As on 31st March 2016, assessee had outstanding Zero Coupon Unsecured Optionally Fully Convertible Debentures (ZOFCDS) and Zero Coupon Unsecured Fully Convertible Debentures (FCDs) crores issued to RIL, its holding company Convertible Debentures, were disclosed as “long-term borrowings” in audited financial statements as on 31-3-2016 as per requirements of Indian GAAP. Since ‘Ind AS’ had become applicable to assessee-company with effect from financial year 2016-17, it made a transition to Ind AS. Accordingly, it prepared and presented its financial statements from financial year ending 31″ March 2017 under Ind AS and re-classified Convertible Debentures as equity instrument in its first Ind AS balance sheet and presented them as “Instruments entirely Equity in nature”. CIT, in order passed under section 263, held that all financial instruments under consideration were Compound Financial Instruments (CFI) and, therefore, amount represented by said instruments was taxable as book profit under section 115JB(2C). On appeal the Tribunal held that for categorizing a financial instruments as CFI, there was to be a liability component embedded in it. 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, settlement has to be made by exchange of variable number of its own equity instruments. Since settlement of convertible debentures issued by assessee would be through exchange of own equity instruments of assessee-company only and not by any financial liability as defined in Ind AS 32 and this exchange, as per terms, would be of a fixed number of equity shares, criteria to classify financial instrument of convertible debentures were not indicative of any Compounding Financial Instrument albeit it was equity. Since convertible debentures were purely in nature of equity and there was no kind of financial liability or any interest component, which could be ascertained or determined on said debentures, there would be no transition amount requiring any adjustment in book profit as per section 115JB(2C). Revision order is quashed. (AY. 2017-18)