TaxTMI 
TaxTMI 
2023 (4) TMI 34
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....Validity of order: 1. erred in passing an order under section 263 of the Act directing the Assessing Officer ("AO") to revise the assessment order dated 28th December 2019 passed under section 143(3) of the Act; 2. failed to appreciate that the order dated 28th December 2019 passed under section 143(3) of the Act is neither erroneous nor prejudicial to the interest of the revenue; 3. erred in directing the AO to make a fresh assessment applying the provisions of section 115JB(2C) of the Act correctly though said provisions are not applicable in respect of the Zero Coupon Unsecured Optionally Fully Convertible Debentures ("ZOFCDs")/ Fully Convertible Unsecured Debentures ("FCDs") Adjustment of "transition amount" under section 115JB(2C) 4. erred in holding that the amount of Rs. 15,824.47 crores being the book value of the ZOFCDs/ FCDs was required to be included in the "transition amount" under section 115JB(2C) and one-fifth of the same should be added to the book profit over a period of 5 years; 5. failed to appreciate that for an amount to be regarded as transition amount, it should have been "adjusted" in Other Equity on the....
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....d also in rejecting the recasted financial statements signed by the Statutory Auditors, correcting the disclosure of the debentures in question under a specific head titled as "instruments entirely equity in nature" in the Balance Sheet, by holding that these are merely self-serving documents lacking the foundation of truth and they merely represent an after-thought; 12. erred in rejecting the appellant's reliance on the Guidance Note issued by the Institute of Chartered Accountants of India in July 2017 (para 8.2.17) in respect of instruments entirely equity in nature and the revised format for presentation of such instruments on the ground that it lacks genuineness and that terming the ZOFCDs/ FCDs as instruments purely equity in nature is misrepresentation of facts; 13. failed to appreciate that proposed additions are not within the spirit of the provisions of section 115JB(2C) as capital receipts can never be taxed as income and in any case, so called equity component of CFI is never tax deductible either under normal provisions or under section 115JB." 4. After considering the entire gamut of facts, findings given in the impugned order as well as submissio....
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....issued on 5 September 1996. 6. The details and issue of assessment of relevant instrument as on 1st April 2016 are as under:- 7. All the above instruments were issued to M/s. Reliance Industries Limited, a subsidiary company. The aforesaid instruments were disclosed as a "liability" under the head "long term borrowings" in the financial statements up to the year ended 31.3.2016 in compliance with the accounting standards issued by the Institute of Chartered Accountants India [commonly known as Indian Generally Accepted Accounting Principles ("IGAAP")] 8. The "Indian Accounting Standards" (Ind AS) became applicable to the Appellant Company from the FY 2016-17 as per the Companies (Indian Accounting Standards) Rules, 2015 ("Rules"). The Assessee, in the balance sheet for the year ending 31.3.2017, reflected the same under the schedule of "Other Equity" with the title 'Instrument Classified as Equity' in its audited financial statements. In this appeal, taxability of aforesaid instruments is in question, i.e. whether same is required to be included in the "transition amount" u/s. 115JB (2C) of the Act while computing the book profit? 8. Ld. PCIT in his order had ma....
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....trument of another entity. What are Compound Financial Instruments? Instruments which have features of both Financial Liability and Equity Instruments are called as "Compound Financial instruments". An example would be a bond or debenture that can be converted into shares, it doesn't matter whether the bondholders will ultimately opt for conversion. Thus, Bonds and debentures, which are purely debt instruments, get transformed into and assume the character of Compound Financial Instrument the moment the element of 'convertibility' gets attached to them. Hence, any optionally convertible bond and debenture wherein holder of the instrument has an option to convert (debt into equity), would essentially remain a Compound Financial Instrument irrespective of its classification and presentation in one's financial statements and any sort of clarification, disclaimer, revision, explanation etc in the notes to accounts that one may resort to. By whatever name called, Debt would remain debt instrument, equity would remain equity instrument and where there is an element of both debt and equity (such as in any Optionally Convertible instrument} it would remain....
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.... the same as issuing simultaneously a debt instrument with an early settlement provision and warrants to purchase ordinary shares or issuing a debt instrument with detachable share purchase warrants. ( emphasis supplied ) In the present case, what is outstanding in the books of assessee company as on 31.03.2016 is ZOFCD / FCD, having terms as under: ZOFCDs of Rs. 441.57 crores- Zero Coupon Unsecured Optionally Fully Convertible Debentures of Rs. 5000 each aggregating to Rs. 441 57 lacs. Under this scheme the issuer and debenture holder has either option to convert debenture into equity or redeem at a premium of 5% of the face value of debenture. In the event of the option not being granted by the Company or debenture holders not exercising their option to convert, it may redeem the said Debentures in part or in full at any time during the tenure of the said Debentures but not later than 25 years commencing from the respective dates of allotment. Premium payable on Debentures redeemed during any financial year will become due at the end of the said financial year. As seen above, this is a mixed instrument having both equity as well as debt compone....
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....ULLY CONVERTIBLE debt Instruments and hence were Compound Financial Instruments, as rightly admitted and noted by assessee company in its Note 36.2 of Notes to financial statements of revised audited books of A.Y. 2017-18 dated 15.03.2019. 5.5.2 Having arrived at this conclusion that these were Compound FinancialInstruments, the next logical question as regards applying provisionsof Sec 115JB(2C) would be, what is the quantum of the 'equity component'of these 'Compound Financial Instrument', which are outstanding in thebooks of assessee company as on convergence date. The answer to this question has been given by the assessee company itself, not once but on multiple occasions and at several places in its Notes to accounts/ financial statements. As noted by assessee company in its Note 36.2 of Notes to financial statements of revised audited books of A.Y. 2017-18 dated 15.03.2019, the said ZOFCD/FCD of Rs. 15824.47 crores have been considered in entirety under the head of 'Other equity' and the same have been further qualified in Note I to Note 36.2 as under: 'Note I : All convertible issued by the company cons....
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....onally convertible and are therefore, compound financial instrument. To term them as instruments of purely equity in nature is nothing but misrepresentation of facts. Thus, the reliance of assessee company on Guidance Note issued by ICAI in July 2017, is misplaced and devoid of merit, 5.5.6 Even the recast/regrouped financials signed by the statutory auditor for FY 2016-17 and the independent auditor certificate confirming alternate manner of presentation, are merely self-serving documents lacking the foundation of truth and they merely represent an after-thought and excuse put forth to escape the lawful consequences under the provisions of IT Act. Hence, the same are rejected. 5.5.7 The contention of the assessee that the part of the ZOFCDs were redeemed during the year before 31.03.2017 is of no consequence since it does not have any bearing on calculation of amount of the transition amount as the adjustment is required to be made at the time of conversion to Ind AS i.e as on 1st of April 2016. 5.6 In its submission, the assessee has made reference to CBDT Circular No. 24/2017 in support of its claim that the ZOFCD/FCD in its books are entirely equity i....
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....ts and are thus includible in the Transition Amount. 5.8 All over the world zero coupon bonds are debt instruments. As per definition debenture is a type of bond or other debt instruments which is the most common variety of bonds issued to the bond holders. Zero coupon bond simply means debt instruments payable at the end of a specific period without periodic interest paid to the debenture holder. Undoubtedly by definition and by nature these zero coupon fully optionally convertible debentures(ZOFCD) have both equity and debt components. Hence, 'compound' in nature. 5.9 These complexities as discussed above were never examined by the AOduring the assessment proceedings rendering the whole assessment order erroneous in so far as prejudicial to the interest of revenue in as much as it had failed to apply the provision of section 115JB(2C) 5.10 The assessee in last part of its reply has contended that the ZOFCDs are in the nature of capital and cannot be taxed under section 115JB. In this regard, it is important to note that Sec 115JB begins with 'non obstante' clause and it creates deeming fiction (of income) in relation to certain companies....
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.... auditor"s certificate are merely self-serving documents and hence, rejected. ix. Reliance placed by the Assessee on the CBDT Circular No. 24/2017 dated 25.07.2017 is misplaced as Q.No.9 which is relied upon by the assessee deals with financial instruments such as non convertible debenture, interest free loan etc are purely debt instruments and like the instrument issued by the assessee, equity component of CFI shall be treated as part of transition amount. x. Subsequent redemption of the instruments is of no consequence since it does not have any bearing on calculation of transition amount at the time of convergence to Ind AS. xi. Debenture is a type of bond or other debt instrument. All over the world, zero coupon bonds are debt instrument. Hence, the instruments issued by the Assessee have both equity and debt components. xii. Accordingly, the AO was directed to make fresh assessment applying the provisions of Section 115JB(2C) correctly. 10. The contentions of the Assessee before us and also before the Ld. PCIT were as under:- i) The financial statements of the Appellant for the FY 2016-17 signed on 18.04.2017 were prepared for th....
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....tion and presentation of financial instruments. It classifies a financial instrument into 'financial liability', 'equity instrument' and "financial asset". An instrument which has both, the component of financial liability and equity, is termed as a 'compound financial instrument' ["CFI"]. As per the principles of "Ind AS 32", since the ZOFCDs and FCDs did not have any "financial liability" component, it was regarded as equity instruments and, hence, the same were treated by the Assessee as 'instruments classified as equity'. 12. In addition to the compliance with Ind AS, companies had to present its Balance-sheet as per the format prescribed in Division II of Schedule III of the Companies Act, 2013. The format of Balance Sheet, for Ind As compliant companies, is bifurcated into "Assets" and "Equity and Liabilities". 13. Under the caption "Equity", it provides for two types of equity, i.e., (i) equity share capital; and (ii) other equity. The constituents of the Schedule of 'other equity' are as follows: a) Share application money pending allotment; b) Equity component of compound financial instruments; c) Res....
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....ax u/s. 2(24) of the Act. This is impermissible. 18. He submitted that, when receipt is not in the character of "INCOME" as defined under section 2(24) of the Act, it cannot be included in the computation of book profit for the purpose of section 115JB of the Act. The issue of taxing the capital receipt has been dealt by the Calcutta High Court in case of PCIT v. Ankit Metal & Power Ltd. [2019] 416 ITR 591 wherein it was held that the subsidy granted by State Government for setting up new industry in the State, being non-taxable capital receipt, cannot form part of the book profits u/s.115JB of the Act as it does not fall within the definition of "income" u/s.2(24) of the Act. 19. Inaddition to above, the CBDT Circular No 24/2017, itself has excluded certain items which are capital in nature and which, on a strict interpretation, clearly falls within the definition of "transition amount". Two answers given in this circular are important to indicate the real scope of the section: "Question 7: Under Section 115 JB of the Act, transition amount has been defined as the amount or the aggregate of the amounts adjusted in the "Other Equity" (excluding capital reserve and se....
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.... the instruments (ZOFCDs and FCDs) in question are CFI or not. At this juncture, the relevant provision of Ind-AS is required to be examined for classification of the instrument as a CFI. (i) Ind AS 32 provides for presentation of financial instruments as "equity instruments", "financial asset" or as "financial liability". Para 28 dealing with CFI states as under: "The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets or equity instruments in accordance with paragraph 15." (ii) Para 29 of Ind AS 32 states that an entity recognises separately the components of a financial instrument that - (a) creates a financial liability of the entity and (b) grants an option only to the holder of the instrument to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the en....
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....ound financial instrument", dual conditions are required to be fulfilled, namely - a) there is creation of financial liability; and b) option for conversion is granted only to the holder. 26. We had called from the terms of ZOFCDs and FCDs. The terms of the ZOFCDs and FCDs in question as on the convergence date are required to be examined in order to evaluate, whether these instruments are CFI in light of the above provisions of Ind-AS 32. These were as follows:- i. The instruments are for a fixed term; ii. The instruments do not carry any interest; iii. The instruments are convertible into fixed number of equity shares of Rs. 10 each of the Assessee, i.e., the Issuer (conversion rate is higher of face value or the book value as on 31st March 2015); iv. The instruments can be converted at any time before the expiry of the term, either at a unilateral option of the Issuer or at the option of the holder of the Instrument, i.e., the Investor; v. The Issuer and the Investor may mutually agree for early redemption of the unconverted portion of the instruments, after expiry of 30 days from the date of allotment; v....
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....ndition is also resulting into negative for "financial liability". • Thus, both the conditions required to classify a financial instrument as a financial liability are not fulfilled in the case of the instruments issued by the Appellant. • If a financial instrument has components of both "financial liability" and "equity", it would be regarded as a CFI as per para 28 and 29 of Ind AS 32. On the basis of the above fact pattern, the instruments issued by the Assessee, do not have any component of "financial liability". Hence, they cannot be regarded as CFI. 28. Paragraph 16 of Ind AS 32 which provides that a financial instrument is an equity instrument rather than a financial liability on fulfillment of certain conditions. Relevant extract is given below: "When an issuer applies the definitions in paragraph 11 to determine whether a financial instrument is an equity instrument rather than a financial liability, the instrument is an equity instrument if, and only if, both conditions (a) and (b) below are met. (a) The instrument includes no contractual obligation: i. to deliver cash or another financial asset to another entity; or....
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....ancial statements. This also shows that the instrument is not CFI and the example 9 to Ind AS 32 supports the same. (iv). Whether mere presentation of instruments which are instruments entirely equity in nature under the head "Other Equity" will form part of transition amount? 32. As per section 115JB(2C) of the Act, for the purpose of companies complying with Ind AS, the book profit in the year of convergence to Ind AS (i.e. FY 2016-17 in the instant case) and each of the following 4 previous years shall be increased or decreased by 1/5th of the 'transition amount'. 33. Instrument classified as equity does not come within any of the sub-categories of schedule 'Other Equity', as provided in Division II Schedule-III of the Companies Act, 2013. Only those sub-categories which are mentioned in Division II would form part of "Other Equity". Explanation (iii) to section 115JB(2C) of the Act defines "transition amount" as the amounts adjusted in the "Other Equity". Hence, as per a strict interpretation of section 115JB(2C) read with Companies Act, the "instrument entirely equity in nature" does not come within the ambit of "Other Equity" and, hence, cannot be tre....
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....rejoinder argued that the Assessee in Note 36.2 of the revised audited financial statements of AY 2017-18, had shown the equity component of CFI as Rs. 15824,47,15,000/. However, the assessee did not include 1/5th of the said amount in the book profit as transition amount under section 115JB(2C) of the Act. 39. On the analysis of the terms of the instrument, the Ld. DR submitted that the Assessee had paid interest on the debentures in the past and subsequently on its redemption, cash was paid towards principal repayment, interest representing discount on debentures and premium paid on such debentures. Therefore, it was under contractual obligation to deliver cash. 40. The DR also argued that the terms and conditions of the instruments were revised on 05.10.2021 and made effective from 01.04.2016/ 01.04.2015 41. Another argument of the DR was that the financial statements signed on 18.04.2017 were revised to give effect to the scheme of merger and subsequently re-casted by the assessee company voluntarily. These voluntary re-casted financial cannot be relied upon since the provision of the section 131 of the Company's Act, 2013 is applicable to the assessee company and ....
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....mpound Financial Instrument ("CFI") is patently incorrect and contrary to the records. The reference in note no. 36.2 was an inadvertent error as admitted by the Assessee and, in any case, the aforesaid footnote could not change the fact that the Assessee had classified the instruments in question as "Equity" and not as "CFI", in its financial statements, which were also audited by the statutory auditors and that such audited annual accounts had also been adopted by the shareholders. 48. In view of the above, the submissions made by the DR that the Assessee had presented the instruments as CFI and hence shall be included in the transition amount as per section 115JB(2C) of the Act is factually not correct. 49. In addition to above, the Assessee also obtained an Independent Auditor's certificate, confirming that as per the terms of the Instruments in question, they have been rightly treated as in the nature of "instruments entirely equity in nature". The Independent Auditor also confirmed the alternate manner of presentation by the Assessee and stated that the same is in conformity with Guidance note issued by ICAI. 50. Further, the fact that the Assessee has not classified....
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....he issuer (Assessee) has an unconditional right to avoid payment of cash. e. Further, it is not in dispute that the settlement will or may be in the issuer"s own equity instruments in a fixed number as per the terms and conditions of the instruments. Since both the conditions laid down as per Para 16 of Ind-AS 32 are satisfied cumulatively, the instruments in question are nothing but "instruments entirely equity in nature". f. The terms of the instrument were not modified on 05.10.2021 and made effective from 01.04.2016/ 01.04.2015. The terms were modified by passing board resolution at the meeting held on 14-01-2016 and extracted copy of resolution was certified as "true copy" by the Company Secretary on 05-10-2021. g. Section 131 of the Companies Act is applied only when provisions of Section 129 or 134 of the Companies Act are not complied with. In the assessee"s case, it is nobody" case that the financial statements do not comply with the provisions of section 129 or 134 of the Companies Act, 2013. The revised financial statements signed on 28-07-2021 were only for the limited purpose of indicating the alternate presentation of the same financial stat....
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....andards) Rules, 2015, the book profit as computed in accordance with Explanation 1 to sub-section (2) shall be further- ........... (2C) For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount: Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clauses relatable to such asset or investment: Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations. Explanation.-For the purpose....
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....n exclusions for the "transition amount" have also been elaborated from clauses (A) to (F). Thus, the "transition amount" by its nomenclature presupposes that due to transition, certain items which otherwise would have impacted profit and loss account either not do or would do in such a manner so as to distort the book profits merely due to transition from one Accounting Standard to other, i.e., India GAAP to IAS. 57. The issue now which needs to be decided here is, whether the aggregate amount of the instruments issued by the assesseecompany falls under the ambit of "transition amount" as defined in section 115JB(2C); and if answer is "Yes", then one-fifth of the same would be taxable for the year under consideration, if "Not", then no adjustment is required to be made. 58. As on 31st March 2016, the assessee had outstanding Zero Coupon Unsecured Optionally Fully Convertible Debentures amounting to Rs 15,544.57 Crores (Rs. 15,103 crores plus Rs. 441.57 crores) and Zero Coupon Unsecured Fully Convertible Debentures of Rs 279.90 crores totaling to Rs 15,824.47 crores issued to RIL - its holding company. (Hereinafter collectively referred to as Convertible Debentures), raised e....
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....nth notice. *The assessee can redeem the outstanding convertible debentures on expiry of the fixed term of the convertible debentures, if the option for conversion into equity shares is not takenup by the end of the term. * The assessee and the debenture holder may mutually agree for early redemption of the outstanding debentures on any date after expiry of 30 days from the date of allotment. 62. Thus, the key terms of the issue of fully convertible debentures consist of conversion into equity shares of the company. This conversion will be based on higher of the book value or face value of the equity shares as at 31st March 2015. 63. As a preface, we have to analyse the relevant provisions of the Companies Act 2013 and new accounting standards as laid down in Ind AS. First of all, section 129 of the Companies Act, 2013 provided that the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under sec. 133 and shall be in the form or forms as may be provided for different class/classes of companies in Schedule III: Provided that the items contained in such financi....
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....rough other comprehensive income; f) Effective portion of Cash Flow Hedges; g) Revaluation Surplus; h) Exchange differences on translating the financial statements of a foreign operation; i) Other items of Other Comprehensive Income (specify nature); and j) Money received against share warrants. 66. Concurrence between Assessee and DR is that the main issue is as to whether the instrument can be classified as Compound Financial Instrument (CFI) and equity component of it as per clause (b) above by application of Ind AS 32? The foundation of PCIT"s order is also based on the characterization of said instrument as CFI or otherwise. 67. Ind AS 32 defines the financial instruments in the recognition and characterization of the instruments. The objective of this Standard is to establish principles for presenting financial instruments as liabilities or equity. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities and equity instruments, etc. The following paragraphs define the scope of financial instruments:- Para 11:-A financial instrument is ....
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.... be settled by the entity (receiving or) delivering a fixednumber of its own equity instruments In exchange for a fixed amount of cash or another financial asset is an equity instrument. Compound financial instruments (Paras 28 to 32] Para 28:- The issuer of a non-derivative financial instrument shall evaluate the terms of the financial instrument to determine whether it contains both a liability and an equity component. Such components shall be classified separately as financial liabilities, financial assets, or equity instruments in accordance with paragraph 15. Para 29:-An entity recognises separately the components of a financial instrument that (a) creates a financial liability of the entity; and (b) grants an option to the holder of the instrument, to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixednumber of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: 1) a financial liability (a contractual arrangement to deliver cash or another f....
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....e ascribed to the instrument as a whole. No gain or loss arises from initially recognising the components of the instrument separately, Para 32:- Under the approach described in paragraph 31, the issuer of a bond convertible into ordinary shares first determine the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. Certain paras relating to compound financial instruments from Application Guidance Para AG 31:- A common form of compound financial instrument is a debt instrument with an embedded conversion option, such as a bond convertible into ordinary shares of the issuer, and without any other embedded derivative features. Paragraph 28 requires the issuer of such a financial instrument to present the liability component and the equity compone....
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....e outstanding convertible debentures which were shown under "long term borrowings" in the in the component Ind AS balance sheet as on 1stApril 2015 and now the said debentures were required to recognize and classify as for the requirements of Ind AS 32. 69. Now whether the characteristic of the convertible debentures issued by the company falls within the scope and definition of "compounding financial instrument" as a provided in "Ind AS 32" as defined therein in various paras which have been incorporated by us supra. First of all, a convertible debenture is a contract that has mainly two characteristics; • firstly, it gives rise to the financial assets for the party which is the holder of the instrument, since it gives a contractual right to receive cash and other financial assets, for example, financial asset in the form of equity instrument of issuer in case of convertible option; and • secondly, it gives rise to financial liabilities or equity instrument to the issue of the convertible debentures depending upon the terms of the convertible debentures, is a financial instrument as per the definition provided under Ind AS 32. Ind AS 32 lays down th....
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.... convertible debentures can be converted into fixed number of equity shares either unilaterally by the investor or by the issuer without the consent or concurrence of the other party to the contract. In other words, the investors will exercise the option unilaterally to convert convertible debentures into equity shares in a situation where the fair value of the equity shares increases above the issue price of the convertible debentures at any time during the term of the convertible debentures. In second situation, the issuer will exercise the option unilaterally to controvert the convertible debentures into equity shares so as to avoid delivery of cash. The repayment in monetary terms by the issuer to the investor in respect of the convertible debentures upon the expiry of their term is contingent upon non-exercise of the option to convert the convertible debentures both by the investor and the issuer. This eventuality may not arise here in this case, since the option to convert is available not only with the investor but also with the issuer and earlier redemption of the convertible debenture available to both, is not a unilateral option, but is subject to mutual agreement of both....
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....y the Ld. PCIT in his order is that, assessee company itself has classified is optionally convertible debentures into "other equity" which is as per the definition under the "transition amount" given in the Explanation gets covered. In order to understand the disclosure requirements of equity finds in the balance sheet which otherwise is called shareholder"s fund consists of equity shares capital and other equity share. As far as equity share capital is concerned, it consists of various types of share capital issued by the company. As regards the other equity, these consist of various types of reserves which are available to the shareholders. In other words, the funds belongs to the share holders as per the new disclosure scheme, the shareholder has to be indicated how much funds are employed in the company. 75. We have to understand the term "other equity" which is part of the shareholder funds. The "other equity" consists of various types of reserves like general reserve, capital reserve, security premium reserve and other reserve similar to the profit and loss attributableto the shareholders. Thus, the disclosure of the total funds available in the account of the shareholders....
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....re are various types of financial instruments which are debt based or equity based instrument for which termsare different for the various types of instruments. On the date of convergence, the company has to determine the comprehensive income or loss based on the status of future financial assets or liability to the respective companies. Accordingly, the company has to recognize only the comprehensive income or loss in the "transition amount" and not the capital liability which has already recognized in the balance sheet of pre-convergence date. 78. The next issue is how to determine the financial gain or loss particularly of the debt financial instrument. First of all, one need to separate debt and equity from the above instrument and determine the impact of comprehensive income or loss in the equity portion and will impact their adjustment in the "other equity". This will be done in accordance with Ind AS 32. The Ind AS 32 provides an example how to compute the fair value and liability assigned to equity bond. For the sake of ready reference, the same is reproduced as under:- An entity issues 2,000 convertible bonds at the start of year 1. The bonds have a three-year ....
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.... 1,51,878 [Recognition of liability component at present value with 9% discounting factor] B At the end of Year 1: Interest Expenses Account 1,66,331 To Liability 1,66,331 [Booking of interest expenses on opening liability of Rs. 18,48,122 @9%] Interest payment at nominal rate Liability Account 1,20,000 To Bank 1,20,000 C At the end of Year 2: Interest Expenses Account 1,70,501 To Liability 1,70,501 Booking of interest expenses on opening liability of Rs. 18,94,453 @9%] Interest payment at nominal rate; Liability Account 1,20,000 To Bank 1,20,000 D At t....
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....s "transition amount". Ld. PCIT has completely erred in accounting principle while holding that the entire convertible debentures for sums aggregating to Rs.15544.57 crores is a "transition amount" which needs to be adjusted over the period of 5 years while computing the book profit. This finding itself vitiates the entire reasoning and the view taken by the Ld. PCIT. 81. If the above illustration is to be taken as a guideline to determine the "transition amount" which needs to be adjusted, then only the financial liability embedded in it alone can be treated as transition amount as per Ind AS 32. Here in this case, there was no kind of any financial liability or any interest component which can be ascertained or determined on the said convertible debentures. As we have already held above that, since these Zero Coupon Optionally Convertible Debenture is purely in the nature of equity and there was no financial liability embedded it, neither any liability has been debited to profit and loss account, nor it has been recognized by the assessee company in financial accounts. There is nothing flowing from the terms or substance of the contract of Zero Coupon OFCD or OFCD where one ca....
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....een 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. 84. Now 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. 85. Accordingly, we entirely agree with submissio....
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....Issued-at par Value Qty Amount A. Zero Coupon 30-06-1995 5000 8,83,140 Unsecured Optionally Fully Convertible Debentures B. Zero Coupon Unsecured Optionally Fully Convertible Debentures 25-03-2015 10 1,10,00,00,000 28-09-2015 10 65,00,00,000 10-02-2016 10 50,00,00,000 31-03-2016 10 12,85,30,00,000 15,10,30,00,000 C. 0% Fully Convertible 05-09-1995 100 2,79,90,000 Total Unsecured Debentures Status 4,41,57,00,000 The Issuer and the Debenture holder will have an option for early conversion at Converted to any time by giving one month notice. 7,23,88,770 Equity The conversion of the debentures will be based on higher of the book value or Shares in FY 2020-21 face value of equity shares as at March 31, 2015. The Debentures are redeemable at a premium of 5% of the face value of the Debentures In the event of the option not being granted by the Company or debenture holders not exercising their option to convert, it may redeem the said Debentures in part or in full at any time during the tenure of the said Debentures but not later than 25 years commencing from the respective da....