Revision U/s 263 Invalid Where AO Conducted Proper Inquiry: Calcutta High Court

The Calcutta High Court has dismissed an appeal filed by the Income Tax Department and upheld the order of the Income Tax Appellate Tribunal (ITAT) which had set aside revision proceedings initiated under Section 263 of the Income Tax Act. The bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar has observed that the revisional jurisdiction cannot be invoked merely because the Commissioner holds a different opinion when the Assessing Officer has already conducted adequate inquiries. The dispute arose after the assessee company filed its income tax return for AY 2018–19 declaring total income exceeding ₹36 crore. The return was later revised slightly downward. During the assessment proceedings under Section 143(3) of the Income Tax Act, the Assessing Officer assessed the income at around ₹39.76 crore. A major issue involved gains of approximately ₹12.97 crore arising from the sale of 34 unlisted preference shares of ICICI Bank. These shares were acquired in June 2012 and sold in March 2018 after being held for nearly six years. The Assessing Officer treated the profit as long-term capital gains (LTCG) and allowed the set-off of brought-forward losses. However, the Principal Commissioner of Income Tax later invoked Section 263 and held that the assessment order was erroneous and prejudicial to the interests of the Revenue. The Commissioner alleged that the shares should have been treated as stock-in-trade and the gains taxed as business income rather than capital gains. The Commissioner accordingly set aside the assessment order. The assessee challenged the revision before the ITAT, which quashed the Section 263 order. The Revenue then approached the High Court. The High Court emphasized that the power under Section 263 can be exercised only when two conditions are simultaneously satisfied. Firstly, the assessment order must be erroneous. Secondly, it must also be prejudicial to the interests of the Revenue. The Court observed that these conditions operate conjunctively and must both exist for the Commissioner to assume revisional jurisdiction. Examining the assessment records, the Court found that the Assessing Officer had indeed issued notices under Section 142(1) and examined documents including board resolutions, purchase and sale records of the shares, balance sheet extracts and capital gains computation. After considering these materials, the AO accepted the assessee’s claim that the gain was long-term capital gain. The bench noted that merely because the assessment order does not contain elaborate reasoning does not mean that no inquiry was conducted. The Court relied on the Supreme Court ruling in CIT v. Max India Ltd., which held that revisional powers cannot be exercised simply because the Commissioner prefers another view when the Assessing Officer has adopted a plausible one. The High Court observed that the Assessing Officer’s view was also supported by CBDT instructions dealing with the tax treatment of gains arising from the transfer of unlisted shares. Since the view adopted by the AO was legally sustainable, the order could not be termed erroneous or prejudicial to the Revenue. The department argued that the shares were originally reflected as stock-in-trade and were converted into capital assets shortly before sale. The Court rejected this contention, noting that no such finding had been recorded by either the Assessing Officer or the Principal Commissioner in the earlier proceedings. The bench held that new factual arguments cannot be introduced at the appellate stage when they were never part of the original assessment or revision proceedings. Such an attempt, the Court said, would amount to laying a new factual foundation that is impermissible in appellate review. The Court also examined the factual indicators surrounding the transaction. It noted that the shares were acquired pursuant to a board resolution describing them as investments. They were held for nearly six years, indicating long-term investment. The transaction was isolated, without any pattern of frequent trading. The shares were valued at cost rather than market value, which is typical of investments rather than trading stock. Based on these factors, the Court concluded that the assessee’s conduct aligned with that of an investor rather than a trader, supporting the treatment of gains as capital gains. The bench further observed that CBDT instructions intended to reduce litigation clarify that income arising from the transfer of unlisted shares should generally be treated as capital gains unless exceptional circumstances such as sham transactions exist. No such exception was established by the Revenue. The Court therefore held that the ITAT had rightly set aside the revision order. Concluding that the Tribunal had correctly interpreted the scope of Section 263 and the nature of the transaction, the High Court dismissed the Revenue’s appeal and upheld the ITAT’s decision. Case Details Case Title: PCIT Versus Russel Credit Limited Citation: JURISHOUR-258-HC-2026(CAL) Case No.: ITAT 153 OF 2025 Date: 20/02/2026 Counsel For Petitioner: Prithu Dudheria, Adv. Counsel For Respondent: Nilanjana Banerjee, Adv. Click Here To Read Order Read More: Provisional Attachment of Bank Accounts Without Reasons Unsustainable Under GST Law: Bombay HC

Revision U/s 263 Invalid Where AO Conducted Proper Inquiry: Calcutta High Court

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