TaxTMI 
TaxTMI 
2026 (6) TMI 370
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....he assessee's has raised the following grounds of appeal :- "1. The Hon'ble National Faceless Appeal Centre ['CIT (A)'J has erred on facts and in law by upholding the order passed by the National Faceless Assessment Centre ('Ld. AO') to the extent adjustments made therein and upheld/ confirmed by the Ld. CIT (A). 2. The Hon'ble CIT(A) has erred on facts and in law by confirming the addition made by the Ld. AO, on account of share premium amounting to INR 3885,51,75,255, received by the Appellant on issuance of Compulsory Convertible Preference Shares ('CCPS') to its holding company [Oravel Stays Limited ('OSL')], on the basis that such share premium is taxable as per section 56(2)(viib) of the Income tax Act, 1961 ('the Act'). 2.1 The Hon'ble CIT(A) has erred on facts and in law by disregarding the Appellant's submission that the present facts which involve issuance of CCPS by the Appellant to its holding company i.e. OSL, do not attract the provisions of section 56(2)(viib) of the Act. 2.2 The Hon'ble CIT(A) has grossly erred on facts and in law by disregarding the Appellant's submi....
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.... prove the genuineness of the transactions and furnish relevant evidence to prove the creditworthiness. In response, assessee submitted that it has entered into a scheme of arrangement with its parent company i.e. Oravel Stays Limited (OSL) where India hotel business was demerged from OSL India, the assessee company. The above-said scheme was approved by the NCLT, Gujarat Bench vide order dated 26.09.2019. As per the terms of the scheme, shareholders of OSL were allotted shares of OHHPL for every share held by them in OSL. Therefore, no consideration in cash towards share application was received by the assessee from the shareholders of OSL. Based on that, 1 : 1 share is issued. Further, under the scheme of amalgamation, assessee has made fresh issue of compulsory convertible preference shares to its parent company, OSL as under :- S.No. Name applicant Date of transaction No. of shares allotted Issue price Issue value Share premium per share Share premium value Total consideration 1 Oravel Stays Limited Apr-20 990,540 10.00 9905400.00 2,316.00 2,294,090,640.00 2,303,996.040 2 Oravel Stays Limited Nov-20 16391,430 ....
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....Assessing Officer proceeded to make the addition of Rs.1,76,04,108 which was added back to the detailed income of the assessee with the following observations :- "18. Based on various judicial precedents, therefore, it may be concluded that while the assessee has the right to choose DCF valuation, they should be able to substantiate it with reasonable data since the Assessing officer, does have the power to question the correctness and reliability of such valuation. Thus, the valuation adopted by the assessee is liable to be not accepted/rejected, not because of the choice of method but because the parameters adopted by the assessee company had not been verified and are unrealistically adopted with a motive to achieve a predetermined valuation of shares. 18.1 Attention is also invited to Explanation to sec. 56(2)(viib) of the Act which reads as under: Explanation.-For the purposes of this clause,- (a) the fair market value of the shares shall be the value- (i) as may be determined in accordance with such method as may be prescribed16; or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, ba....
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....remium was true 'income' which could be taxed under Section 56 of the I.T. Act. 18.4 During the year ended 31.03.2022, the company has converted 1,63.91,430 nos. of 0.01% G Series CCPS having the face value of Rs. 100/- each into an equal number of equity shares having the face value of Rs. 10/- each and remaining Rs. 90/- for each share aggregating Rs. 147,52,28,700/- is transferred to securities premium account. This proves the fact that the assessee company has while issuing the Preference shares, intentionally kept the face value for issuance of 'G Series' shares at Rs. 100/-, even though it was clear that the said CCPS will convert into shares and it will be at par, with the face value of Rs. 10/- only and the balance Amount of Rs. 90/- per shares will have to be credited to share premium account. This proves the fact that such a differential amount of Rs. 147,52,28,700/- has the character of 'Share Premium' collected on such CCPS issued, and represents the 'Excess Share Premium' received. Since this amount is included in the DCF valuation determining FMV of shares and is also included in consideration received for the issue of shares exceeding the FMV as refe....
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....e shares on 1:1 basis in the proportion of their investment at book value, i.e. @Rs. 10/- each and/or @Rs. 100/- each (as the case may be). Subsequently, the Parent company made huge investments aggregating Rs. 39,028,994,955/- being the Shares issued at a substantial premium of Rs. 2,316/- and Rs. 2,140/- over and above the issue price. This act has artificially inflated the share valuation of other investors including the earlier investment made by M/s. Oravel Stays P Ltd. The Notes to Balance Sheet also describes, how and when the CCPS issued can be converted into equity. One important point included in such note is that before filing of Red Herring prospectus and entering the Share market and making public issue, these CCPS are to be compulsorily converted into equity shares, which may generate huge profits to investors. It is further fortified by the fact that OYO had filed its draft red herring prospectus (DRHP) for its initial public offering of around Rs. 8,430 crore (USD 1.2 billion) with the market regulator in October'2021. This appears to be the whole gamut of issuing shares at very high premium by the assessee company, even though it has never disclosed operating profi....
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....M/s. Oravel Stays P Ltd. dated 16.04.2020. Subsequently, the Board of the assessee company passed a resolution dated 20.04.2020 and accorded consent for the allotment of 9,90,540 nos. of Series C Compulsorily Convertible Cumulative shares to the allottee. And, on the very same day M/s. Oravel Stays P Ltd. was allotted these shares, upon receipt of the requisite amount. This proves the fact that the valuation should have been made considering the facts & figures reported in the last Balance Sheet dated 31.03.2020. AO has further held that it is grossly misleading and incorrect on the part of the Merchant Banker/assessee Company that knowing the fact that the share subscription agreement was signed on 16.04.2020, they were not aware of the wider repercussions of COVID-19 on the hotel & tourism industry. Under such an event, the assessee company cannot and should not take shelter, that the Projections shared with Merchant Banker were for the pre-COVID period and in absence of the visibility of widespread repercussions of the COVID Pandemic. The appellant's answer in this regard as drafted by the merchant banker was as follows: In the present case, we underst....
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.... rate in perpetuity is highly unlikely and such a performance trajectory is not sustainable. And this is just sufficient to prove the unrealistic assumptions/projections made by the Assessee/Merchant Banker". The appellant has not been able to defend such aggressive projections either during the assessment proceedings or during the appellate proceedings. On this issue the following portion of the assessment order is edifying: 8.9 In a bid to justify the projections of growth rate the assessee company has submitted that the projections for the valuation report dated 31st December 19for the investment made inApril-20 of INR 2.304 million was considering an environment where the company was growing at an accelerated pace. The assessee asserted that the same is evident from the actual financials of the company which demonstrates YoY net margin. (Amount m INR Mn) Year ending Net Margin (Revenue from operation less cost of sales) Growth % 31st March 2017 413.8 31st March 2018 987.5 138.6% 31st March 2019 3,358.2 240.1% 31st March 2020* 22,850.2 580.4% 'post considering the demerger impact between a....
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....d once the pandemic impact subsides. Such an assumption is one-sided. The assessee failed to account for other unforeseen threats viz. reoccurrence of the pandemic. any other calamities etc., which are likely to impact revenues There is no guarantee that once the pandemic is over, everything in the world will go easy and business cycles may not face any adversities from rising inflation, looming threat of recession etc. (Page 60) 6.8.6.3 The AO compared values under Net Asset Value (NAV) method as per Rule 11UA. Found huge gap between DCF valuation adopted by assessee and NAV-based value, concluding DCF was manipulated to inflate share premium. AO held issuance of CCPS is a form of equity and thus covered by section 56(2)(viib). 6.8.6.4 AO then follows up with her own technical analysis of the valuation process, what went wrong and finally his own conclusions regarding the true value of the shares. 6.8.7. After carefully going through the overall arguments of the AO, I find that the AO has successfully demonstrated the discrepancies and procedural mistakes in the valuation process and the AO's arguments in this regard are full of merit and extremely convi....
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....TAT Delhi in the following decisions (referPages 44 to 69 of the Case law compilation). a) DCIT v. Kissandhan Agri Financial Services (P.) Ltd. [2023] 150 taxmann.com 390 b) BLP Vayu (Projects-I) Pvt. Ltd. v. PCIT [2013] 151 taxmann.com 47 c) ACIT v. Dhruv Milkose Pvt. Ltd. I.T.A. No. 8431/DEL/2019 d) ITO v. K V Global Pvt. Ltd. [2024] 160 taxmann.com 234 e) Rugby Regency (P.) Ltd v. ACIT [2024] 160 taxmann.com 1056 f) ITO v. Solitaire BTN Solar (P.) Ltd. [2024] 164 taxmann.com 170 6. The CIT(A) has sought to distinguish the above authorities only on the footing that OSL held 99.6% and not 100% of the assessee post demerger. It is submitted that this distinction brought out by the CIT(A) is specious and wholly insubstantial. 7. It is submitted that similar issue has already been decided favourably by the Hon'ble Delhi ITAT in the case of ITO v. K V Global Pvt. Ltd. (Supra), which deals with a case where the holding company was holding 51% shareholding in its subsidiary (refer para 6 to 7at pages68 and 69 of the case law compilation). The reasoning of the Ld. CIT(A) is clearly in teeth of the decision of the Hon....
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....Furthermore, the downstream investment made by OSL, a foreign owned and controlled company ("FOCC") is in compliance with Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. As per clause 23 of the above Rules, the investment by OSL, an FOCC, into the assessee company will be treated as "Downstream investment", which required the assessee to comply with the entry route, sectoral caps, pricing guidelines and other attendant conditions as applicable for foreign investment. Without prejudice, FMV of shares computed as per DCF method is fully compliant with Rule 11UA(2)(b) of IT Rules 13. Even assuming that CCPS issued are akin to equity shares, Rule 11UA(2) grants a specific option for valuation of unquoted equity shares. In the present case, the DCF method adopted by the assessee is in accordance with option expressly granted as per Rule 11UA(2) of the IT Rules. However, the Ld. AO has grossly erred in disregarding the same on the basis that the valuation report was not reliable and in concluding that NAV is the correct method to be applied. 14. It is a settled proposition that once the taxpayer has opted for DCF method, the learned AO does not ....
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....root of the matter." 16. In that view of the matter, the rejection of the reasoned and scientific valuation report by an expert by the assessing officer on his ipsi dixit is not justified. Management projections used for the purpose of DCF valuation are valid and reasonable; and the learned AO has erred in rejecting the same, on the basis of comparison with the actual performance of the business. 17. The projections considered as part of the valuation for both the share issuances, were based on past growth and therefore the assumptions are duly/ reasonably estimated by the management (as a prudent businessman) considering the assessee's business model and its future potential(refer Pages 429 of the factual paper book in ITA No.: 5718/ DEL/2025). 18. The assessee duly factored in the impact of the Covid-19 in the valuation undertaken for share issue transaction undertaken in November 2020 (refer Pages 418 of the factual paper book in ITA No.: 5718/ DEL/2025). 19. In this context, reference may also be made to the book value and FMV of similarly placed start-up public companies and private companies where it may be observed that the FMV of....
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.... the Hon'ble CIT(A) has rightly confirmed the addition made by the Assessing Officer (AO) on account of share premium received by the appellant on issuance of Compulsory Convertible Preference Shares (CCPS) to M/s Oravel Stays Limited (OSL). It is respectfully submitted that Section 56(2)(viib) of the Income-tax Act, 1961 clearly provides that where a company receives consideration for issuance of shares exceeding the Fair Market Value (FMV) of such shares, the excess amount shall be treated as income in the hands of the company. In the present case, the AO has meticulously analyzed the valuation report submitted by the appellant and found that the consideration received by the appellant far exceeded the FMV as determined independently. The addition, therefore, is in strict accordance with the provisions of law, and the CIT(A) has correctly upheld the AO's action. ■ Ground No. 2.1 - Applicability of S.56(2)(viib) to the issuance of CCPS to the holding Company. The Department submits that the contention of the appellant that issuance of CCPS to its holding company is not covered under section 56(2)(viib) is wholly misconceived. There is no exclusion in the Ac....
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....unaudited Balance Sheet prepared on 31.12.2019 and 30.06.2020, which is complete contravention to the provision to rule 11U(b). (ii) AO Para 8.5, Pg. 51: While making a valuation of FMV of shares as on 31.12.2019. the Valuer in its report dated 09.04.2020. has considered the forecast period of only five years i.e. up to Dec-24. Whereas in the Valuation report dated 19.09.2020, providing valuation as on 30.06.2022, the forecast period is taken at 6.5 years. There is no uniformity in the computation of FMV on both dates of Valuation. (iii) AO Para 8.5, Pg. 54: The Assessee as well as the merchant banker could not furnish any reasons as to why the aggressive revenue growth rate forecast/assumptions are taken into consideration when the Valuation was carried out after the onset of COVID pandemic in the month of April-2020 and the reasoning as to why the "Valuation Date' was considered to be 31.12.2019 (Pre-COVID) period, even though the share subscription agreement itself was signed in the month of April-20. This is just a deliberate attempt by the Assessee company in connivance with the merchant Banker to adopt an aggressive growth rate to artificially jack up th....
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....al figures reported. The very basis for the DCF valuation was itself not substantiated by the Assessee. The Assessee couldn't produce the evidence to substantiate the basis of projections in cash flow and neither could provide reasonable connectivity between those projections in cash flow with the reality evidenced by the material. (vii) AO Para 9.2, Pg.64: The projected figures of revenue as adopted by the Assessee/merchant banker are too much on the higher side which in turn computes the growth rate and directly affects the DCF valuation. Thus, these projections are unrealistic and not reliable. (viii) AO Para 10, Pg. 64-66: The formula adopted by the Merchant Banker in computing the 'Cost of Equity' is erroneous. (ix) AO Para 10.3, Pg. 66: The Assessee company has selectively used the data to calculate the average levered and unlevered beta of comparable companies. It is seen that the beta of unlisted companies in not readily available and the case cited being comparable are also not really comparable in terms of the scale of operations, a business segment in which they operate i.e. Budget/Semi luxury/luxury hotels, Owned/managed Hotel properties, Comm....
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....ing officer does have the power to question the correctness and reliability of such valuation. The parameters adopted by the Assessee company had not been verified and are unrealistically adopted with a motive to achieve a predetermined valuation of shares. The reliance is placed on Hon'ble jurisdictional Delhi High Court's judgment in the case of Agra Portfolio (P.) Ltd. vs. Principal Commissioner of Income-tax, reported in [2024] 161 taxmann.com 303 (Delhi) [Copy Attached] wherein Hon'ble High Court has upheld the rejection of DCF valuation submitted by the Assessee in case the assessing officer is not satisfied about the correctness of the same. The relevant observations of Hon'ble High Court in this regard are reproduced as under - 17. While it would be open for the AO, for reasons so recorded, to doubt or reject a valuation that may be submitted for its consideration, the statute clearly does not appear to empower it to independently evaluate the face value of the unquoted equity shares by adopting a valuation method other than the one chosen by the assessee. It is this aspect which was duly acknowledged by the Bombay High Court in Vodafone. M-Pesa. Ltd. (sup....
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....d to justify the sale consideration actually received. We are of the opinion that Id Assessing Officer has not carried out valuation by an independent valuer and merely chosen a part of the valuation report submitted by the assessee. Therefore, we restore back the issue to the AO for referring the matter to a valuation expert by way of the issue of commission and thereafter, determining the FMV of the undertaking of the food division of the assessee." 19. Proceeding along similar lines, the Hyderabad Bench of the ITAT in Jt. CIT(OSD) v. MLR. Auto Ltd. [IT Appeal No. 115 (Hyd) of 2021, dated 2812- 2023] had held as follows: "17.1. The conjoint reading of Section 56(2)(viib) and Rule HU and 11UA makes it abundantly clear that in case assessee exercised his option for determination of the fair market value of the shares and exercise then such decision of the assessee shall be final and binding on the assessing officer. The option was given by the Act to the assessee either to apply the DCF method or net asset valuation method, this option is not available to the assessing officer. Rule 11UA provides the method of determining the FMV of a property other than the immov....
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.... given to the assessee cannot be withdrawn or taken away by the learned Assessing Officer by adopting different method of valuation i.e., net asset value method. The method of valuation is always the option of the assessee. The learned Assessing Officer is authorised to examine whether assessee has adopted one of the available options properly or not. In the present case, the learned Assessing Officer has thrust upon the assessee, net asset value method rejecting discounted cash flow method for only reason that there is a deviation in the actual figures from the projected figures. It is an established fact that discounted cash flow method is always based on future projections adopting certain parameters such as expected generation of cash flow, the discounted rate of return and east of capital. In hindsight, on availability of the actual figures, if the future projections are not met, it cannot be said that the projections were wrong. To prove that the projections. "'were unreliable, the learned Assessing Officer must examine how the valuation has been done. In a case future cash flow projections do not meet the actual figures, rejection of discounted cash flow method is not pr....
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....set value method gives the same result, where would have been the need to prescribe the two methods in the law. In view of above facts, we do not find any infirmity in the order of the learned Commissioner of Income-tax (Appeals) in deleting the addition of Rs.69,000,000 made by the learned assessing officer u/s 56 (2) (viib) of the act. Accordingly, ground Nos. 3 and 4 of the appeal of the learned Assessing Officer are dismissed. " 21. We deem it apposite to lastly take note of the following pertinent observations as appearing in a decision rendered by the ITAT Bench at Bangalore in Taaq Music (P.) Ltd. v. ITO [2020} SCC OnLine ITAT 9482 : "11. The law provides that, the fair market value may be determined with such method as may be prescribed or the fair market value can be determined to the satisfaction of the Assessing Officer. The provision provides an Assessee two choices of adopting either NAV method or DCF method. If the Assessee determines the fair market value in a method as prescribed the Assessing Officer does not have a choice to dispute the justification. The methods of valuation are prescribed in Rule 11 UA(2) of the Rules. The provisions of Rule 11....
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....w the instant appeal and set aside the order of the ITAT dated 16 May 2018. The Questions of Law as framed, namely, Question A and C are answered in the negative and in favor of the appellant assessee. In light of the answers rendered in respect of the aforenoted two questions, the additional questions which are framed would not merit an independent examination. The matter shall in consequence stand remitted to the AO which shall undertake an exercise of valuation afresh in accordance with the DCF method. 23. We also accord liberty to the AO to determine the FMV of the shares bearing in mind the DCF Method by having the same independently determined by a Valuer appointed for the aforesaid purpose. " In the aforesaid judgment, the Hon'ble High Court held that the valuation of shares under section 56(2)(viib) read with Rule 11UA of the Income-tax Rules, 1962, is essentially a question of fact. The Court further held that the Assessing Officer has jurisdiction to examine the valuation report and underlying assumptions, including financial projections, valuation date, and methodology adopted. The Hon'ble Court emphasized that where the valuation report adopted by the ....
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.... a mechanical balance-sheet formula or exercise i.e., NAV method prescribed under Rule 11UA(2)(a). It is submitted that since DCF is inherently a forward-looking method, there is no requirement or relevance for an audited or unaudited balance sheet as the enterprise value is computed / valuation of shares is done basis the projections of a future date. The submissions of the ld. DR contain the said inherent fallacy and does not factor in the relevancy of the balance sheet (audited or otherwise) for the purpose of DCF valuation. Even otherwise, the valuation was supported by a merchant banker's report and registered valuer's report and is in compliance with Rule 11UA. (ii) There is nothing impermissible in having a different forecast horizon for different valuation dates and the said comparison projected by the Ld. DR in its submission is entirely conjectural and without any basis. The reason is obvious as June 2020 valuation adopted a longer period because COVID had disrupted the business and the management considered that a longer explicit forecast period was needed for stabilization; the June 2020 projections were in fact materially lower and more conservative t....
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....l value, discounting inputs, beta, capex, debt/cash and all variables, and the assessee furnished a detailed response together with the Excel workings and explanations by the merchant banker before the AO. (vii) It is humbly submitted that mere making of a sweeping observation that projections are "too high" is not a legal ground to discard the DCF methodology. It is submitted that projections must be judged from the perspective of the valuation date and commercial expectations then prevailing, not from the armchair or skepticism of the income-tax department. It is also a settled jurisprudence that the Revenue cannot substitute its own view of business prudence for that of management and an independent merchant banker/ registered valuer. The Delhi ITAT in Cinestaan Entertainment (P.) Ltd. v. ITO (2019) 106 taxmann.com 300 (which was upheld by the jurisdictional high court as well), wherein it was held that the commercial expediency has to be seen from the perspective of the businessman. The Tribunal while relying on the Hon'ble Apex Court rulings in the case of SA Builders 288 ITR 1 (SC) and CIT v. Panipat Woollen and General Mills Company Ltd., 103 ITR 66 (SC) he....
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....his Hon'ble Court) held that "if law provides the assessee to get the valuation done from a prescribed expert as per the prescribed method, then the same cannot be rejected because neither the Assessing Officer nor the assessee have been recognized as expert under the law." The Hon'ble Bombay High Court in Cadbury India Ltd. [2014] 49 taxmann.com 52 (Bombay), held as under: "7.1.10 Valuation is not an exact science. Far from it. It is always and only an estimation, a best-judgment assessment. The fact that a particular estimation might not catch an objector's fancy is no ground to discredit it. All valuations proceed on assumptions. To dislodge a valuation, it must be shown that those assumptions are such as could never have been made, and that they are so patently erroneous that the end result itself could not but be wrong, unfair and unreasonable....." The Hon'ble Bombay High Court in the case of SEBI & Ors (2015) ABR 291. Relevant extracts are as below: "48.6 Thirdly, it is a well settled position of law with regard to the valuation that valuation is not an exact science and can never be done with arithmetic precision. The attempt....
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....pporting computations, explanatory replies, and clarifications of merchant banker submitted during the course of assessment proceedings. There is no motive of the assessee to achieve pre-determined values as the valuation is duly supported by valuation reports by independent merchant banker and registered valuers and hence the argument raised by the Ld. DR is devoid of any merit. Without prejudice and independently, the entire issued with regard to DCF / valuation is ultimately academic because the CCPS / shares were issued by the assessee to its holding company. The Hon'ble Delhi ITAT in the assessee's own case held that section 56(2)(viib), being an anti-abuse deeming provision aimed at taxing unjustified premium/unaccounted money, should not be extended to intra-group holdingsubsidiary capital infusions unless there are concerns of money laundering, which do not exist in the facts of the case and such objections have also not taken by the Department or not borne out from the record." 12. Considered the rival submissions and material placed on record. From the above facts on record, we observe that the assessee had issued CCPS after the reorganization of the ....
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....ortfolio P Ltd (supra), the facts are distinguishable. 14. After careful reading of the section 56(2)(viib) of the Act and intention of the legislature, the provision was brought in to curb the circulation of unaccounted money and in the case on hand, the shares were issued to the existing shareholders and also it is fact on record that the company was running in the consistent losses and only way to address such financial situation and bring the existing company out of debt is to introduce fresh and additional capital. That is the reason the parent holding and existing shareholders saw the potential in the company to introduce the fresh capital, they projected the future growth and based on the above projection, the valuation was carried and value of shares were obtained from the RBI approved valuers. It is established and settled position of law that the tax authorities cannot review the valuation of shares which was done on the basis of rule 11UA of the Income Tax Rules. In our view, subsequently the tax authorities cannot change the valuation method adopted by the assessee. Therefore, the tax authorities have gone beyond their jurisdictions in reevaluation of value of each s....
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.... Mn with 15% +- variance. SI. No. Month Transaction during the month (INR in Mn) Quarterly (INR in Mn) 1 April 2020 51.30 177.10 2 May 2020 72.73 3 June 2020 53.07 4 July 2020 36.95 133.64 5 August 2020 34.65 6 September 2020 62.04 7 October 2020 31.32 137.86 8 November 2020 62.37 7 December 2020 44.17 10 January 2021 107.28 125.36 11 February 2021 110.19 12 March 2021 -92.11 Total 573.96 573.96 Therefore, it is humbly submitted, no arbitrary disallowance should be made in this regard in view of the accounting adjustments in the books of account ----. " 18. After considering the above submissions, the AO was not convinced with the submissions that accounting adjustment entered due to incorrect entries posted in the previous months. He observed that assessee failed to provide any evidence in this regard. He further observed that even during video conferencing, the assessee remained silent on the above issue. He observed that the assessee company has nothing to say on this particular issue and is not in possession of the re....
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....sessee stood understated at all. 6. The amount of Rs. 9.21 crores does not represent real income since the same neither accrued nor was received by the assessee. The concept of accrual of income is explained by the Hon'ble Supreme Court in the case of E.D. Sasoon& Co. Ltd. vs CIT : 26 ITR 27 (SC) in the following terms: "Income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti solvendum in futuro. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him." 7. The same principle has been reiterated in the later decision reported as CIT v. Excel Industries: 358 ITR 295(SC)wherein the apex Court laid down three tests to determine as to when income can be said to have accrued....
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.... Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 18. Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialise and its money value is, therefore, not the income of the assessee." 8. The Delhi High Court in the case of Amar Nath Khandelwal vs CIT: 126 ITR 322 (Del HC) held that mere raising of bills which is not acknowledged by the other party would not result in any accrual of income. 9. In that view of the matter, the unilateral raising of claim of management fee on the overseas affiliates amounting to Rs. 9.21 crores, which has neither been acknowledged nor paid by the such entities cannot said to have accrued to the assessee. The withdrawal of the said amoun....
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.... by the assessee is allowed for statistical purpose. 24. In the result, appeal filed by the assessee is partly allowed as indicated above. 25. Now we take up Revenue's appeal being ITA No.7237/Del/2025 wherein Revenue has raised following grounds :- "1. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) NFAC has erred in deleting the addition made by the Assessing Officer on account of payments made to M/s Mypreferred Transformation & Hospitality Pvt. Ltd. (M/s. MTH), which in substance, represent reimbursements for capital expenditure incurred on behalf of the assessee, and not mere revenue expenditure. 2. Whether on the facts and in the circumstances of the case and in law the CIT(A),NFAC has erred in not appreciating the fact that the payments led to tangible improvements and enduring capital benefits in OYO- branded properties, which infers that the expenditure was capital and not revenue in nature. 3. Whether on the facts and in' the circumstances of the case and in law the CIT(A), NFAC has erred on facts and in law to apply the settled legal principle laid down by the Hon'ble Supreme Court in McDowell &....
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....r capital expenditure on designing, renovating and upgrading the look and feel of the Hotels through landscaping, standardisation and fitting of requisite general equipment such" as air conditioners, television sets, furniture, coffee machines, and tablets and security equipment such as CCTV, electronic cards, monitoring systems, etc. * To incur expenses, as may be required from time to time, on major repairs and maintenance for the Hotels. MTH as per the arrangement will make a return of 16% on the cost incurred which will be recovered through the assessee company as monthly EMI over the period of contract or 24 months whichever is less. The assessee company had payables outstanding to MTH under this framework agreements over which MTH is required to earn 16% margin which has been categorized as interest in the financial statements of the assessee company which is not in pursuance of loan transaction but payment under consideration is in pursuance of Master Framework Agreement (MFA) between the parties. Therefore, any comparison with Bank loan rate is not valid and unfitting. Thus, it is humbly submitted that while as per accounting, INR 1,046,220,293/- has been ....
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.... he disallowed the difference as excessive expenditure claimed by the assessee. Accordingly, he proceeded to disallow the amount of Rs.104,62,20,293/-. 29. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and submitted the detailed submissions. For the sake of brevity, it is reproduced below :- - MTH was a joint venture between OSL and SB Topaz (Cayman) Ltd ('Softbank'). The said JV was made for the purpose of providing transformation and related advisory services including incurring capital expenditure on the property to meet OYO standards. In order to provide standardized OYO experience to all customers across properties, an agreement was entered into with MTH for hotel transformation (including the scope/ responsibility in terms of incurring capital expenditure on the properties). A copy of the Master Framework Agreement ('MFA') dated 15 March 2019 entered into between OSL (which included its affiliates) and MTH is enclosed as per Annexure 12. The relevant terms of the MFA are clarified hereunder: MFA Clause reference Relevant provision of the MFA 2.1 With an aim to facilitate the business activities and operations of ea....
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....enance for the Hotels. ■ Selection and purchase of operating supplies and equipment. ■ To supervise and purchase or arrange for the purchase of all inventories, provisions and supplies required for the performance of the MTH Services through inter alia the OYO Bazaar application. 1.1.35 ■ "Transformation Tasks" shall mean the detailed list of renovation, repair, refurbishment works required to be carried out on the relevant Hotel in order to make such Hotel operational, as determined by the Parties in accordance with Clause 3.1; - As may be evidenced from the terms of the MFA, the present arrangement involves rendering of transformation support by MTH to OHHPL, in consideration whereof, OHHPL shall be paying assured return to MTH by way of 16% margin on the cost incurred. - Based on the above, during the financial year relevant to subject AY, the Appellant has claimed deduction amounting to INR 104,62,20,293, in respect of subject business expenditure payable to MTH under the above referred MFA. Our Submission - We wish to submit our arguments on merits of the case as under: A. Subject expenditure is revenue....
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....gered the requirement to capitalize this expenditure in the books of accounts of the Appellant. * In this regard, reliance is placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute & Co Ltd vs CIT [124 ITR 1 (SC)], wherein the following tests were laid down to determine whether the expenditure is capital or revenue in nature: ".......There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be o....
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....ellant company, it is submitted that the same is not in the nature of 'interest' since it has not been incurred in pursuance of any debt/ borrowing but a payment for services availed by the Appellant in pursuance of the MFA between the parties. ■ In this regard, it may be relevant to note that section 2(28A) of the Act defines interest to mean "interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised." Given that the present agreement involves availing of transformation services (as outlined above) and no form of debt or borrowing has been provided by MTH to OHHPL, the subject expenditure should not fall within the meaning of interest. * It is further submitted, that as per settled principle of law, the accounting treatment of an item should not have an impact on the tax treatment of the same. Reliance in this regard is placed on the ruling of Hon'ble Supreme Court in the case of Taparia Tools Ltd. v. JCIT (201....
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....sister concern since the sister concern was also paying tax at higher rate and copies of the assessment orders of the sister concern were taken on record by the Tribunal. " * Further, reliance in this regard can also be placed on the following judicial precedents: - Voltamp Transformers P. Ltd. v. CIT (1981) (Gujrat HC) 129 ITR 102 - Shar-Lee Filtorites Pvt. Ltd. v. ACIT (2008) (Delhi ITAT) TIOL-500- ITAT - DEL - M/s. Swadeshi Internationals v. ACIT (2010) (Bangalore ITAT) ITA 703/2009 - CIT vs. Modi Xerox Limited (All) 344 ITR 411 In the present case, the expenditure incurred by the Appellant company (an entity that has tax losses) has been duly included in the taxable income of the service provider entity (i.e., MTH) and due taxes have been paid on the said amount of INR 104,62,20,293 by MTH (an entity that has profits/ taxable income and which has been paying taxes on its income, including this income from the Appellant). Therefore, it would be evident that in the present facts, there has been no such tax planning or avoidance which is a pre-requisite for applicability of section 40A(2)(b) of the Act. In view of the above, pr....
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....xperience to all customers across properties. For this purpose certain transformation and related advisory services were required that also involved the incurring capital expenditure on those properties listed under OYO that did not meet OYO standards. For this purpose a company called My preferred Hospitality Services Pvt Ltd was created which is a JV between OSL, the parent company of the appellant and SB Topaz (Cayman) Ltd (Softbank). A master framework agreement was signed vide which MTH was to provide these transformation services including making capital expenditure on the hotels/properties listed under OYO brand. After rendering such services MTH was supposed to bill it the appellant on a cost plus mark-up basis. The AO has held the payments made by the appellant to M/s MTH as capital expenditure and therefore not allowable. I find that as a result of the transformation services certain capital expenditure is made which results in renovation, addition of fixtures, capacity expansion, etc. in respect of properties enlisted under OYO brand of the appellant. These properties are not owned by appellant. The tangible changes in the form of capital assets or the rights to....
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....ent is not in respect of servicing of any debt or repayment for any loan but it is quite simply a payment for the service rendered to the appellant by M/s MTH. It is clear that the nomenclature used by the appellant is incorrect but the appellant cannot be penalised for this mistake. Since the payment is not in the nature of interest, therefore, the basis of addition that an excess and unreasonable rate of interest has been paid out, does not survive. The addition is deleted and this ground of appeal is allowed." 31. At the time of hearing, ld. DR of the Revenue brought to our notice page 62 of the paper book which is the marketing and operational consulting agreement and as per the transformation sheet, it has given the details of various modification required by the owner. This is between the owner and MTH. He brought to our notice detailed findings of AO and also brought to our notice page 73 of the impugned order and submitted that the findings of the ld. CIT (A) are completely departure from the detailed findings given by the AO. He objected to the findings of the ld. CIT (A) and submitted that the relief granted by the ld. CIT (A) is towards capital expenditure incurred by....
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..... To incur expenses, as may be required from time to time, on major repairs and maintenance for the Hotels. 7. Selection and purchase of operating supplies and equipment. 8. To supervise and purchase or arrange for the purchase of all inventories, provisions and supplies required for the performance of the MTH Services through inter alia the OYO Bazaar application." 3. For the aforesaid services, MTH was to be paid cost + 16% (as per clause 9.78(ii) of the Shareholders Agreement). 4. During the relevant previous year, the assessee had paid an amount of Rs. 104 crores to MTH for the aforesaid services which was claimed deduction as revenue expenditure. The assessing officer disallowed deduction therefor to the extent of Rs.45,77,21,380 (in excess of 9%) on the ground that such expenditure (debited under the head "interest" in the books of accounts) was excessive having regard to the legitimate needs of the business. Alternatively, the assessing officer held that the expenditure was capital in nature and, therefore, the entire expenditure was, in any case, disallowable. 5. The CIT(A) noted that under the arrangement between the assessee an....
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.... as per which MTH was to provide these transformation services including making capital expenditure on the hotels/properties listed under OYO brand. 34. We perused the Master Framework Agreement dated 19th March 2019 and based on the above framework, the assessee entered into a tripartite agreement with MTH along with the hotel owners to work under common business venture and also within the framework of OYO business model. As per the above framework, there are two business models, these were offered to the hotel owners, i.e., Franchise Model and Operated business model. a. In the franchise model, the assessee itself enters into Hotel MOCA with the hotel owners and give separate indent to the MTH to execute the refurbishment/renovation to the respective hotel. b. In the Operated business model, MTH will directly enter contract with the hotel owners to execute the refurbishment/renovation. c. The task for the MTH would be to execute the transformation task of capital as well as repair expenses to address the design, renovation and upgradation of the look of the hotels through landscaping, standardization and fitting of requisite general equipments etc.,....
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....plication no.222/Del/2026 for extension of the stay. As we have already decided the appeal in which stay was filed, the aforesaid stay application has now become infructuous and accordingly, the same is dismissed as infructuous. 37. In the result, appeal filed by the assessee is partly allowed as indicated above and appeal filed by the revenue is dismissed. Order pronounced in the open court on this 4th day of June, 2026. ============= Document 1DUCHIUSO 1 Profit before tax as per profit and loss account (item 53, A-P&L) / (ilem 53 of Part A-P&L - Ind AS) (as applicable) 61(0) and 62(b) of Part 1 2a Net profit or loss from speculative business included in 1 (enter -ve sign in case of loss) 2a 0 2b Net profit or Loss from Specified Business uis 35AD Included in 1 (enter -ve sign in case of loss) 26 D Income/ receipts credited lo 0 House property 3a 0 b Capital gains 3b 34.32.563 C Other sources 3c 1.76.04.108 3 profit and loss account considered under other . ci Dividend Income 3cl 0 heads of income/chargeable u/s 115BBF/ chargeable u/s 115BBG cil Other than Dividend Income 3cll 1.76.04.108 ws 115BBF 3d 0 C WS 115BBG 3c 0 Document 2 SCHEDULE 1 ....