Oyo Hotels & Homes Pvt. Ltd vs. Pr.CIT-7
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has set aside a revisionary order passed under Section 263 of the Income Tax Act, 1961, holding that the provisions of Section 56(2)(viib) do not apply to the issue of shares by a wholly-owned subsidiary to its holding company.
Background
For AY 2018–19, the assessee-company, a wholly-owned subsidiary, issued 33,33,333 Series AI Compulsorily Convertible Preference Shares (CCPS) to its holding company at ₹150 per share (including a premium of ₹140), aggregating to ₹49.99 crore.
In revision proceedings, the Principal Commissioner of Income Tax (Pr. CIT) held that the Fair Market Value (FMV) of the CCPS, determined under Rule 11U, was only ₹33.55 per share. The Pr. CIT opined that the excess premium was taxable under Section 56(2)(viib) and that the Assessing Officer (AO) failed to make proper inquiries, rendering the original assessment order both erroneous and prejudicial to the interests of the Revenue.
Assessee’s Arguments
- The transaction was between a wholly-owned subsidiary and its holding company, which does not attract Section 56(2)(viib) as per various judicial precedents.
- The AO had examined the valuation during assessment and accepted the Discounted Cash Flow (DCF) method, backed by a report from a Category-I Merchant Banker.
- The Pr. CIT’s application of the Net Asset Value (NAV) method under Rule 11UA(2)(a) was incorrect because the assessee had validly opted for the DCF method.
- As both conditions for invoking Section 263 — “erroneous” and “prejudicial” — were not satisfied, the revision lacked jurisdiction.
Tribunal’s Observations
The ITAT referred to the Delhi High Court ruling in FIS Payment Solutions & Services India Pvt. Ltd. (2024) and coordinate bench decisions in cases such as Kissandhan Agri Financial Services (P.) Ltd., Dhruv Milkose Pvt. Ltd., and K.V. Global Pvt. Ltd., which consistently held that:
Section 56(2)(viib) is intended to curb the inflow of unaccounted money through unjustified share premiums, and does not apply to genuine transactions between a holding company and its wholly-owned subsidiary where no benefit arises.
In this case, the transaction was purely internal to the corporate group, with no tax evasion motive, and the AO had conducted due inquiry.
Decision
- The assessment order could not be considered “erroneous” merely because the Pr. CIT preferred a different valuation method.
- Since the basic jurisdictional requirements of Section 263 were not satisfied, the revisionary order was quashed.
Outcome: Appeal allowed in favour of the assessee.
Key Takeaways
- Section 56(2)(viib) should not be mechanically invoked in transactions between a wholly-owned subsidiary and its holding company.
- Jurisdiction under Section 263 requires both “error” and “prejudice” to be established; difference of opinion on valuation methodology is insufficient.
- Valid exercise of the DCF method, supported by a Merchant Banker’s report, cannot be disregarded without strong grounds.
Case Citation: ITA No. 2611/Del/2024, AY 2018–19, order dated 27.02.2025, ITAT Delhi Bench “E”