Mumbai Tribunal holds reclassification of fully equity instrument to “Other Equity” on convergence to Ind-AS is not liable to MAT

This Tax Alert summarizes a recent Mumbai Tribunal (Tribunal) decision in case of Reliance Industries Investment and Holdings Ltd.  (Taxpayer) wherein issue arose whether under minimum alternate tax (MAT) provisions of the Indian Tax Laws (ITL), reclassification of optionally/compulsorily convertible debentures on convergence to Ind-AS as “Other Equity”, was includible in “transition amount” and hence, taxable under MAT over five years.

The Tribunal held that on convergence to Ind-AS, only those adjustments in “Other Equity” which would otherwise impact Profit and Loss Account (P&L) are includible in “transition amount”. A reclassification of a fully equity instrument as per Ind-AS to “Other Equity” is not includible in “transition amount”. The Tribunal also held that, in the facts of the Taxpayer’s case, considering the terms and conditions of convertible debentures, they were not classifiable as “compound financial instruments”, in absence of a liability component embedded therein – rather they were fully equity in nature. Although, the Taxpayer initially presented the instruments under “Other Equity”, hey were rightly classified by the Taxpayer as “Instruments entirely equity in nature” separate from “Other Equity” in the revised Balance Sheet as per the Guidance Note issued by Institute of Chartered Accountants of India (ICAI). Therefore, in absence of any adjustment in “Other Equity”, the amount of these debentures could not be included in “transition amount.