9911796707
TMI Blog2023 (4) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 convergence date and that the same would not cover the present case where the ZOFCDs and FCDs are merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 submissions made before us, it is seen that the main issue which is culled out from the order of Ld. PCIT under section 263 of the Act reveals that the Ld. PCIT has arrive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance 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 made following observations while directing the AO to compute the income as to the additions u/s 115JB after applying the provision of section 2C correctly:- 5. After careful examination a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 a compound financial instrument. 5.4 in support of its contention that ZOFCDs are the instruments entirely equity in nature, assessee has mainly relied on * Ind AS 32 (especially Para 11, Para 16, Para 28 and Para 29) * Its classification and presentation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D, 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 component and debenture holder has option to convert debt into equity. Therefore, the contention of the assessee that it is an instrument entirely equity in the nature is not correct. It clearly falls under the category of Compound Financial Instruments. ZOFCDs of Rs. 15,103 crores : Zero Coupon Unsecured Optionaiiy Fully Convertible Debentures of Rs. 10 each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 considered under other equity under the head Equity Component of Compound Financial Instruments' Thus, as per own admission and computation made by the assessee company, the said equity component of compound financial instruments in its books in the form of ZOFCD/FCD, has been arrived at Rs. 15824.47 crores. It is noteworthy that, though by its own admission, assessee has treated the entire ZOFCD and FCD amounting to 15824.47 Crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf-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 in nature and hence were not includible in transition amount. However, suchreliance is misplaced as the said Q no 9 in CBDT's Circular No. 24/2017 dated 25/07/2017 has dealt with financial instruments such as Non convertible debentures and Interest free loan etc which are purely debt instruments which are indeed embedded part of any compound financial instruments The question may not have specifically dealt instruments with nomenclature such as ZOFCD/FCD as in the case of assessee but cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FCD) 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. Accordingly, the computation under section 115JB is made as per certain adjustments provided in the section itself without going into the nature (as capital/revenue) of these specific items. Hence, the addition on account of transition amount is to be made as per the provisions of section 115JB((2C) of the Income-tax Act. Moreover, the case laws quoted by the assessee are not relevant to the issue under consideration as the provisions of section 115JB(2C) is effective from AY 2017-18 and the said case laws are distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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 the first time as per the provisions of Ind AS. ii) During the year under consideration, various companies merged with the Appellant company, vide order of National Company Law Tribunal dated 2nd November 2017, sanctioning scheme of merger with an appointed date of 1st October 2016. Accordingly, to give effect to the scheme of merger, on 15.3.2019, the appellant revised the financial statements. iii) Thereafter, to give effect to the "Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013" issued in July 2017 by the Institute of Chartered Accountants of India ("ICAI") (hereinafter referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 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) Reserve and surplus; d) Debt instrument through other comprehensive income; e) Equity instrument through 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. 14. As per the provisions of section 115JB(2C) of the Act, which provides that the "book profit" of the year of convergence (being first year of adoption of "Ind AS)" shall be further increased/ decreased (as the case maybe) by 1/5th of the transition amount for 5 assessment years, the term "transition amount" is defined a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trict 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 securities premium reserve) on the convergence date. Whether changes in share application money on reclassification to "Other Equity" would form part of the Transition Amount? Answer: Share application money pending allotment which is reclassified to Other Equity on transition date shall not be considered for the purpose of computing transition Amount. ........... Question 9: How do we account for items such as equity component, if any, of financial instruments like Non-Convertible debentures (NCDs), Interest free loan etc. included in other equity as per Ind AS for the computation of transition amount under MAT? Answer: Items such as equity component of financial instruments like NCD"s, Interest free loan etc. would be included in the Transition Amount." 20. Thus, it was submitted that clarifications given in the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). (iii) Para 15 of the said Ind AS states that the issuer of a financial instrument shall classify the instrument, or its component parts, on its 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 financial liability, financial asset and equity instrument contained therein. (iv) Para 30 of Ind AS 32 provides that Classification of the liability and equity components of a convertible instrument is not revised as a result of any change in likelihood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estor; 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; vi. Since the instrument do not carry any interest, the Issuer has not made any interest payments. 27. The criterion to be considered by the Issuer for determining the classification of the instruments as "financial liability" at the time of their initial recognition is as below: i. Whether there is any contractual obligation to pay cash to the Investor? * As is seen from the above terms of the instruments, since the option to convert the instrument into equity, is not only available with the Investor but is also available with the Assessee Issuer, there is no obligation to pay cash by the Issuer to the Investor since the issuer can unconditionally avoid delivery of cash by converting into equity shares. * Further the condition for early redemption is only if the issuer and investor, both, agree for the same. Therefore, as the holder of the instrument does not have an unconditional right to call for redemption of investment, the issuer (Assessee) does not have an obligation to pay cash to the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 potentially unfavourable to the issuer. (b) If the instrument will or may be settled in the issuer"s own equity instruments, it is: i. a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or ii. a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. 29. From the above, it is seen that there are two primary conditions to be satisfied to fall within the category of "Equity Instrument", they are - a) There is no obligation on the issuer to deliver cash or financial asset; and b) The settlement will or may be in the fixed number of the issuer"s own equity instruments. Both the above conditions are examined in the forgoing paras, which were negative for "financial liability" but positive for an "equity instrument". Hence, it was submitted that the instruments in question are nothing but "instruments entirely equity in natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of "transition amount". 34. It has been pointed out that from the perusal of the CBDT circular no.2/2018 [F.N0.370142/15/2017- TPL] dated 15th February 2018, it is clear that what is intended to be included in the term 'transition amount' is only adjustments which would otherwise have impact in the profitability of the assessee but on account of adoption of IND AS, the same are adjusted in "Other Equity" schedule and not Profit and Loss account. A transaction not having a bearing on Profit and Loss account was never intended to be covered by the amendment. 35. The Assessee company has presented the instruments in question under 'other equity' as there was no guidance at the time of finalisation of the annual accounts, in April 2017, as to under which head would it be appropriate to show the 'instruments which are entirely equity in nature'. Meanwhile, the Institute of Chartered Accountants of India ("ICAI") issued a "Guidance Note on Division II - Ind AS Schedule III to the Companies Act, 2013" in July 2017 to provide guidance for the preparation of financial statements in accordance with Ind AS. The said guidance note inter-alia provides that the instrume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s obtained for revision and recasting of the financial. 42. The DR further argued that the conditions of para 16 of Ind AS 32 has not been fulfilled, i.e., the instrument can"t be considered as equity instruments as neither the assessee company nor the debenture holder exercised the option of conversion of such debentures into equity shares of the assessee company. Moreover, here in this case all the debentures has been redeemed, which goes to show that in substance it was never meant to be converted into equity. On these facts alone, it can be held that it is not an equity instrument. 43. Accordingly, the instruments being Compound Financial Instrument, Equity component of Compound Financial Instrument, i. e. Rs. 15824,47,15,000/- was to be included in the 'Transition amount' on convergence date and 1/ 5th of the transition amount was to be included in the Book Profit u/ s 115JB(2C) of the IT Act. He also referred to various observations of Ld. PCIT and heavily relied upon the same and submitted that he has clearly culled out how these ZFOCs are nothing but financial liability in the form of CFI falling within the definition of "transition amount". 44. The Assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts is evidenced by the very fact that the accounting treatment required to be given to instruments which are CFI as given in Example 9 of Ind As 32 has not been given by the Assessee. 51. The conclusion drawn by the Ld. DR on the analysis of the terms of the instruments are incorrect as it has been drawn on the basis of the historical terms and conditions of the aforesaid instruments at the time of their issue, subsequent to which the terms and conditions had been changed and as on the convergence date i.e. 1st April, 2016, the rate of interest was 0% which was relevant for the purpose of classification of the said instrument. One has to see whether there is any contractual obligation to deliver cash in future and not basis past terms which are no longer valid. Accordingly, as on 01.04.2016, the Appellant had no contractual obligation to pay interest in respect of these instruments. Further, the observation of the Ld. DR that the interest represents discount, is factually incorrect since in the case of Appellant, the instruments were issued at par and were never issued at discount. 52. Moreover, the instruments redeemed during the year also included fresh debentures which were is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Income Tax proceedings. D E C I S I O N 54. We have heard both the parties, perused the relevant findings given in the impugned orders as well as documents and material referred to before us. The observations and findings of Ld. PCIT in the impugned order passed u/s 263 have already been discussed in detail in the foregoing paragraphs. The findings and reasoning of Ld. PCIT has to be tested, whether the assessment order passed by the AO accepting the computation of book profit is erroneous in so far as prejudicial to the interest of revenue. If both the conditions are satisfied, then Ld. PCIT"s order setting aside the assessment order will stand. However, if the reasoning itself does not lead to conclusion that no adjustment 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 section 115JB(2C) while computing the book profit needs to be examined on merits, because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st day of the first Indian Accounting Standards reporting period as defined in the Indian Accounting Standards 101; (iii) "transition amount" means the amount or the aggregate of the amounts adjusted in the other equity (excluding capital reserve and securities premium reserve) on the convergence date but not including the following:- (A) amount or aggregate of the amounts adjusted in the other comprehensive income on the convergence date which shall be subsequently re-classified to the profit or loss; (B) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38 adjusted on the convergence 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 associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial year 2016-17, it made a transition to Ind AS. Accordingly, it prepared and presented its financial statements from the financial year ending 31" March 2017 under Ind AS. Due to the requirement of presenting the comparative information for the previous financial reporting period commencing from 1" April 2015, as per Ind AS 101; first time adoption of Indian Accounting Standards, the assessee prepared its first Ind AS Balance Sheet as on 1st April 2015. As per the requirement of Ind AS 101, for preparing this first Ind AS Balance Sheet, assessee reclassified items that it recognized in accordance 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 Deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere for the first time adoption of Indian Accounting Standards is to be adopted, it provides:- Para 1:- The objective of this Ind AS is to ensure that an entity's first Ind AS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that: (a) is transparent for users and comparable over all periods presented; (b) provides a suitable starting point for accounting in accordance with Indian Accounting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll of its liabilities. A financial liability is any liability that is: (a) a 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the holder but even the issuer has the option to convert the debentures into equity instruments. Hence, the example provided here in para 29 may not 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 theamount of a compound financial instrument is allocated to its equity and liability components, the equity component is assigned the residual a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re favourable conversion ratio or paying other additional consideration in the event of conversion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a financial liability and an equity instrument. The term compounding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us can be classified as a "compound 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy 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 sub-clause (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 accounting standards ofInd AS 101, 16, 38 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 time of initial recognition of above convertible bonds in subsequent periods and at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ening 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. 20 lakhs 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 case, then it is very difficult to fathom that how the entire optional convertible debentures can be classified and held as financial instrument, i.e., entire debenture is a financial liability so as to be classified under the head "transition amount", as held by Ld. PCIT in his order. We have reiterated many times in the earlier part of the order that only the component of financial liability element alone i.e., (financial liability or assets) which has to be taken as "transition amount". Ld. PCIT has completely erred in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 same as transition amount. 83. We have 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. The Zero Coupon OFCDs issued in the year 2015 and 2016 issued for sums aggregating to Rs. 1510.30 crores, the entire ZOFCDs was redeemed in the financial year 2016-17 at par. Thus, even though it has been redeemed within the year in a very short span of a year, then also there is neither any int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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