On conversion to Ind AS our convertible debentures were parked under "other equity" and a note called them the equity component of a compound financial instrument. The Assessing Officer has treated the whole amount as transition amount and is adding one-fifth a year to book profit. Can he?
Not if the instrument has no liability component. Ind AS 32 requires a compound financial instrument to have both a liability component and an equity component, and where the balance sheet shows the debentures as an instrument entirely equity in nature, they are not a compound financial instrument, are therefore no part of the transition amount defined in s.115JB(2C), and no one-fifth adjustment can be made.
Decided by the ITAT (Saktijit Dey, Vice President and Makarand Vasant Mahadeokar, Accountant Member (ITAT Mumbai 'D' Bench)) on 2026-05-21, reported as ITA Nos.2398 and 2399/Mum/2025 (AY 2018-19 and 2019-20) and ITA No.4256/Mum/2025 (AY 2020-21); heard 5 March 2026, pronounced 21 May 2026. It bears on section 115JB, section 115JB(2A), section 115JB(2C), section 14A, section 143(3), section 263 of the Income Tax Act 1961, in Assessment & Scrutiny, How Tax Law Is Read and Revision & Rectification matters.
This is the single largest s.115JB(2C) adjustment reported to date — a transition amount of Rs.15,824.47 crores, of which one-fifth, Rs.3,164.89 crores, was added to book profit in each year — and it turns entirely on a classification question decided by Ind AS 32 rather than by any tax principle. Two things carry beyond this assessee. First, the test is substantive: a compound financial instrument must comprise both a liability component and an equity component, and the item in Division II of Schedule III to the Companies Act 2013 that feeds the transition amount is "Equity component of compound financial instruments", so if there is no liability component there is nothing to import. Second, and this is the practically valuable half, the Bench held that an auditor's inadvertent description in a note to the accounts cannot be used to reclassify an instrument for MAT purposes, applying Apollo Tyres: once financial statements are filed with the Registrar of Companies and adopted by the shareholders, the tax authorities cannot question the classification of items in the balance sheet. Note the limits. The Bench decided nothing about instruments that genuinely do carry a liability component; on those, the transition amount consequence follows. And the reasoning is borrowed — the merits were decided by a coordinate Bench for AY 2017-18, and this order follows it, so the strength of the authority is only as good as that earlier order.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee is a wholly owned subsidiary of Reliance Industries Ltd engaged in holding investments in shares and securities, lending, trading in petroleum products and providing manpower services. It had issued various convertible debentures to its holding company. Until the financial statements for the year ended 31 March 2016, prepared under Indian GAAP, those debentures were disclosed under "long term borrowings". Following the Central Government notification of 16 February 2015, the assessee adopted Ind AS from 1 April 2016, that is from AY 2017-18. In the Ind AS financial statements the debentures were classified under the broad head "Other equity" with the sub-head "Instrument classified as Equity" in Note 11, but Note 36.2, reconciling profit and other equity between Indian GAAP and Ind AS, described the amount as the equity component of a compound financial instrument. For AY 2019-20 the assessee returned income of Rs.13,50,780 (revised to Rs.8,54,680) under the normal provisions and book profit of Rs.18,14,08,406. In the assessment for AY 2018-19 the Assessing Officer had found the transition amount as on 1 April 2016 to be Rs.15,824,47,15,000 and had held that one-fifth had to be added in each of AY 2017-18 to AY 2021-22; following that view he added Rs.3,164,89,43,000 in the year under appeal. For AY 2017-18, the year of convergence, the Assessing Officer had made no such adjustment; the Principal Commissioner revised that assessment under s.263 holding the debentures to be compound financial instruments, and on appeal the Tribunal held both that the assumption of s.263 jurisdiction was invalid and, on the merits, that no adjustment could be made under s.115JB(2C). The first appellate authority therefore allowed the assessee's appeals for the later years, and the Revenue appealed.
The Revenue's appeals were rejected and the orders of the first appellate authority upheld. Applying the coordinate Bench's finding for AY 2017-18, the convertible debentures issued by the assessee are entirely equity in nature and not compound financial instruments; they therefore form no part of the transition amount as defined in s.115JB(2C) and no adjustment to book profit falls to be made under that sub-section. The additions under s.115JB(2C) were held unjustified (paragraphs 37 to 39; the concluding paragraph number could not be fixed on re-reading, see editor_note).
The Bench set out the statutory scheme: s.115JB(2A) requires a company whose financial statements are drawn up in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules 2015 to further increase or decrease book profit as that sub-section provides, and s.115JB(2C) requires the book profit of the year of convergence and each of the following four previous years to be increased or decreased by one-fifth of the transition amount; the Explanation defines the year of convergence, the convergence date by reference to Ind AS 101, and the transition amount as the amounts adjusted in other equity, excluding capital reserve and securities premium reserve, on the convergence date, subject to six carve-outs (paragraph 13). To find the meaning of "other equity" the Bench turned to the balance sheet format in Division II of Schedule III to the Companies Act 2013, in which item (b) of other equity is the "Equity component of compound financial instruments" (paragraphs 14 and 15). Ind AS 32 requires an issuer to classify an instrument or its component parts on initial recognition according to the substance of the contractual arrangement; paragraph 16 treats an instrument as equity rather than a financial liability where it includes no contractual obligation and where it will or may be settled in the issuer's own equity instruments; and paragraphs 28 to 32 require a compound financial instrument to have both a liability component and an equity component, with the right of conversion lying with the holder (paragraphs 17 to 19). Only where both components are present does the transition amount forming part of other equity have to be added to book profit (paragraph 20). On the facts, Note 11 showed the debentures under "instrument classified as equity" so that the liability component was missing, and it was the auditor's statement in Note 36.2 that led the Assessing Officer to treat them as compound financial instruments (paragraph 21); counsel explained that the auditor's statement was inadvertent, that the assessee had never treated the debentures as a liability in its books, and that although conversion could be effected unilaterally by either party, redemption was mutual (paragraph 22). The Bench recorded its complete agreement with the coordinate Bench's analysis of Ind AS 32 and s.115JB(2C) for AY 2017-18, noting that that decision had been reached on the merits after examining the Act and Ind AS 32 and not merely by reversing the s.263 order on technical grounds, so that its findings were binding absent strong reason to depart (paragraph 37). It added that the conclusion is supported by Apollo Tyres Ltd v CIT (255 ITR 273), under which once financial statements are filed with the Registrar of Companies in compliance with statutory requirements the authorities, other than those with specific powers, cannot question the classification of items in the balance sheet; the audited accounts showing the debentures as instruments entirely equity in nature had been registered and adopted by the shareholders, so the tax authorities were not permitted to question the classification (paragraph 38).
As discussed earlier, the CFI must comprise of two components, i.e., 'liability component' and 'equity component'.
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Handle my notice → Ask a CA on WhatsAppNot if the instrument has no liability component. Ind AS 32 requires a compound financial instrument to have both a liability component and an equity component, and where the balance sheet shows the debentures as an instrument entirely equity in nature, they are not a compound financial instrument, are therefore no part of the transition amount defined in s.115JB(2C), and no one-fifth adjustment can be made. This was decided by the ITAT (Saktijit Dey, Vice President and Makarand Vasant Mahadeokar, Accountant Member (ITAT Mumbai 'D' Bench)) and bears on section 115JB, section 115JB(2A), section 115JB(2C), section 14A, section 143(3), section 263 of the Income Tax Act 1961. It is reported as ITA Nos.2398 and 2399/Mum/2025 (AY 2018-19 and 2019-20) and ITA No.4256/Mum/2025 (AY 2020-21); heard 5 March 2026, pronounced 21 May 2026. This is the single largest s.115JB(2C) adjustment reported to date — a transition amount of Rs.15,824.47 crores, of which one-fifth, Rs.3,164.89 crores, was added to book profit in each year — and it turns entirely on a classification question decided by Ind AS 32 rather than by any tax principle. Two things carry beyond this assessee. First, the test is substantive: a compound financial instrument must comprise both a liability component and an equity component, and the item in Division II of Schedule III to the Companies Act 2013 that feeds the transition amount is "Equity component of compound financial instruments", so if there is no liability component there is nothing to import. Second, and this is the practically valuable half, the Bench held that an auditor's inadvertent description in a note to the accounts cannot be used to reclassify an instrument for MAT purposes, applying Apollo Tyres: once financial statements are filed with the Registrar of Companies and adopted by the shareholders, the tax authorities cannot question the classification of items in the balance sheet. Note the limits. The Bench decided nothing about instruments that genuinely do carry a liability component; on those, the transition amount consequence follows. And the reasoning is borrowed — the merits were decided by a coordinate Bench for AY 2017-18, and this order follows it, so the strength of the authority is only as good as that earlier order. If it applies to you, the first step is this: Read the terms of the instrument, not the label: identify whether there is any contractual obligation to deliver cash or another financial asset, and whether redemption (as opposed to conversion) can be forced unilaterally by the holder.
The assessee is a wholly owned subsidiary of Reliance Industries Ltd engaged in holding investments in shares and securities, lending, trading in petroleum products and providing manpower services. It had issued various convertible debentures to its holding company. Until the financial statements for the year ended 31 March 2016, prepared under Indian GAAP, those debentures were disclosed under "long term borrowings". Following the Central Government notification of 16 February 2015, the assessee adopted Ind AS from 1 April 2016, that is from AY 2017-18. In the Ind AS financial statements the debentures were classified under the broad head "Other equity" with the sub-head "Instrument classified as Equity" in Note 11, but Note 36.2, reconciling profit and other equity between Indian GAAP and Ind AS, described the amount as the equity component of a compound financial instrument. For AY 2019-20 the assessee returned income of Rs.13,50,780 (revised to Rs.8,54,680) under the normal provisions and book profit of Rs.18,14,08,406. In the assessment for AY 2018-19 the Assessing Officer had found the transition amount as on 1 April 2016 to be Rs.15,824,47,15,000 and had held that one-fifth had to be added in each of AY 2017-18 to AY 2021-22; following that view he added Rs.3,164,89,43,000 in the year under appeal. For AY 2017-18, the year of convergence, the Assessing Officer had made no such adjustment; the Principal Commissioner revised that assessment under s.263 holding the debentures to be compound financial instruments, and on appeal the Tribunal held both that the assumption of s.263 jurisdiction was invalid and, on the merits, that no adjustment could be made under s.115JB(2C). The first appellate authority therefore allowed the assessee's appeals for the later years, and the Revenue appealed. The matter was decided on 2026-05-21 by the ITAT (Saktijit Dey, Vice President and Makarand Vasant Mahadeokar, Accountant Member (ITAT Mumbai 'D' Bench)). On those facts the ITAT held as follows. The Revenue's appeals were rejected and the orders of the first appellate authority upheld. Applying the coordinate Bench's finding for AY 2017-18, the convertible debentures issued by the assessee are entirely equity in nature and not compound financial instruments; they therefore form no part of the transition amount as defined in s.115JB(2C) and no adjustment to book profit falls to be made under that sub-section. The additions under s.115JB(2C) were held unjustified (paragraphs 37 to 39; the concluding paragraph number could not be fixed on re-reading, see editor_note).
The Bench set out the statutory scheme: s.115JB(2A) requires a company whose financial statements are drawn up in compliance with the Indian Accounting Standards specified in the Annexure to the Companies (Indian Accounting Standards) Rules 2015 to further increase or decrease book profit as that sub-section provides, and s.115JB(2C) requires the book profit of the year of convergence and each of the following four previous years to be increased or decreased by one-fifth of the transition amount; the Explanation defines the year of convergence, the convergence date by reference to Ind AS 101, and the transition amount as the amounts adjusted in other equity, excluding capital reserve and securities premium reserve, on the convergence date, subject to six carve-outs (paragraph 13). To find the meaning of "other equity" the Bench turned to the balance sheet format in Division II of Schedule III to the Companies Act 2013, in which item (b) of other equity is the "Equity component of compound financial instruments" (paragraphs 14 and 15). Ind AS 32 requires an issuer to classify an instrument or its component parts on initial recognition according to the substance of the contractual arrangement; paragraph 16 treats an instrument as equity rather than a financial liability where it includes no contractual obligation and where it will or may be settled in the issuer's own equity instruments; and paragraphs 28 to 32 require a compound financial instrument to have both a liability component and an equity component, with the right of conversion lying with the holder (paragraphs 17 to 19). Only where both components are present does the transition amount forming part of other equity have to be added to book profit (paragraph 20). On the facts, Note 11 showed the debentures under "instrument classified as equity" so that the liability component was missing, and it was the auditor's statement in Note 36.2 that led the Assessing Officer to treat them as compound financial instruments (paragraph 21); counsel explained that the auditor's statement was inadvertent, that the assessee had never treated the debentures as a liability in its books, and that although conversion could be effected unilaterally by either party, redemption was mutual (paragraph 22). The Bench recorded its complete agreement with the coordinate Bench's analysis of Ind AS 32 and s.115JB(2C) for AY 2017-18, noting that that decision had been reached on the merits after examining the Act and Ind AS 32 and not merely by reversing the s.263 order on technical grounds, so that its findings were binding absent strong reason to depart (paragraph 37). It added that the conclusion is supported by Apollo Tyres Ltd v CIT (255 ITR 273), under which once financial statements are filed with the Registrar of Companies in compliance with statutory requirements the authorities, other than those with specific powers, cannot question the classification of items in the balance sheet; the audited accounts showing the debentures as instruments entirely equity in nature had been registered and adopted by the shareholders, so the tax authorities were not permitted to question the classification (paragraph 38). In the words reproduced by the source cited on this page: "As discussed earlier, the CFI must comprise of two components, i.e., 'liability component' and 'equity component'." The decision followed or applied Apollo Tyres Ltd v CIT (255 ITR 273) (SC) — applied to bar reclassification of items in audited accounts filed with the Registrar of Companies; The coordinate Bench order in the assessee's own case for AY 2017-18 (s.263 proceedings) — followed on the merits; Ind AS 32, paragraphs 15, 16 and 28 to 32 — applied.
It was decided by the ITAT on 2026-05-21 and is reported as ITA Nos.2398 and 2399/Mum/2025 (AY 2018-19 and 2019-20) and ITA No.4256/Mum/2025 (AY 2020-21); heard 5 March 2026, pronounced 21 May 2026. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 115JB, section 115JB(2A), section 115JB(2C), section 14A, section 143(3), section 263, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeals were rejected and the orders of the first appellate authority upheld. Applying the coordinate Bench's finding for AY 2017-18, the convertible debentures issued by the assessee are entirely equity in nature and not compound financial instruments; they therefore form no part of the transition amount as defined in s.115JB(2C) and no adjustment to book profit falls to be made under that sub-section. The additions under s.115JB(2C) were held unjustified (paragraphs 37 to 39; the concluding paragraph number could not be fixed on re-reading, see editor_note). It arises in Assessment & Scrutiny, How Tax Law Is Read and Revision & Rectification matters, on section 115JB, section 115JB(2A), section 115JB(2C), section 14A, section 143(3), section 263 of the Income Tax Act 1961, and was decided by Saktijit Dey, Vice President and Makarand Vasant Mahadeokar, Accountant Member (ITAT Mumbai 'D' Bench). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Test the instrument against paragraphs 16 and 28 to 32 of Ind AS 32; if there is no liability component there is no compound financial instrument and no equity component of one to bring into the transition amount. Check what the balance sheet and the notes actually say — here Note 11 showed the debentures under "instrument classified as equity" while Note 36.2 called them the equity component of a compound financial instrument, and it was the Note 36.2 wording the Assessing Officer seized on. Where a note is wrong, do not merely assert inadvertence: put the terms of issue, the conversion and redemption mechanics and the auditor's position on record, and run Apollo Tyres against any attempt to reclassify audited accounts filed with the Registrar. If the initial year of convergence has already been decided in your favour, say so squarely — the first appellate authority here held that once no adjustment can be made in the year of convergence, the adjustments in the four succeeding years are bound to fail.
Validity check could not be completed. Validity check could not be completed. The order was pronounced on 21 May 2026 and no later treatment was located; the Revenue's time to appeal under s.260A to the Bombay High Court may be open. The coordinate Bench order for AY 2017-18 that this order follows was not itself retrieved and read on this pass — its reasoning is known only from the extract reproduced within this order, so a reader relying on the AY 2017-18 decision should obtain it separately. The coordinate Bench order followed is ITA No.1065/Mum/2022, dated 29 March 2023. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The electronic text of this order is unstable and a reader must treat paragraph citations with care: successive fetches of the indiankanoon print view returned materially different renderings of the closing paragraphs, and the concluding sentence recorded on the first reading could not be reproduced on any later fetch. What is firmly established is the disposal — the Revenue's appeals were dismissed and the orders of the First Appellate Authority left undisturbed — and the reasoning at paragraphs 13 to 22 and 37 to 39, of which the sentence at paragraph 20 was re-confirmed verbatim on an independently addressed fragment fetch. The order reproduces, before recording this Bench's agreement, an extract from the coordinate Bench order for AY 2017-18 (ITA No.1065/Mum/2022, dated 29 March 2023); the extract is not this Bench's own reasoning. The convertible-debenture figures are reproduced in the order from the Departmental Representative's written submissions. The same order also decides a s.14A read with Rule 8D(2)(ii) ground, on which the first appellate authority's deletion for want of recorded satisfaction was upheld; that ground is not summarised here. A secondary report of this order (taxscan.in) gave the case name, the appeal numbers, the Bench, the date of pronouncement and the outcome and matched the raw header; it is cited only for that corroboration. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeals were rejected and the orders of the first appellate authority upheld. Applying the coordinate Bench's finding for AY 2017-18, the convertible debentures issued by the assessee are entirely equity in nature and not compound financial instruments; they therefore form no part of the transition amount as defined in s.115JB(2C) and no adjustment to book profit falls to be made under that sub-section. The additions under s.115JB(2C) were held unjustified (paragraphs 37 to 39; the concluding paragraph number could not be fixed on re-reading, see editor_note).
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