OYO Share Premium From FOCC Investment Not Taxable Under S.56(2)(viib) Income Tax Act: ITAT Delhi

The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 4 June held that Section 56(2)(viib) of the Income Tax Act cannot be invoked to tax share premium received through a Foreign Owned and Controlled Company (FOCC) where the investment complies with India's foreign investment regulations, as such transactions cannot be treated as routing unaccounted money.

Accountant Member S. Rifaur Rahman and Judicial Member Vimal Kumar allowed the appeal filed by OYO Hotels and Homes Private Limited and deleted the addition made under Section 56(2)(viib) for Assessment Year 2021-22, while deciding cross appeals arising from the assessment. The Bench held:

“Another important aspect in this case is, the investments were made by the foreign owned and controlled company after due compliance with FEMA regulations, the downstream investment enrooting the funds from foreign entity cannot categorized under the unaccounted money.”

OYO issued compulsorily convertible preference shares (CCPS) to its parent company, Oravel Stays Limited (OSL), in two tranches during the relevant assessment year, raising nearly Rs. 3,902 crore through share capital and share premium.

The Assessing Officer treated about Rs. 3,885 crore of the share premium as taxable income under Section 56(2)(viib), holding that OYO's discounted cash flow (DCF) valuation reports relied on unrealistic projections that artificially inflated the company's value. The Commissioner of Income Tax (Appeals) upheld the addition.

Before the Tribunal, OYO contended that OSL, a Foreign Owned and Controlled Company, made the investment through a downstream investment structure in compliance with the Foreign Exchange Management Act (FEMA) and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. It submitted that such investments are subject to regulatory scrutiny, including compliance with sectoral caps, entry routes and pricing norms governing foreign investment.

The Tribunal accepted the contention and held that the investment originated from a foreign entity through a FEMA-compliant route. It observed that such funds could not be equated with unaccounted money, which Section 56(2)(viib) seeks to curb.

It further observed that Parliament introduced Section 56(2)(viib) through the Finance Act, 2012 as an anti-abuse measure to prevent the laundering of unaccounted money through inflated share premiums. It held that the provision was not intended to cover genuine capital infusions by a parent company into its subsidiary where the investment originated from a foreign entity and complied with the applicable FEMA framework.

Accordingly, the ITAT deleted the addition under Section 56(2)(viib), holding that the provision did not apply to the facts of the case.