Calcutta High Court explain section 263 of Income Tax- Russel Credit Limited Case

Case Details

• Case Number: ITAT 153 of 2025

• Court: High Court at Calcutta

• Jurisdiction: Special Jurisdiction (Income Tax), Original Side

• Assessment Year: 2018–19

• Date of Judgment: 20 February 2026

• Judges:

  • Justice Rajarshi Bharadwaj

  • Justice Uday Kumar

• Appellant (Revenue) : Principal Commissioner of Income Tax-1, Kolkata

• Respondent / Assessee : Russel Credit Limited

Facts of the Case

The assessee filed its return of income for the assessment year 2018–19 declaring a total income of ₹36,79,98,920, which was later revised to ₹36,18,36,450. The assessment was completed under section 143(3) at a total income of ₹39,76,74,478. While completing the assessment, the Assessing Officer treated the gain of ₹12,97,56,648 arising from the sale of 34 unquoted preference shares as long-term capital gains. These shares had been purchased in June 2012 and were sold in March 2018, resulting in a holding period of nearly six years. The Assessing Officer also allowed the set-off of such gains against brought-forward losses and permitted certain losses on disposal of property, plant and equipment.

Thereafter, the Principal Commissioner of Income Tax invoked section 263 of the Act and held that the assessment order was erroneous and prejudicial to the interests of the revenue. On this basis, the assessment order was set aside. The assessee challenged this revisionary order before the Income Tax Appellate Tribunal, which allowed the appeal and quashed the order passed under section 263. Aggrieved by the Tribunal’s decision, the Revenue approached the High Court.

Issues in Question

a. Whether the Income Tax Appellate Tribunal was legally correct in cancelling the order passed under section 263, when the tax department claimed that the original assessment was wrong and harmful to the interests of the Revenue because the Assessing Officer had not properly examined the issue as required under Explanation 2(b) to section 263?

b. Whether the Income Tax Appellate Tribunal was correct in law in accepting that stock-in-trade can be converted into a capital asset within the same financial year, even if such conversion takes place just before the sale of that stock?

c. Whether the Income Tax Appellate Tribunal was correct in law in holding that the profit earned from the sale of unlisted preference shares of ICICI Bank should be taxed as long-term capital gains, and not as business income, even though those shares were shown as stock-in-trade in the company’s balance sheet?

d. Whether the Income Tax Appellate Tribunal was correct in law in not applying paragraph 3(b) of CBDT Circular No. 6 of 2016, which states that income from the sale of shares and securities can be treated as capital gains if the shares are held for more than twelve months, at the option of the assessee, and that the same treatment should be followed consistently in later years?

Revenue’s Arguments

The Revenue contended that the Assessing Officer had failed to properly examine the nature of the shares and had wrongly treated the income arising from their sale as long-term capital gains instead of business income. According to the Revenue, the shares were in the nature of stock-in-trade and the assessment order lacked proper enquiry, making it erroneous and prejudicial to the interests of the revenue. It was further argued that the Tribunal erred in ignoring the relevant CBDT circular and in holding that the revision under section 263 was not justified. The Revenue also attempted to argue that the assessee had converted stock-in-trade into capital asset just before the sale of the shares.

Respondent’s Arguments

The assessee argued that the Assessing Officer had conducted detailed enquiries during the assessment proceedings, including calling for explanations and examining documents relating to the purchase and sale of shares. It was submitted that the shares were acquired pursuant to a board resolution as investments, were held for nearly six years, and were sold in a single transaction, clearly indicating an investment activity. The assessee further contended that the Assessing Officer’s view was supported by the CBDT Instruction dated 2 May 2016, which provides that income from transfer of unlisted shares should be treated as capital gains. Therefore, the conditions for invoking section 263 were not satisfied.

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Court’s Reasoning, Wording, and Discussion

• The High Court explained that Section 263 can be used only in limited situations. For revision to be valid, the assessment order must be wrong erroneous and must also prejudicial to the Revenue. Both conditions must exist together. If even one condition is missing, Section 263 cannot be applied.

• The Court referred to Explanation 2(b) to Section 263, which says an order is erroneous if it is passed without proper enquiry. However, the Court clarified that this does not mean every short or brief order is erroneous. What matters is whether the Assessing Officer applied his mind to the issue.

• In this case, the Assessing Officer had issued notices, asked for documents, examined explanations, and considered the details provided by the assessee. Therefore, it was not a case where no enquiry was made. The fact that the assessment order did not contain lengthy reasoning did not make it invalid.

• The Court made it clear that Section 263 cannot be used simply because the Commissioner disagrees with the Assessing Officer. If the Assessing Officer has taken a reasonable and lawful view after enquiry, the Commissioner has no power to revise the order just to substitute his own opinion.

• The Court also noted that the Assessing Officer’s view was supported by the CBDT Instruction dated 2 May 2016, which specifically deals with tax treatment of income from unlisted shares. Since the Assessing Officer followed a binding instruction, his decision could not be called erroneous.

• On the issue of alleged conversion of stock-in-trade into capital asset, the Court found that neither the Assessing Officer nor the Commissioner had recorded any such finding. Because this point was never part of the original proceedings, the Revenue was not allowed to raise it later at the appellate stage.

• The Court stressed that appeals must be decided on the basis of facts already on record. New arguments based on new facts cannot be introduced later to justify an otherwise invalid revision.

• While deciding the nature of income, the Court looked at the intention at the time of purchase, the long holding period, the absence of repeated transactions, and the overall conduct of the assessee. All these factors showed that the shares were held as investments and not as trading stock.

• Based on these facts, the Court agreed that the income from sale of shares was rightly treated as long-term capital gains, and not as business income.

• Finally, the High Court held that the Tribunal had not made any mistake in cancelling the order passed under Section 263. All questions of law were decided in favour of the assessee and against the Revenue, and the Revenue’s appeal was dismissed.

FAQs

1: What was the main dispute in this case?

Answer:
The main dispute was whether the Principal Commissioner of Income Tax was justified in revising the assessment under section 263 of the Income Tax Act by treating the original assessment order as erroneous and prejudicial to the interests of revenue. The dispute mainly arose from the tax treatment of profit earned by the assessee from the sale of unlisted preference shares of ICICI Bank.

2: Why did the Commissioner invoke Section 263 of Income tax ?

Answer:
The Commissioner invoked section 263 of the Income Tax Act on the ground that the Assessing Officer had wrongly treated the profit from sale of unlisted preference shares as long-term capital gains instead of business income. According to the Commissioner, the shares were shown as stock-in-trade, proper enquiry was not conducted, and the assessment order caused loss to revenue.

3: What did the Tribunal find regarding enquiry by the Assessing Officer?

Answer:
The Tribunal found that the Assessing Officer had conducted proper enquiry during the assessment proceedings. Notices were issued, explanations were sought, documents were examined, and the issue of capital gains was consciously considered. Therefore, this was not a case of “no enquiry” or “lack of enquiry”.

4: Can Section 263 of Income Tax be applied just because the Commissioner disagrees with the Assessing Officer?

Answer:
No. The Tribunal and later the Court held that section 263 cannot be invoked merely because the Commissioner holds a different opinion. If the Assessing Officer has taken a legally permissible and plausible view after enquiry, revision is not allowed.

5: How was the profit from sale of unlisted preference shares treated and why?

Answer:
The profit was treated as long-term capital gains because the shares were held for nearly six years, were acquired through a board-approved investment decision, and were sold in a single, isolated transaction. There was no evidence of regular trading activity.

6: Did showing shares as stock-in-trade in the balance sheet change their tax treatment?

Answer:
No. The Tribunal held that accounting classification in the balance sheet is not conclusive. The real nature of the transaction must be determined from intention, conduct, and surrounding circumstances. Substance prevails over form.

7: What role did CBDT instructions play in this case?

Answer:
The Tribunal relied on the CBDT Instruction dated 2 May 2016, which states that income from transfer of unlisted shares should be taxed as capital gains, except in exceptional cases. Since no exception was proved by the Revenue, the Assessing Officer’s view was held to be correct and binding.

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