Established in 2004, JP Ltd. (JPL), based in Tirupur, Tamil Nadu, India, has established a foothold for itself as a prominent manufacturer,…

Established in 2004, JP Ltd. (JPL), based in Tirupur, Tamil Nadu, India, has established a foothold for itself as a prominent manufacturer, wholesaler and exporter of high-quality T-shirts. Recognised as a prestigious export house, JPL takes pride in its brand, "RK," known for its commitment to style, comfort, and ethical manufacturing practices. JPL boasts a state-of-the-art manufacturing facility equipped with advanced technology and machinery. Their production process adheres to stringent quality control measures, ensuring every "RK" T-shirt is crafted using premium materials and delivers exceptional durability, comfort, and style. The company's dedication to quality has not only earned them the trust and loyalty of their domestic clientele but has also established them as a reliable and sought-after supplier in the international market. Understanding the evolving preferences of their customers, JPL offers a diverse range of T-shirts. Their product portfolio encompasses a wide variety of styles, colours, and designs, catering to diverse demographics and fashion trends. They prioritise innovation and constantly update their collections, ensuring their brand stays ahead of the curve and caters to the ever-changing needs of the T-shirt market. Looking ahead, JPL is committed to sustainable growth and expanding its global footprint. They are actively exploring new markets and forging strategic partnerships to broaden their international reach. Additionally, they are implementing eco-friendly practices throughout their operations, prioritising responsible sourcing and sustainable manufacturing processes. With a focus on continuous improvement, innovation, and ethical practices, JPL strives to solidify its position as a leading player in the global T-shirt industry. On 23rd April, 2024, JPL enters into a contract with RI Ltd. (RIL) to sell T-shirts for 600 per T-shirt. As per the terms of the contract, if RIL purchases more than 2,000 T-shirts till March 2025, the price per T-shirt will be retrospectively reduced to 540 per unit. Till September 2024, JPL sold 190 T-shirts to RIL. JPL estimates that RIL's purchases by March 2025 will not exceed the required threshold of 2,000 T-shirts. In October 2024, RIL acquires DC Ltd. (DCL) and from October 2024 to December 2024, JPL sells an additional 1,200 T-shirts to RIL. Due to these developments, JPL estimates that purchases of RIL will exceed the 2,000 T-shirts threshold for the period and therefore, it will be required to retrospectively reduce the price per T-shirt to 540. JPL is analyzing a strategic move – the potential acquisition of RIL through a merger. This decision is driven by the potential for significant synergy benefits that could propel JPL's growth and market position. The synergy between the two companies can be multifaceted. Firstly, combining their manufacturing capabilities could lead to economies of scale. Sharing resources and expertise could optimize production processes, potentially reducing costs and increasing overall efficiency. Additionally, a larger production capacity could allow JPL to cater to a broader range of customer demands and potentially enter new markets. The financial data relating to these two companies are; JPL has reported after tax earnings of 10 crores. The company has 10,00,000 equity shares outstanding, with a current market price of 75 per share. Whereas, RIL has reported after tax earnings of 3 crores. It has 2,50,000 equity shares outstanding, and the market price per share is 60. It is proposed that certain changes in the shareholding of RIL would be made in case of consolidation with JPL, as per the discussion between the management of the two companies, JPL & RIL. During the course of the audit of JPL, CA Kashavi Rana is verifying export revenues of the company for the F.Y. 2024-25, with her engagement team. She has verified transactions entered in "Export Sales” account maintained in accounting software from relevant export invoices. The export sales are being made on payment of IGST, for which a refund is automatically credited in the account of the company after the goods are shipped. On enquiring from internal audit staff regarding the recognition of export revenues, she is told that export sales are recognised for the year on the basis of “Bills of Lading”. However, she is not convinced with such a response and feels that the same does not appear to be proper. She finds that four export invoices bearing dates in the month of March 2025 having a total value of 125 lakhs have not been recognized in export revenue on the ground that bills of lading for these invoices were issued in the month of April 2025. Further, during audit of current year, CA Kashavi had identified that there was a misstatement also in last year pertaining to export revenues of the company and the same is still not corrected. She had issued an unmodified audit report in last year. In respect of its Japanese exports, on 31st March, 2025, JPL has an export exposure of JPY 10,00,000 receivables. On the date of export, the Finance Department approached the bank to obtain applicable foreign exchange rates for converting the export proceeds. In response, the bank has provided them both the prevailing spot rate and the forward rate. Based on the information received, Finance team prepared a comprehensive report (refer Annexure) detailing the prevailing spot rate and the forward rate for the specified period. This report will serve as the basis for evaluating hedging strategies and revenue recognition in foreign currency. Japanese Yen (JPY) is not directly quoted against Indian Rupee. It is estimated that at the time of realization of export receivables the Japanese Yen will depreciate to 124 level and Indian Rupee to depreciate against US $ to 65. CA Kashavi recommended that taking a forward cover in such a situation would be beneficial. On 31st March, 2025, JPL has an outstanding interest liability of 1 crore towards loan payable to BFCI Ltd., a public financial institution. On the same date, it issued debentures to BFCI Ltd. in lieu of the outstanding interest and deducted the said interest while computing profits and gains of business of A.Y.2025-26. The Assessing Officer, however, rejected the deduction of interest on loan claimed by JPL. After the issue of such debentures, the company has a total debt of 3 crores and surplus funds to the tune of 5 crores. Further, it has made a gross profit of 18 crores and incurred indirect expenses of 4 crores for the financial year. Annexure 1 This report pertains to the foreign currency exchange rates relevant to the company's export transactions. The Finance Department has compiled and prepared a detailed analysis based on exchange rate quotations received from the company's authorized dealer bank. The report includes both the spot exchange rate and the forward exchange rate for March 2025 as on the date of export. The current spot rates are: Forward rates for March 2025 are: INR/US $ 62.22 INR/US $ 66.50 JPY/US$ JPY 102.34 JPY/US$ JPY 110.35