Errors made by CA in audit report will not change nature of income from capital gain to business income

Summary: The assessee company was engaged in the trading of shares as a business activity and also holding shares as investments. The assessing officer treated the income arising from sale of equity shares as “Business Income” as against the claim of the assessee that the income was from short term capital gain. Aggrieved the assessee made an appeal with CIT(A) who upheld the order of A.O. on the basis of audit report by CA. The assessee preferred further appeal with Tribunal which held in favour of the assessee that on perusal of the audit report of the assessee, it was evident that the assessee had classified the equity shares as investments and not as stock-in-trade in its audited Balance Sheet.

Therefore, the assessee was right in treating the profits from sale of such shares as “Income from Short Term Capital Gain”. If an error is committed by CA in his audit report, this would not change the intention of the assessee. Accordingly, the AO was directed to treat the income derived from sale of equity shares as “Capital Gain” and not as “Business Income”.

Brief Facts: The assessee is a Private Ltd. Co. engaged in the business of trading in shares as well as investment in shares which filed its ITR with returned income Rs. 12,84,952/- under the head Short Term Capital Gain. The case was taken up subsequently for scrutiny. However, the Ld. AO opined that since the nature of business of the assessee is trading in shares, so the same should be treated as “Business Income” and not under “Capital Gain” and made assessment accordingly. The Ld. CIT(A) also upheld the view of the Ld. AO. The Ld. CIT(A) arrived at such a conclusion on the basis of audit report of the Chartered Accountant filed in Form No. 3CA and 3CB.

Submission before Tribunal: In further appeal with ITAT, the Ld. AR argued that the assessee had treated the shares purchased as its “investments” and not as “stock in trade”. The Ld. AR further submitted that in the audited financial statements, the entire equity shares purchased by the assessee was disclosed as “investment” and not as “stock in trade”. To evidence the same, the Ld. AR referred to the paper book page No. 3 to 8 filed by the assessee. It was therefore pleaded that the gain earned by the assessee from the sale of its investment in equity shares may be treated as income from “short term capital gain” and not under the head “Income from business or profession”. The Ld. DR on the other hand relied on the orders of the Ld. Revenue Authorities and prayed for confirming the same.

Order by ITAT: On perusing the audited statement of account of the assessee enclosed in paper book page no. 3 to 6, it is quite evident that the assessee has classified the equity shares purchased by it as ‘investments’ and not as ‘stock-in-trade’ in the Balance Sheet. Therefore, the assessee is right in itsrem to treat the gain resulting from the sale of its investment in equity shares under the head “income from short term capital gains” as per the provisions of the Act.

Error committed by the Chartered Accountant in his audit report will not alter the intention of the assessee for holding the equity shares purchased by it as “investment” which is evident from the statement of accounts/ Balance Sheet of the assessee. It is pertinent to mention that the CA of the assessee as well as the Ld. Revenue Authorities may have been confused on the issue because the assessee though have classified the purchase of equity shares as investment in its Balance Sheet, the same is disclosed in the P&L Account as trading activity.

Considering the facts and circumstances of the case, I hereby direct the Ld. AO to treat the income earned by the assessee during the relevant AY as “Short Term Capital Gain” or “Long Term Capital Gain”, as the case may be.