ITAT Deletes Disallowance on OYO’s Assured Margin Payments, Holds Them Revenue Expenditure

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) recently upheld the deletion of a disallowance made in the case of OYO Hotels and Homes Private Limited for AY 2021-22. During scrutiny proceedings, the Assessing Officer treated the assured margin and minimum guarantee payments made by OYO to hotel asset owners as capital expenditure, holding that such payments resulted in a long-term business advantage. The Assessing Officer accordingly disallowed the claim.

However, the Commissioner of Income Tax (Appeals) found that the payments were made in the ordinary course of business for securing hotel inventory and facilitating operational services under OYO’s business model. Since no ownership rights or capital assets were acquired through these payments, the CIT(A) deleted the addition. Aggrieved by the relief granted, the Revenue carried the matter in appeal before the Tribunal.

The ITAT dismissed the Revenue’s appeal and affirmed the findings of the CIT(A). The Tribunal observed that the true nature of an expenditure has to be determined from the commercial and operational realities of the transaction rather than from the terminology used in agreements.

“The character of expenditure must be examined from the standpoint of business operations and not merely from contractual nomenclature.”

The Bench noted that the hotel properties continued to remain under the ownership and control of the respective asset owners, while OYO merely incurred assured margin and guarantee payments for obtaining inventory and operating its hospitality aggregation business. Since the payments did not result in acquisition of any capital asset, ownership right, or enduring benefit in the capital field, they could not be characterised as capital expenditure.

“No capital asset or enduring advantage comes into existence merely because the assessee guarantees a minimum return to its hotel partners for business operations.”

Holding that the expenditure was incurred wholly and exclusively for business purposes, the Tribunal allowed the deduction under Section 37(1). Consequently, the Revenue’s grounds were rejected. The stay application filed in the connected proceedings was also disposed of as infructuous in view of the final adjudication of the appeals.

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