Delhi High Court Stays ₹1,140 Cr Angel Tax Demand Against OYO in Major Relief
In a significant legal relief for hospitality major OYO, the Delhi High Court has reportedly stayed the recovery of a substantial tax demand amounting to nearly ₹1,140 crore. The demand was raised by the Income Tax Department under the controversial angel tax provisions, targeting the assessment year 2021–22.
The Tax Dispute: What Happened?
The tax notice was issued after OYO Hotels & Homes, a subsidiary of Oravel Stays, issued compulsorily convertible preference shares (CCPS) to its parent company. The Income Tax Department interpreted this capital infusion as income, stating that the issuance of shares at a premium should be taxable under Section 56(2)(viib) of the Income Tax Act—commonly referred to as the “angel tax” provision.
However, OYO strongly contested this interpretation. The company argued that the funds received were capital in nature and not income, and therefore should not fall under the purview of angel tax. OYO emphasized that these funds were invested by its holding company, Oravel Stays, and the issuance of CCPS was a standard capital restructuring exercise, not a taxable income event.
Legal Context: Demerger and Corporate Structure
Adding complexity to the case, the National Company Law Tribunal (NCLT) had previously approved a scheme of demerger between Oravel Stays and OYO Hotels & Homes back in 2019. This corporate reorganization had effectively separated OYO’s businesses under two different entities for strategic and operational clarity.
Given this approved demerger and the nature of the transaction, OYO argued that the investment could not be classified as taxable income. The company’s defense hinges on the fact that the CCPS issuance was made to an existing shareholder as part of a business structuring move, not a transaction involving new investors or premium capital gains.
High Court Steps In
Taking cognizance of OYO’s arguments, the Delhi High Court has now stayed the tax department’s recovery actions until further orders. While this doesn’t mean the case has been resolved, it offers temporary relief to OYO by halting coercive recovery measures.
This stay order gives OYO time to contest the tax department’s claims and make its case in detail, possibly setting a precedent for how angel tax provisions should be interpreted in cases involving corporate restructuring and intra-group investments.
Broader Implications for Startups
The case is being closely watched by India’s startup ecosystem. Angel tax has long been a contentious issue, with many startups facing scrutiny over valuation premiums and capital infusions. OYO’s successful stay could pave the way for more clarity in how such investments are treated under Indian tax law, especially in light of changes to the angel tax regime in recent years.
As the case progresses, both investors and startups will be watching closely to see whether the judiciary sets a precedent that protects genuine capital infusions from being misclassified as income.
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