Archive for category: Valuations

– Yuttika Dalmia | finserv@vinodkothari.com

Section 56(2)(viib) of the Income-tax Act, 1961, popularly known as the “Angel Tax” provision, was introduced to prevent the routing of unaccounted money through the issue of shares at a high premium. In an important ruling discussed below, the Delhi ITAT held that this anti-abuse provision should be applied only to transactions that fall within its intended purpose and should not be mechanically invoked in genuine transactions between group companies.

Facts of the case

• OYO issued CCPS to its holding company Oravel Stays Ltd. following a court-approved demerger of its India hotel business.
• Oravel’s holding reduced from 100% to 99.6% solely due to the demerger — parent-subsidiary relationship maintained throughout.
• Shares issued at substantial premium based on DCF valuation report.
• Capital infused was FEMA-compliant downstream foreign investment.
• AO alleged shares were issued in excess of FMV and made an addition of ₹3,885.52 crore under Section 56(2)(viib).

Issues Before the Tribunal

• Whether Section 56(2)(viib) applies to shares issued by a subsidiary to its holding company.
• Whether AO can reject DCF valuation and substitute NAV method.
• Whether premium on conversion of CCPS into equity is taxable under Section 56(2)(viib).

AO’s Findings

• Rejected DCF valuation citing negative net worth, losses and aggressive COVID-era projections.
• Treated excess consideration over FMV as taxable income under Section 56(2)(viib).

ITAT’s Findings

• Section 56(2)(viib) being an anti-abuse provision cannot extend to bona fide holding-subsidiary capital infusions absent any money laundering concerns.
• AO acted beyond jurisdiction by rejecting merchant banker’s DCF report — tax authorities lack expertise to redo such valuations.
• FEMA-compliant downstream investment cannot be treated as unaccounted money — foundational assumption of Section 56(2)(viib) fails.

Key Takeaways

• Section 56(2)(viib) must be interpreted purposively — it targets unaccounted money, not genuine intra-group restructurings.
• AO cannot disregard a registered valuer/merchant banker report without strong and cogent reasons.
• FEMA compliance creates a strong presumption of genuineness against Angel Tax application.
• Entire addition of ₹3,885.52 crore deleted by ITAT.

Note: Section 56(2)(viib) of the Income-tax Act, 1961 has been omitted with effect from 1 April 2025 and accordingly is no longer applicable from Assessment Year 2026–27 onwards.

Link to case law: Oyo Hotels And Homes Private … vs Deputy Commissioner Of Income Tax, … on 4 June, 2026