1. The Finance Act, 2017 amended section 115JB of Income-tax Act, 1961 to provide the framework for computation of book profit for Ind AS complaint companies in the year of adoption and thereafter i.e. to rationalize the provisions of the section in line with Ind AS (Note: Ind AS and not Ind ASs) by inserting sub-section (2A), (2B) and (2C).
Sub-section (2C) to Section 115JB as amended via The Finance Act, 2017 is reproduced below for ease of reference:-
“For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount:
Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clauses relatable to such asset or investment:
Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations.
Explanation.—For the purposes of this sub-section, the expression—
(i) “year of convergence” means the previous year within which the convergence date falls;
(ii) “convergence date” means the first 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 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.”
Hence, to claim the adjustment of 1/5th of transition amount an entity has to satisfy the following conditions as per section 115JB(2C):-
2. The “transition amount” includes every adjustment in “other equity”, excluding only the amounts of capital reserve and security premium and as stated in (A) to (F). Thus, the amount adjusted due to implementation of Ind AS 115 qualifies as “transition amount”.
3. Further, the aforementioned provision refers to “year of convergence”, which derives its essence and meaning from Ind AS 101 First-time Adoption of Indian Accounting Standards via “convergance date”. The Ind AS 101 applies to an entity’s first Ind AS financial statements.
Extract of Appendix A “Defined terms” to Ind AS 101:-
“first Ind AS financial statements- The first annual financial statements in which an entity adopts Indian Accounting Standards (Ind ASs), by an explicit and unreserved statement of compliance with Ind ASs.
first Ind AS reporting period- The latest reporting period covered by an entity’s first Ind AS financial statements
first-time adopter- An entity that presents its first Ind AS financial statements.
Indian Accounting Standards (Ind ASs)- Ind ASs are Accounting Standards prescribed under Section 133 of the Companies Act, 2013.”
Scope of Ind AS 101 from Para 2 to 5 is stated as follows:-
“2 An entity shall apply this Ind AS in:
(a) its first Ind AS financial statements; and
(b) each interim financial report, if any, that it presents in accordance with Ind AS 34, Interim Financial Reporting, for part of the period covered by its first Ind AS financial statements.
3 An entity’s first Ind AS financial statements are the first annual financial statements in which the entity adopts Ind ASs, in accordance with Ind ASs notified under the Companies Act, 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs.
4 [Refer to Appendix 1]
4A [Refer to Appendix 1]
4B [Refer to Appendix 1]
5 This Ind AS does not apply to changes in accounting policies made by an entity that already applies Ind ASs. Such changes are the subject of:
(a) requirements on changes in accounting policies in Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors; and
(b) specific transitional requirements in other Ind ASs.”
On study of the Appendix A (extract) and scope to Ind AS 101 makes it clear that the Ind AS is applicable and provides for only first-time adoption of Indian Accounting Standards and any inclusion to Ind AS 101 would be deemed as first-time adoption and vice-a-versa.
Furthermore, Para 10 Appendix 1 to Ind AS 101 states:-
“10. IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers are effective from annual period beginning on or after January 1, 2018 and January 1, 2017, respectively. As the above said standards are not yet effective consequential amendments due to these standards have not been incorporated in current version of IFRS 1. However, corresponding Ind AS 109 Financial Instruments and Ind AS 115 Revenue from Contracts with Customer have been issued with consequential amendments in other IFRS including IFRS 1. Accordingly, there consequential amendments Ind AS 109 and Ind AS 115 have been incorporated in Ind AS 101.”
Also, Para 9 to Ind AS 101 provide exception to the exclusion from scope of Ind AS 101 reproduced as follows:-
“9 The transitional provisions in other Ind ASs apply to changes in accounting policies made by an entity that already uses Ind ASs; they do not apply to a first-time adopter’s transition to Ind ASs, except as specified in Appendices B–D.”(Appendices B-D include Ind AS 115)
On harmonious interpretation of the aforementioned, the financial statement introducing Ind AS 115 effective on or after 1 April 2018 shall be “first Ind AS financial statement” due to applicability of Ind AS 101. Further, such reporting period would be “first Ind AS reporting period” and the entity thereof, would be “first time adopter”.
4. On taking inference of later interpretation in the amended provisions of minimum alternate tax (“MAT”) via Finance Act, 2017, an entity opting for IndAS 115 would qualify the condition of “convergence year”. Thereby concluding, adoption of Ind AS 115 would be eligible for the adjustment of 1/5th of the transition amount indifferent to whether the entity adopted Ind ASs before or 1 April 2018.
5. Further, it is pertinent to mention that any interpretation of provisions otherwise would result in double taxation which would erode income of assessee just because the entity adopted Ind AS before 1 April 2018 which would be completely against the intention of department to rationalize the provisions of Section 115JB in line with Indian Accounting Standard.