TaxTMI 
TaxTMI 
2026 (5) TMI 1344
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.... 3. Learned counsel appearing for the assessee agreed with the aforesaid submission of ld. DR. Hence, we propose to take up ITA No. 2399/Mum/2025 as the lead appeal. ITA No. 2399/Mum/2025 4. As stated earlier, the grounds raised in all the appeals are identical, except variance in figures, hence, for ease of reference, we reproduce the grounds taken in ITA No. 2399/Mum/2025 hereunder: Sr. no. Grounds of Appeal Amount 1 Ground1. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in deciding the appeal in assessee's favour on the addition made u/s.115JB(2C) of the Act by placing reliance on the decision of the Hon'ble ITAT order in assessee's own case whereby the Ld. PCIT u/s.263 of the Act was reversed?" Rs. 6819967429 2 Ground2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that Zero Coupon Unsecured Optionally Fully Convertible Debenture(ZOFCD or FCD) which is in the nature of Compound Financial Instrument which is to be considered as 'transition amount within the provisions of section 115JB(2C) of the Act?" Rs. 0 3 G....
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.... of the Companies Act, 2013 every Indian Company is required to prepare and present the financial statements in compliance with Accounting Standards notified by the Central Government in terms with section 153 of the Companies Act. Till financial year 2015-16, the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), formerly known as Indian Generally Accepted Accounting Principles (IGAAP), were followed by all resident companies. In terms with IGAAP, in the financial statements for the year ended 31.03.2016, the assessee disclosed the outstanding instruments, i.e., the debentures issued to M/s. RIL, under the head 'long term borrowings'. Vide notification dated 16.02.2015, the Central Government notified a new set of Accounting Standards known as Indian Accounting Standards ("Ind AS") applicable from 01.04.2016. After change of Accounting Standards, the assessee started following Ind AS to prepare and present its financial statements from A.Y. 2017-18 onwards. In the financial statements prepared in accordance with newly introduced Ind AS, the assessee classified the debentures issued to RIL under the broad head 'Other equity' and sub-head 'Instrum....
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.... not be carried out. The A.O. observed, after considering the detailed submissions of the assessee, the A.O. in A.Y. 2018-19, had ultimately concluded that the outstanding instruments representing the convertible debentures amounting to Rs. 15824.47 crores, being transition amount as per Ind AS r.w.s. 115JB(2C) of the Act, 1/5th of the amount has to be added to the book profit of the year. Thus, following the decision taken in A.Y. 2018-19, the A.O. added back an amount of Rs. 3164,89,43,000/-, being the transition amount, to the book profit computed in terms with section 115JB(2C) of the Act. 8. The assessee contested the aforesaid addition before the first appellate authority. While deciding the issue in appeal, the first appellate authority noted that A.Y. 2017-18 was the initial year where the adjustment, if any, u/s. 115JB(2C) of the Act was to be made for the first time and in succeeding four assessment years, 1/5th of the amount has to be adjusted. He found that in assessment completed u/s. 143(3) of the Act in A.Y. 2017-18, the A.O. did not make any adjustment in terms with section 115JB(2C) of the Act. Whereas, the Principal Commissioner of Income Tax (PCIT), while exam....
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....on merit and has travelled extra miles to decide the case on merit also but ultimately decided on the merits of proceedings-initiated u/s 263 of the Act. 1. The PCIT in his order u/s 263, for AY 2017-18, gave clear findings on merits that the instruments in question were CFI and that it was ought to be considered under "transition amount" for the purposes of section 115JB(2C) of the Act. Since there were clear findings on merits, the assessee had also raised grounds on merits before the Hon'ble ITAT. Where, in the exercise of revisional jurisdiction under section 263, the Commissioner has expressly adjudicated and concluded upon the merits of the issues in dispute, the Tribunal, while hearing an appeal against such revisional order, is bound to examine and decide those very merits. Once the Commissioner records a categorical and definitive finding on merits in the order w/s. 263, the same is only challengeable in the appeal against the order w/s. 263. The Assessing Officer's order u/s. 143(3) rws 263 is confined merely to giving ministerial effect to the Commissioner's directions, and the assessee cannot, in an appeal against such consequential order, reopen or colla....
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....stries Limited, a subsidiary company, 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 IGAAP and in view of making compliance to Ind AS, appellant itself classified above referred instruments as equity component of CFI in its Audit report. Hence, the amount has to be included in transition amount u/s 115JB(2C) of the Act. 3. The Department has misconceived the facts regarding the classification of the instruments in question in the original financial statements, dated 18 April 2017. In the Balance-sheet as at 31 March 2017, signed on 18.04.2017, the ZOFCDs and FCDs were duly disclosed as 'Instrument classified as Equity' under the heading 'Other equity. The classification of the instruments in question was detailed in Note 11 to the Financial statements. In the Statement showing changes of equity as at 31st March 2017, being a part of financial statements signed on 18th April 2017, also showed the movement in the instruments in question as "instrument classified as Equity" under the main heading "other equity". However, only in note no. 36.2 of notes to the accounts, rela....
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.... and admitting additional evidence without giving any opportunities to Revenue in clear cut violation of established principle of natural justice. The ITAT, while hearing the appeal for A.Y. 2017- 18 had called for terms/revised terms of ZOFCD/FCD. This document was not available for A.Y. 2017-18 while passing assessment order as well as before PCIT during proceedings-initiated u/s 263 of the Act and in fact not available with the AO while passing the assessment order for the A.Y; 2018-19 το Α.Υ. 2020-21 also. Therefore, decision based on additional evidence which was not examined by the AO cannot be applied unless an opportunity was given to A.O. for his counter submission. 4. The revised terms of ZOFCD/ FCD were available with the PCIT during the proceedings u/s. 263 of the Act as the same were duly reproduced in the Auditor's Certificate dated 23rd April 2021, while confirming that the instruments in question were "instrument entirely equity" and not CFI. The PCIT has also noted terms and conditions of each of the instrument in his order at page 6 and 7 of the order u/s. 263. The PCIT could not have passed the order under section 263 unless th....
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....f instruments, there is any correspondence via mail/letter within both entities. These facts were never produced before AO/PCIT When the issue was raised for first time by PCIT during proceedings-initiated u/s 263 of the Act that it falls under transition amount w/s 115JB(2C) of the Act then only the appellant reclassified nature of Instrument claimed to be revised on dated 28.7.2021. Instruments under dispute were earlier treated as CFI in assessee's audit report but on 28/07/2021 it was reclassified as entirely equity in nature without any valid reason and in contravention of AS 101 and AS 32 and CBDT circular no 2/2018. 6. Assessee had always disclosed the instruments in question as "instrument equity in nature" in the original financial statements, signed on 18.04.2017. In the re-casted financial statements, dated 28th July 2021, only the presentation on the face of the balance sheet was modified, in accordance with the Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013, issued by the Institute of Chartered Accountants of India, and disclosed the ZOFCDs and FCDs under the head "instrument entirely equity in nature". The said recasted financia....
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....t executed subsequent to the revision proceedings for AY 2017-18. These terms were filed with PCIT in proceedings u/s 263 for the A.Y. 2017- 18 and with the AO for the A.Y. 2018-19 and 2020-21. 7. The ITAT had wrongly interpreted the category "other equity" as category "equity", although vide para 65 of its own order clearly discussed the constituents of the schedule of other equities as per the Companies Act and wrongly interpreted which component of other equity has to be taken for the purpose of transition amount. 7. The Hon'ble ITAT has nowhere stated "other equity" as "equity" in its order or any para in its order. Hence, the understanding and observation of Learned CIT-DR regarding 'equity' and "other equity is misconceived. 8. The ITAT has erred in deciding the above instruments as, entirely equity in nature. The Hon'ble Bench has also erred in interpreting Indian Accounting Standard, AS-32 that since in this case the issuer also grants an option to the holder of the instrument to convert it into an equity instrument of the entity, therefore, para 29 of Ind AS-32 and example given is not app....
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....ht to call for redemption of investment. Hence, the issuer does not have an obligation to pay cash to the investor. The fact that the parties may, at a subsequent point of time, mutually agree for redemption, does not make it the obligation of the Assessee to pay cash as on the date when the instrument is issued. To determine the classification of instrument, one has to see the position as on the issue of the instrument as on the date when Ind AS became applicable and not at the subsequent point of time. Para 19 of Ind AS 32 explains the meaning of "no contractual obligation to deliver cash" as "if an entity does not have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability." From this it is clear that if the issuer has an unconditional right to avoid delivering cash, it is not a financial ability. The terms provide that instruments are convertible into fixed number of equity shares. Hence, this condition is also resulting into negative for 'financial liability'. Thus, both the conditions required to classify a financial instrument as a finan....
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.... the instruments in question and, hence, the Instrument cannot be regarded as CFI. 9. The, ITAT has erroneously held that there is no financial liability, whereas, in case of A category of ZOFCD, there are terms and conditions to repay at 5% premium on face value on execution of option. 9. The terms and condition of category A of the ZOFCD, ie. of Rs. 441.57 crs, in respect of redemption at a premium value is irrelevant. The criteria is to determine where there is a financial liability in an instrument is not dependent on whether the instrument is redeemable at premium or at par or at discount but inter-alia based on whether the Assessee had an unconditional right to avoid payment in cash and convert to equity shares. Once there is no financial liability, the instrument cannot be classified as compound financial instrument. Further, the instrument is classified based on the determination as on 1 April 2016 and subsequent event of either conversion or redemption is not relevant. The terms relating to redemption is relevant only to the extent of its nature as to mandatory or optional. It was not a case of mandatory redemption at a premium price, which would ....
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....ect from 1/4/2000 8% per annum 5 Coupon rate changed with effect from 1/4/2004 0% As can be seen from the above table, the Learned CIT-DR's observation that the coupon rate remained 8.25% until the date of conversion is factually incorrect. Accordingly, as at the convergence date, the rate of interest was 0% which was relevant for the purpose of classification of the said instrument. The fact that the interest was payable for certain interim financial years does not change its classification on the date of convergence. It may be noted that this allegation was also raised by the department during the hearing before the Hon'ble Tribunal for AY 2017-18 which was duly addressed by the Assessee in its rejoinder. These facts were also recorded by the Hon'ble Tribunal in para 84 of the ITAT order. Thus, raising the same allegations again in the year under consideration is not only untenable but frivolous. 12. The ITAT erred in referring to the decision of the Hon'ble Supreme Court in Appollo Tyres vs CIT 255 ITR 273 that the tax authorities do not have the jurisdiction to question the classification of said Instrument in the said....
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....o. 3 were issued on 05.09.1996. It is a matter of fact that the assessee, though, was preparing its financial statements following IGAAP till A.Y. 2016-17, however, after notification of Ind AS, the assessee started following the freshly introduced accounting standard from A.Y. 2017-18 onwards. In the balance sheet prepared as at 31.03.2017, the assessee has shown the debentures as other equity under the head 'equity and liabilities'. However, in the notes to the accounts, it was stated that all convertibles issued by the company considered as other equity are to be treated as equity component of CFI. At this stage, it is necessary to refer to certain provisions under section 115JB of the Act, which are relevant for our purpose. 13. Sub section (2A) of section 115JB of the Act provides that a company whose financial statements are drawn up in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit has to be further increased or decreased in terms with the said provision. Sub section (2C) of section 115JB of the Act provides that in case of a company referred to in sub-section (2A), the book p....
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....per the Companies Act referred to above in respect of companies who are required to prepare the financial statements in accordance with the Ind AS is bifurcated into 'assets' and 'liabilities'. Equity is further bifurcated to the following two types: a) Equity share capital b) Other equity The schedule of other equities is as follows: a) Share application money b) Equity component of compound financial instruments (CFI) c) Reserve and surplus d) Debt instruments through OCI e) Equity income through OCI f) Effective portion of cash flow hedge g) Revaluation surplus h) Exchange difference on translating the financial statement of foreign operation i) Other items of OCI (to be specified) j) Money received against share warrant 15. As per the Schedule noted above, what is of importance is item (b) "Equity component of compound financial instruments (CFI)". Ind AS-32 specifies the principle for presenting financial instruments as liabilities or equity. Further, it applies to the classification of financial instruments, from the perspective of the issuer, into financial asset....
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....d meets the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D. An equity instrument is any contract tuat evidences a residual interest in the assets of an entity after deducting all of its liabilities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See Ind AS 113, Fair Value Measurement.) A puttable instrument is a financial instrument that gives the holder the right to put the instrument back to the issuer for cash or another financial asset or is automatically put back to the issuer on the occurrence of an uncertain future event or the death or retirement of the instrument holder. 17. Paragraph 15 of Ind AS-32 prescribes that the issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as a financial liability, a financial asset or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset and an equity instrument. 18. Paragraph 16 provides that financial instrument ....
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....assessee has strenuously urged before us that due to inadvertence the Auditor has erroneously stated that the convertible debentures notified under the head other equity are of the nature of CFI. He has submitted before us that in the books of account, the assessee has never treated it as a liability. Drawing our attention to the terms of conversion of the debentures, ld. Counsel submitted that though debentures can be converted to equity unilaterally by either of the party, however, redemption is not unilateral but mutual. For better appreciation, the details of debentures issued by the assessee with terms of conversion, as detailed in the written submissions of ld. DR are reproduced hereunder: SN Title of instrument Issue Date Face Value Issued Status Qty Amount Relevant Terms A. Zero Coupon Unsecured Optionally Fully Convertible Debentures 30.06.1995 5,000 8,83,140 4,41,57,00,000 The Issuer and the Debenture holder will have an option for early to conversion at any time by giving one month's notice. The conversion of the Debentures will be based on higher of the boo....
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....,000 23. As could be seen from the details of debentures mentioned in Sr. No. B and C above, they were either redeemed or cancelled before the end of F.Y. 2016-17 itself. While, the ZOFCDs of 15103 crores were redeemed at par, FCDs of Rs. 279.90 crores were bought back at par by the assessee vide Board Resolution dated 14.07.2016. Therefore, at the end of the year, these two items did not exist. The only instrument which remained was ZOFCDs of Rs. 441.57 crores. These were converted to 7,23,88,770 equity shares in F.Y. 2020-21. 24. Thus, the materials on record clearly demonstrate that the debentures were never intended to be treated as liability as no payment on account of interest was either made or intended to be made. Though, of course, as per the terms of ZOFCDs at item no. A, the debentures were redeemable at premium of 5% of the face value, however, as discussed earlier, the redemption was not unilateral but mutual. Therefore, without the consent of the assessee, the debentures could not have been redeemed by the holder. On the contrary, as per the terms of the debentures the assessee could have unilaterally converted the debentures to equity at any stage upo....
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....ereby, had corrected the mistake in note no. 36.2 of notes to accounts. This is evident from the re-casted financial statements, a copy of which is placed at pg. 115 of the paper book. We have further noticed that the FCDs of Rs. 217.90 crores appearing at item no.(C) noted above were subjected to change in conversion terms vide Board Resolution dated 14.01.2016. As per the revised terms, the debentures were fully convertible to equity shares of the company after the expiry of 15 years, but not later within 20 years from the respective dates of allotment. Further, the conversion of debentures will be based on higher of the book value or face value as at 31.03.2015. 27. Learned DR has questioned the sanctity of the aforesaid board resolution by submitting that only after Pr. CIT initiated action u/s. 263 of the Act in A.Y. 2017-18 to examine applicability of section 115JB(2C) of the Act, the assessee has reclassified the nature of instrument through Board Resolution. We do not find much substance in such submission of ld. DR in absence of any corroborative material to demonstrate that the assessee reclassified the nature of instrument after initiation of proceedings u/s. 263 of t....
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..../fair value adjustments have been made to items of Property, Plant & Equipment (PPE) under Ind AS, as per section 115JB of the Act, the book profit of 30. In our view, what is of relevance is Q. No. 9. As could be seen from the said question and it's answer, it refers to the financial instruments like non-convertible debentures (NCDs). Whereas, in assessee's case, the financial instruments are not NCDs. Hence, the clarification provided in the Circular under reference would be of no help to the Revenue. 31. As discussed in the foregoing paragraphs, the facts on records as well as the terms of conversion of debentures, in no way demonstrate that they would come within the ambit of CFI or other equity. It appears, due to lack of proper guidance regarding the classification of the financial instruments, the assessee was compelled to show it under the head 'other equity'. However, in the very same balance sheet, the assessee had shown it under the sub- head 'instrument classified as equity'. Thus, it is established on record that the assessee has always treated the instruments as equity, having no component of liability. Merely, because in the notes to accounts, the auditor inadv....
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....ltimately completed the assessment u/s. 143(3) of the Act vide order dated 28.12.2019, assessing the total income at Rs. 194/- under the normal provisions and book profit at Rs. 7,58,40,803/-. 35. The PCIT, in exercise of powers conferred u/s. 263 of the Act, called for and examined the assessment records. After examination, ld. PCIT was of the view that the assessment order is erroneous and prejudicial to the interest of the Revenue, as the A.O. not only failed to examine the applicability of section 115JB(2C) of the Act, but has also made no adjustment to the book profit under the said provision with regard to the transition amount, being debentures issued of Rs. 15824.47 crores. In this context, the PCIT issued a show cause notice, requiring the assessee to explain why the assessment order should not be revised. In response to the show cause notice, the assessee furnished detailed submissions not only challenging the validity of assumption of revisionary jurisdiction, but also on merits of applicability of section 115JB(2C) of the Act. Ld. PCIT did not accept the contentions of the assessee. Vide order dated 17.03.2022, he not only held that exercise of power u/s. 263 of the ....
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....stment of the book profit can be made u/s 115JB on facts and in law, then setting aside the assessment order may not be required as it will be neither erroneous nor prejudicial to the interest of revenue. Ld. PCIT has to point out not only there is an error in the assessment order but also it is prejudicial to the interest of revenue. Thus, the issue of applicability of section115JB(2C) while computing the book profit needs to be examined on merits, because Ld. PCIT has arrived at the conclusion that assessee should have made adjustment on account of transition amount in section 115JB(2C). 55. The relevant provisions of sub-section (2C) read with explanation are as under:- Special provision for payment of tax by certain companies. 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2012, is less than eighteen and one-half per cent of its book profit, such book profit shall be deemed to be the total ....
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....gence date; (C) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the convergence date; (D) adjustments relating to items of property, plant and equipment and intangible assets recorded at fair value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards 101 on the convergence date; (E) adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the convergence date; and (F) adjustments relating to cumulative translation differences of a foreign operation in accordance with paragraph D13 of the Indian Accounting Standards 101 on the convergence date. 56. Ergo, a company whose financial statements are to be drawn in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit of the year convergence, which means the first day of Indian Accounting Standards rep....
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....cordance with Indian GAAP as one type of asset, liability, or component of equity, as a different type of asset, liability, or component of equity in accordance with various applicable Ind ASs. 60. To comply with this requirement, assessee applied the requirements of Ind AS 32. Accordingly, it re-classified the Convertible Debentures of Rs. 15,824.47 crores, (which were presented as on 31st March 2016 in Indian GAAP balance sheet as "Long term borrowings") as equity instrument in its first Ind AS balance sheet and presented them as "Instruments entirely Equity in nature". These Convertible Debentures were not reclassified as Compound Financial Instrument (another category covered under Ind AS 32) by the assessee. 61. To understand whether the ZCOCDs and OFCDs issued by the assessee company contained any terms and conditions of any financial liability as contemplated in Ind AS 32, the key terms of issue of the "optionally fully convertible debentures" outstanding as on 31st March 2016 (after considering the modifications made to the original terms of issue of the various series of convertible debentures on or before 31st March 2016) needs to be understood. Same are....
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....ng Standards (Ind ASs); and (c) can be generated at a cost that does not exceed the benefits. Para 2:- An entity shall apply this Ind AS in: (a) its first Ind AS financial statements; (b).............. Para 6:- An entity shall prepare and present an opening Ind AS Balance Sheet at the date of transition to Ind ASs. This is the starting point for its accounting in accordance with Ind ASs.............. Appendix A: Definition of the term "date of transition to Ind AS The beginning of the earliest period for which an entity presents full comparative information under Ind ASs in first Ind AS financial statements. Para 10:-.................. an entity shall, in its opening Ind AS Balance Sheet: (a)............; (b)............; (c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability, or component of equity, but are a different type of asset, liability, or component of equity in accordance with Ind ASs; (d) apply Ind ASs in measuring all recognised assets and liabilities. 65. The "transition amount" as discussed above is defined as amount adju....
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.... are potentially unfavourable to the entity; or (b) a contract that will or may be settled in the entity's own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own equity instruments; (ii) ............... Para 15:-The issuer of a financial instrument shall classify the instrument or its component parts, on initial recognition as a financial liability, a financial asset, or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a financial asset, and an equity instrument. Para 16:-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 (ii)to exchange financial assets or financial liabilities with another entity under conditions that are potent....
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....fit in the current situation. Para 30:- Classification of the liability and equity components of a convertible instrument is not revised as a result of a change in the likelihood that a conversion option will be exercised, even when exercise of the option may appear to have become economically advantageous to some holders. Holders may not always act in the way that might be expected because, for example, the tax consequences resulting from conversion may differ among holders. Furthermore, the likelihood of conversion will change from time to time. The entity's contractual obligation to make future payments remains outstanding until it is extinguished through conversion, maturity of the instrument or some other transaction. Para 31:-Equity instruments are instruments that evidence a residual interest in the assessee of an entity after deducting all of its liabilities. Therefore, when the amount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The....
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.... before a specified date. The difference, at the date the terms are amended, between the fair value of the consideration the holder receives on conversion of the instrument under the revised terms and the fair value of the consideration the holder would have received under the original terms is recognised as a loss in profit or loss. 68. As noted above, the company had to prepare the financial statements for the FY 2015-16 and at that time it was prepared under GAAP and OFCDs were disclosed in the balance sheet as on 31st March 2016 as "long-term borrowings". Since, Ind AS 32 was made effective to the Companies Act 2016 for the financial year commencing from 1st April 2015, the assessee company was required to prepare its opening Ind AS 32 balance sheet as on the date of transition, which is the beginning of the earlier period for which an entity presents fully comparative information under Ind AS 32. Whenever opening Ind AS 32 balance sheet is prepared, Ind AS 32 & 101 requires that in this opening balance sheet not only all the assets and liabilities should be recognized but also the classification should be in accordance with the requirements of Ind AS 32. With the clas....
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....mpounding financial instrument has not been independently defined under Ind AS 32. However, if there is such financial instrument, the accounting standard requires that the issuer should first determine the liability component and then separate the liability component from the fair value of the entire financial instrument. One has to ascertain the liability component which is sine qua non for treating it as a "transition amount". The financial instrument if it is categorized as a compound financial instrument, then there has to be a liability component embedded in it. 71. Ergo, we have to see, whether in the present case, what constitute financial liability. Ostensibly, there are two situations in relation to financial instrument which can be reckoned as financial liability; firstly, there is a contractual obligation to make settlement either by monetary payment or by delivering any other financial asset; or secondly, the settlement has to be made by exchange of variable number of its own equity instruments. If we keep this definition as provided in Ind AS 32 incorporated (supra),then the instrument is an equity instrument for the issuer only if both the conditions as stat....
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.... financial instrument" which has both a liability and an equity component. As specified under Ind AS 32, the liability component of the convertible debentures is represented by the present value of the aggregate of the following future payments:- i) Principal repayment ii) Periodical interest payments. In the present case, the notional convertible debentures issued by the assessee, there is neither payment of interest component nor any kind of premium at the time of repayment. The repayment of principal in monetary terms will also not be there, as the settlement will be through issue of own equity instruments of the assessee company. Thus, the liability in monetary terms is "NIL" in the present case. Further when the entire financial instrument is classified as equity, there will be no charge on account of notional interest or any kind of financial liability in the statement of profit and loss during the entire tenure of such instrument after initial recognition in the financial accounts. It was for this precise reason; the assessee company has neither provided any interest cost or claimed any kind of financial liability in the profit and loss account. Th....
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....the form of a capital liability already recognized in the balance sheet, i.e., before the convergence date. The definition of transition amount itself excludes certain capital reserves, which is evident from the exceptions provided in the various clauses A to F in subclause (iii) of Explanation to sub-section 2C of section 115JB. These exclusions itself clarifies that certain reserves even though they are clearly part of the "other equity", since they are capital in nature, but are earmarked for other purposes which Companies Act has imposed certain restrictions for their utilization, are not treated part of transition amount. In a nut shell, not all the reserves forming part of other equity are "transition amount" as understood by the Revenue authorities. In the earlier part of the order, we have also referred to the CBDT circular number 24/2017 (supra), wherein CBDT has clarified vide question No. 7, which itself indicates that already recognized capital liability cannot be part of the transition amount. What should be the part of the "other equity", is, total comprehensive income determined on the date of convergence date based on adjustment determined as per the various account....
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....value of the principal CU 20,00,000 payable at the end of 3 years 15,44,367 Present value of the interest CU 1,20,000 payable annually in arrears for 3 years 3,03,755 Total liability component 18,48,122 Equity component (by deduction) 1,51,878 Proceeds of the bond issue 20,00,000 The above illustrative example given in the IASB and the Ind AS 32 Appendix C-documents shows that the amount of CU 1,51,878 has been classified as equity component of the compound financial instrument on initial recognition. The liability component of CU 18,48,122 will have to equal CU 20,00,000 at the end of 3 years so that at the expiry of the term of the instrument, the same can be paid back to the investor. To this effect, the difference of CU 1,51,878 (CU 20,00,000 less 18,48,122) will have to be debited as notional interest in the statement of profit and loss during the remaining term of the compound financial instrument. 79. In case the financial instrument is classified as a compound financial instrument as covered in the illustrative example, then the accounting entries under Ind AS with respect to the data as per the said illustrative example, at the ....
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....ansaction value PV Instrument value 20,00,000 15,44,367 Interest rate 6% Market rate 9% Nominal int Dis Factor PV Year 1 1,20,000 0.9174 1,10,092 Year 2 1,20,000 0.8417 1,01,002 Year 3 1,20,000 0.7722 92,662 3,60,000 3,03,755 Year Particulars Amount Opening Liability (PV) 18,48,122 1 Interest @ 9% 1,66,331 Payment (1,20,000) Liability at the end of year 1 18,94,453 2 Interest @ 9% 1,70,501 Payment (1,20,000) Liability at the end of year 2 19,44 954 3 Interest @ 9% 1,75,046 Payment 21,20,000 80. The aforesaid illustrative and the example as given in Ind AS 32 goes to illustrate as to what should be the "transition amount". In the above illustration, the value of Instrument/Debenture of Rs. 20lakhs is not the financial liability but the value of Rs. 151,878/- is the value of compounding Income. If we apply the above example in the present....
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.... 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 along with other capital liability on such instruments. Be that as it may, 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 sa....
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....s to be applied and in subsequent assessment years only consequential effect has to be given. In this context, we deem it appropriate to refer to the following observations of Hon'ble Supreme Court in case of Shasun Chemicals & Drugs Ltd. vs. CIT [2016] 73 taxmann.com 293 (SC) : 13. In the Income Tax Return which was filed for the Assessment Year 1995-96 the assessee had claimed that it had incurred a sum of Rs. 45,51,890/- towards the share issue expenses and had claimed 1/10th of the aforesaid share issue expenses under Section 35D of the Act from the Assessment Years 1995-96 to 2004-05. This claim of the assessee was found to be justified and allowable under the aforesaid provisions and on that basis 1/10th share issue expenses was allowed under Section 35D of the Act. When it was again claimed for the Assessment Year 1996-97, though it was disallowed and on directions of the Appellate Authority, the Assessing Officer made physical verification of the factory premises. He was satisfied that there was expansion of the facilities to the industrial undertaking of the assessee. It is on this satisfaction that for the Assessment Year 1996-97 also the expenses were allowe....
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....ly indicates that the transition amount of Rs. 41,40,28,675/- was scrutinised and accepted. The learned PCIT does not dispute this fact; his grievance is only that the Assessing Officer did not again verify the composition of the same transition amount in the year under consideration. In our considered opinion, such a view overlooks the settled principle that where a matter stands examined and accepted in the foundational year, the Assessing Officer cannot be faulted for not reopening or redetermining it in every succeeding year, particularly when the assessee has consistently followed the same computation mechanism and furnished all requisite particulars. 40. Therefore, once the issue has been decided in a particular manner in the year of convergence, that decision will apply in full force to the subsequent assessment years and no different view can be taken. 41. Copiously referring to the observations of the Coordinate Bench in A.Y. 2017-18, ld. DR had made arduous attempt to punch holes in the said order. He had submitted that since, the order of the co-ordinate bench is in an appeal arising out of order passed u/s. 263 of the Act, the decision taken therein would not appl....
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....through the observations of the Coordinate Bench in the context of facts and materials on record, we are of the firm view that there being no foreseeable difference in the factual position relating to the issue in dispute, the decision taken by the Coordinate Bench in A.Y. 2017-18 will apply in full force. Thus, in our view, the first appellate authority adopted the correct approach of following the decision of the higher appellate authority. In the final analysis, we do not find merit in the grounds raised. 43. One more issue raised by the department is in relation to disallowance u/s. 14A read with Rule 8D. In course of assessment proceeding, the A.O. noticed that in the assessment years in dispute though the assessee had earned considerable amount of exempt income, however, the suo motu disallowance made by the assessee was not in accordance with the method prescribed under Rule 8D. Accordingly, he issued a show cause notice to the assessee to explain why disallowance should not be made in terms with the method prescribed under Rule 8D. In response to the show cause notice issued, the assessee furnished a detailed reply justifying the suo motu disallowance and objecting to th....