Query No. 1: [Difference in closing stock shown to bank and books]

AO made addition in respect of difference between closing stock as shown in regular books of account and that declared in statement furnished to the bank in respect of hypothecation facility availed by it. Whether such addition can be made especially when inflated statements have been furnished to banking authorities merely for availing larger credit facilities? Whether such addition can be made by AO in case there is no difference in “quantity” but only “Valuation” of stock differs? Whether such addition can be made when such stock in merely “Hypothecated” and not “Pledged” with bank? Whether verification” by bank shall have any bearing on such addition?


From the fact, it is clear that “quantity” shown in the books of account tallies with statement furnished to the bank, but there is difference in valuation. In CIT vs. Ramakrishna Mills (Coimbatore) Ltd [93 ITR 49 (Mad.)], the Assessing Officer made addition to the income returned by the assessee on the ground that there was discrepancy between the stock shown in its account books and the declarations made by it to banks with whom goods have been hypothecated for the purpose of obtaining overdraft facilities. The Tribunal deleted the addition on the ground that though the declaration made to the banks were only rough estimates the correct declaration had been made in the return of submitted to the Textile Commissioner and these tallies with the assessee’s books. The High Court in reference held that the Tribunal was justified in coming to the conclusion on the basis of the evidence before it.

Thus, it quantity of stock tallies with the books, generally no addition could be made, only on the ground of valuation.

Query No. 2: [ No refusal under section 80G(5), even if amount applied is less than 85% of the amount by charitable Trust ]

Assessee trust moved an application in Form No. 10G for grant of approval under section. 80G(5) of the Act. CIT called for various details from which he found that trust had failed in making expenditure to the extent 85% in FY 2011-12 which was necessary as per provisions of S. 80G(5). Hence, CIT rejected application moved by the assessee seeking approval under section. 80G(5). Whether, while considering certification of institution for purpose of 
S. 80G(5), the authority granting approval can act as an Assessing Officer and carry out detailed inquiry or should they confine the inquiry merely to find out whether the institution satisfies prescribed conditions or not? Whether, even in a case where 85% of the amount of donations received by the Trust is spent in a given year, approval under section 80G can be denied? Whether like law prevail for registration under section 12AA as well?


A trust or institution is registered under section 12A/12AA is eligible for approved under section 80G except for religious trusts. Registration under section 12AA is ordinarily sufficient proof for eligibility for approval under section 80G. In DIT(E) vs. Sri Ramakrishna Seva Ashrama [357 ITR 731], the Karnataka High Court observed that where the assessee has utilized 85% of donations excluding corpus donation, it is not a case of denial for registration, which depends upon the eligibility for exemption and its claim for renewal of approval under section 80G cannot be denied.

Even if amount applied is less than 85% of its income then also approval under section 80G cannot be refused, as per CIT vs. Gulab Devi Memorial Hospital [391 ITR 73 (P & H)]. In that case, a medical institution had been approved for exemption under section 10(23)(vi) and had also been registered under section 12AA, there is right to approval under section 80G for deduction in the hands of the tax donors. The denial of approval under section 80G on the ground that the assessee was spending only a small percentage for charitable activities was not material in the light of the finding of the Tribunal that the assessee has not deviated from its objects and was creating a surplus for purpose of expansion.

Query No. 3: [IDS is not valid, when notice for prosecution is issued]

If for the year for which Section 276CC is issued,₹ Assessee has filed declaration under IDS, prosecution notice or prosecution is valid?


Section 276CC of the Income-tax Act, 1961 is not applicable, when a person “wilfully fails” to furnish return of income in time i.e. under section 139(1) or under 139(4) i.e. belated return before end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

If no return is furnished within the aforesaid period, the Assessing Officer must have issued a notice under section 142(1) or section 148 of the Act calling upon the assessee to file his return of income.

As per Income Declaration Scheme, 2016 no declaration could be made in respect of any undisclosed income chargeable under the Income tax Act for any assessment year 2016/17 or any earlier assessment year in case where a notice under section 142 or 148 of the Act in respect of such assessment year is issued and proceeding is pending before the Assessing Officer.

So, how the assessee could have filed declaration under IDS? And if filed whether it was valid declaration?

Further, punishment under section 276CC can ensue only when it is proved that the assessee has wilfully failed to furnish the return in due time after service of notice.

Query No. 4: [Non compliance of section 47(xiiib)]

In case where conditions for conversion of Companies into LLP is not complied as on very First instance (under section 47(xiiib)) say WIP is more than 5 crores in the previous year. How to calculate capital gains, if any, for Company shareholder and LLP. The assets are transferred at Book Value


Section 48 provides that the income chargeable under the head “capital gains” shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :

(i) Expenditure incurred wholly and exclusively in connection with such transfer;

(ii) The cost of acquisition of the asset and the cost of any improvement thereto ——“

The Supreme Court in CIT vs. George Henderson & Co. Ltd [66 ITR 622] held that “full value of consideration” means the entire consideration received by the assessee and not the market value of the capital asset transferred. But, if the parties themselves use the market value as the basis for fixing the consideration for the transaction, it is the market value that represents the full value of consideration.

As per Baijnath Chaturbhuj vs. CIT [31 ITR 643 (Bom.)], where the consideration for the transfer is in kind, as for instant, in a transfer by way exchange of capital assets, the fair market value of the property granted in exchange as on the date of the exchange shall have to be ascertained in order to arrive at the figure of consideration received.

So, if the assets transferred at Book value and if it is a fair market value, then, there is no question of capital gains as basic condition of section 47(xiiib) is not complied.

Further section 47A(4) provides that “where any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied with, the amount of profits or gains arising from the transfer of such capital asset or intangible assets or share or shares not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be profits & gains chargeable to tax of the successor limited liability partnership or the shareholder of the predecessor company, as the case may be, for the previous year in which the requirements of the said proviso are not complied with”.

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