Strategic Tax Planning through Asset Reclassification: A Case Study on Ind AS 105 Compliance

Introduction:

Tax planning is a crucial financial strategy that enables corporations to minimize tax liabilities while adhering to legal compliance. One effective approach is asset reclassification, which can impact financial statements, tax obligations, and overall profitability. This case study explores how Orion Tech Solutions Ltd. successfully leverages asset reclassification under Ind AS 105 to optimize its tax position before divesting a production facility.

Case Study: Tax Optimization through Asset Reclassification

Background:

Orion Tech Solutions Ltd. ("the company"), a leading IT hardware manufacturer, has decided to divest its assembly unit in Noida. Instead of directly selling the entire unit as a Capital Gains transaction, the company strategically reclassifies certain fixed assets into inventory to optimize tax benefits.

Initial Financial Position (As of 31st March 2025):

Component	Carrying Amount (₹ in Crores)
Land	500
Buildings	300
Machinery	220
Computers	30
Inventory	110
Trade Receivables	80
Trade Payables	(150)
Provision for Warranty	(30)
Total Assets (before reclassification)	1,240
Total Liabilities	(180)
Net Carrying Amount	1,060

Strategic Asset Reclassification Approach:

To maximize tax efficiency, the company transfers specific assets from fixed assets to inventory before divesting the unit.

Step 1: Identifying Assets for Reclassification

• Machinery and Computers are reclassified from fixed assets to inventory.

• These assets are recorded at the lower of cost or net realizable value (NRV) to reduce taxable gains.

Step 2: Valuation at Lower of Cost or NRV

• Machinery: ₹220 crores (Cost) → Revalued at ₹190 crores (NRV)

• Computers: ₹30 crores (Cost) → Revalued at ₹25 crores (NRV)

• Total Inventory (Including Existing Stock of ₹110 crores) = ₹325 crores

Step 3: Tax Planning Impact

• The sale of machinery and computers is now taxed as business income, enabling deductions for related expenses.

• Depreciation recapture is minimized as assets are reclassified before sale.

Revised Financial Position After Reclassification:

Component	Carrying Amount (₹ in Crores)
Land	500
Buildings	300
Inventory (Reclassified Assets + Existing)	325
Trade Receivables	80
Trade Payables	(150)
Provision for Warranty	(30)
Total Assets (After Reclassification)	1,225
Total Liabilities	(180)
Net Carrying Amount	1,045

Step 4: Execution of Sale and Financial Impact

• Inventory (including reclassified machinery and computers) is sold for ₹350 crores.

• Remaining CGU assets (land and building) are sold for ₹750 crores.

Tax Implications:

• Business Income: ₹350 crores from inventory sale

• Capital Gains: ₹750 crores - (Land ₹500 crores + Building ₹300 crores) = ₹50 crores Capital Loss, which offsets other capital gains for tax savings.

Accounting Entries for Compliance:

1. Reclassification of Machinery & Computers to Inventory:

   Inventory A/c Dr. ₹215 crores
   Accumulated Depreciation A/c Dr. ₹35 crores
   To Machinery A/c ₹220 crores
   To Computers A/c ₹30 crores

2. Impairment Loss on Reclassified Assets:

   Impairment Loss A/c Dr. ₹35 crores
   To Inventory A/c ₹35 crores

3. Sale of Inventory at ₹350 crores:

   Cash A/c Dr. ₹350 crores
   To Inventory A/c ₹215 crores
   To Business Profit A/c ₹135 crores

4. Sale of Land & Building (Corrected Entry):

   Cash A/c Dr. ₹750 crores
   Capital Loss A/c Dr. ₹50 crores
   To Land A/c ₹500 crores
   To Building A/c ₹300 crores

Conclusion:

This case study illustrates how strategic asset reclassification can be an effective tax-saving tool while ensuring Ind AS 105 compliance. The key benefits include:

1. Capital Gains Tax Reduction – Reclassifying fixed assets before sale helps offset capital losses against gains.

2. Lower Taxable Income – Business income classification allows deductions that capital gains taxation does not.

3. Regulatory Compliance – Proper accounting treatments align with Ind AS 105 standards.

4. Enhanced Financial Planning – Effective asset reclassification maximizes both immediate and long-term tax benefits.

This structured tax strategy ensures corporations optimize tax savings while maintaining financial compliance and transparency.