Facts of the Case

The assessee’s accounts were subjected to tax audit under Section 44AB, and the auditor furnished Form No. 3CD. In Clause 16(d) of the audit report, certain income was reported in a manner suggesting it formed part of business income. However, in the income tax return, the assessee had already disclosed this income under the appropriate head and not as business income.

Issues Involved

Whether an addition to business income can be sustained solely on the basis of an erroneous disclosure by the tax auditor in Form 3CD, when the assessee has correctly offered the income under the proper head in the return of income.

Petitioner’s (Assessee’s) Arguments

  • The reporting in Form 3CD was a mistake on the part of the tax auditor.
  • The assessee had correctly disclosed the income under the appropriate head in the return.
  • The audit report cannot override the actual nature of income or the disclosures made in the return.
  • No independent evidence existed to treat the income as business income. 

Respondent’s (Department’s) Arguments

  • The tax audit report is a statutory document prepared under Section 44AB.
  • The information furnished therein should be relied upon for assessment purposes.
  • Since the auditor reported the amount in Clause 16(d), the Assessing Officer was justified in treating it as business income.

 Court Order / Findings (ITAT)

  • An inadvertent error by the tax auditor in Form 3CD cannot, by itself, justify an addition.
  • If the income clearly falls outside the scope of business income, its incorrect reporting in the audit report does not alter its true character.
  • Where the assessee has already disclosed such income under the correct head in the return, no separate addition is warranted.
  • Assessment must be based on the real nature of income and not merely on a reporting mistake.

 Important Clarification

  • Form 3CD is a reporting tool and not determinative of tax liability.
  • The audit report cannot substitute the legal characterization of income.
  • Errors in audit reporting must be examined in the context of overall disclosures and evidence on record.

Link to download the order -  https://itat.gov.in/public/files/upload/1679640883-ITA%20No.%203%20Alld%202023%20Brajesh%20Agrawal.pdf

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