2023 (4) TMI 34 - AT - Income Tax

Tribunal overturns tax order on convertible debentures, rules in favor of Assessee.

Reliance Industrial Investment and Holdings Limited. Versus DCIT Cir – 3 (3) (1), Mumbai

The Tribunal held that the Principal Commissioner of Income Tax's order directing the revision of the assessment under section 263 was erroneous and ... Revision u/s 263 by CIT - instruments, viz., convertible debentures issued by the Assessee is required to be included in the “transition amount” u/s. 115JB (2C) while computing the book profit - financial instruments under consideration are “compound financial instruments” (CFI) - action of the AO in not applying section 115JB(2C) of the Act to the “transition amount” has rendered the Assessment order erroneous in so far as it is prejudicial to the interest of the Revenue - whether the instruments (ZOFCDs and FCDs) in question are CFI or not? - HELD THAT:- If the issuer has an unconditional right to avoid delivering cash, it cannot be classified as a financial liability. In the facts of the case of the Assessee, basis the terms of the Instruments, the issuer (Assessee) has an unconditional right to avoid payment of cash.Hence, this condition is resulting into negative for “financial liability”. In the statement of equity for the year ended 31st March 2017 under the head “other equity”, the assessee has taken optional convertible debentures and Zero Coupon unsecured fully convertible debenture of Rs. 10 each., which are in the nature of capital liability or capital debt to the company until the same is not fully converted into Equity. There is no corresponding financial liability of such convertible debentures have been shown in the financial statement or in the profit and loss account. Though from the perusal of the financial statement, we find that assessee has shown debt/equity instruments through other comprehensive income which is though not the correct presentation of the debt instrument, because as stated above, the debt instrument has to be classified separately alongwith other capital liability on such instruments. Nothing turns out on such presentation as one thing which is clearly borne out from the financial accounts and facts of the case is that, in so far as Zero Coupon OFCDs and OFCDs in the case of assessee did not have any kind of financial liability to classify it as Compounding Financial Instrument and in turn to quantify the same as transition amount. As already noted in the earlier part of our order that Zero Coupon OFCDs issued on 30th June 1995 which was issued at par for Rs. 441.57 crores was converted into 72388770 equity shares in financial year 2020-21 and the total convergence was at par only. Even though it has been redeemed within the year in a very short span of a year, then also there is neither any interest component nor any financial liability in the form of compounding financial instruments or any kind of discounting factor which can be said to be applicable. Nor assessee has claimed in the financial account or treated it as financial liability. The fact that it was redeemed will not take away the character at the time of issuance of Zero coupon OFCDs as both the issuer and investors had understood that it would be converted into equity shares at par and that”s the precise reason no financial liability has been recognized on these instruments by the assessee. This aspect of this matter has already discussed in the earlier part of the order. Coming to the 0% fully unsecured debentures issued in the year 1996, they have been bought back by the company during the FY 2016-17 at par and the OFCDs have been cancelled. Even these OFCDs issued in year 1996 for the period of a decade, no financial liability or any interest cost has been taken into profit and loss account even for the purpose of disclosure under the Companies Act. Accordingly, we entirely agree with submissions of the assessee made before us and hold that none of the OFCDs which has been shown in the balance sheet of the assessee under the head “Other Equity”, there exist any kind of financial liability or interest liability in any manner which can be classified or determined as a “transition amount”. We have already held above, that as per the definition of Transition amount, the capital reserves are eliminated while making adjustment in book profit, similarly, the CBDT has clarified to eliminate the capital liability like Share Application Money, the composite Amount declared by the assessee has to readjusted to find the net composite amount by eliminating the capital liability, i.e., Convertible Debentures. There will not be any transition amount which requires any adjustment in the book profit as per section 115JB (2C) of the Act. It is important to note that as discussed herein above, the capital liability and financial liability are two different concepts and Ld Pr. CIT has confused with the above two concepts and treated the capital liability as disclosed by the assessee as part of Composite Income in the schedule to the Other Equity. Thus, we hold that no adjustment is required in the book profit u/s 115 JB (2C) by way of “transition amount” in the case of the assessee. Accordingly, the order of Ld. PCIT u/s 263 is reversed on merits and matter is decided in favour of the assessee. Assessee has contended as noted in para 17 & 18 of this order that only those receipts which are chargeable to tax as income u/s 2(24) can be included in computation of book profits and capital receipts cannot be brought to tax in computing book profits - Since we have already held that no adjustment is required u/s 115JB (2C) by way of “transition amount”, no separate finding is warranted on this proposition of the assessee. Issues Involved:1. Validity of the order under section 263 of the Income-tax Act, 1961.2. Adjustment of 'transition amount' under section 115JB(2C) of the Income-tax Act, 1961.3. Classification of Zero Coupon Unsecured Optionally Fully Convertible Debentures (ZOFCDs) and Fully Convertible Debentures (FCDs) as Compound Financial Instruments (CFIs).Summary:Validity of Order:1. The Principal Commissioner of Income Tax (PCIT) directed the Assessing Officer (AO) to revise the assessment order under section 263, which the Assessee contested as neither erroneous nor prejudicial to the revenue's interest.2. The PCIT concluded that the instruments in question were CFIs and thus, the amount of Rs. 15,824.47 crores should be included in the 'transition amount' under section 115JB(2C) for computing book profit.3. The Tribunal found that the PCIT's direction to apply section 115JB(2C) was based on an incorrect classification of the instruments as CFIs.Adjustment of 'transition amount' under section 115JB(2C):1. The PCIT held that the ZOFCDs and FCDs were required to be included in the 'transition amount' and one-fifth of this should be added to the book profit over five years.2. The Assessee argued that these instruments were entirely equity in nature and did not affect the profits, hence should not be considered as part of the transition amount.3. The Tribunal agreed with the Assessee, stating that the instruments did not have a financial liability component and thus could not be classified as CFIs. Consequently, no adjustment was required in the book profit under section 115JB(2C).Classification of Instruments:1. The PCIT classified the ZOFCDs and FCDs as CFIs based on the terms of the instruments, which included both equity and debt components.2. The Assessee contended that the instruments were entirely equity in nature, as they did not have any financial liability and were presented under 'Other Equity' due to the absence of specific guidance at the time.3. The Tribunal examined the terms of the instruments and the relevant provisions of Ind AS 32, concluding that the instruments did not create a financial liability and were not CFIs. They were purely equity instruments.Decision:1. The Tribunal found that the PCIT's order was erroneous and prejudicial to the Assessee, as the instruments in question did not qualify as CFIs and thus, should not be included in the 'transition amount' for computing book profit under section 115JB(2C).2. The appeal filed by the Assessee was allowed, and the order of the PCIT under section 263 was reversed on merits.