has called “high-pitched and excessive.” Senior counsel for OYO pointed out that the stay granted by the Principal Commissioner of Income Tax had been extended multiple times without any adverse findings. They argued that the refusal to further extend the stay was arbitrary and contrary to the CBDT’s own guidelines for high-pitched assessments.

In May 2023, the Delhi High Court had directed the Commissioner of Income Tax to grant a personal hearing on OYO’s stay application. However, with no decision forthcoming, OYO returned to court seeking complete protection from any recovery until its appeal was decided. A Division Bench comprising Justices Vibhu Bakhru and Tejas Karia agreed with OYO’s plea and ordered that recovery proceedings be stayed. The court further directed that the Commissioner of Income Tax (Appeals) must provide a personal hearing and decide the matter within eight weeks. If the decision goes against OYO, the demand cannot be enforced for two additional weeks, giving the company time to appeal.

Angel Tax Context: Learnings from Pr. CIT v. NRA Iron & Steel (P) Ltd.

In a landmark ruling, the Supreme Court in Pr. CIT v. NRA Iron & Steel (P) Ltd. held that companies must prove the identity, creditworthiness, and genuineness of share capital receipts, even if routed through official banking channels. The Court stressed that mere documentation is not enough: if investors are untraceable or lack the capacity to invest, Section 68 applies and the funds can be taxed as unexplained income. This tough stance shifts significant responsibility onto businesses to verify investor details—sparking concerns that firms are being turned into de facto tax investigators, which critics describe as a “devil tax” that goes far beyond the original intent of the angel tax regime.

Angel Tax: Recent Judicial Developments

Angel Tax aims to curb money laundering via inflated share premiums. In IA Hydro Energy, the Himachal Pradesh High Court ruled that loan-to-equity conversions do not attract angel tax. Likewise, the Delhi Tribunal in Solitaire BTN Solar held that issuing shares to a holding company does not trigger angel tax since no undue benefit is derived. These decisions underscore that valuation methods like the DCF method, when properly adopted, must be respected. However, critics warn that this effectively deputizes companies as tax enforcers, blurring the line between legitimate scrutiny and excessive compliance burden.

Abolition of Angel Tax: A Major Relief for Startups

Introduced in 2012, India’s angel tax provision, which taxed share premiums exceeding fair market value on the assumption of unaccounted money, long posed hurdles for genuine startups. Despite repeated exemptions, it continued to deter investment, especially from foreign investors. The Union Budget 2024–25 marked a landmark shift by effectively abolishing the angel tax for DPIIT-recognized startups receiving eligible domestic and foreign investments, aligning India with global best practices. This long-awaited move is expected to boost innovation, ease of doing business, and attract higher capital inflows—fostering entrepreneurship and job creation.

Akansha Rathi and Associates (ARACS), Navi Mumbai, continues to support startups and businesses with strategic legal and tax advisory as the regulatory landscape evolves.