[Cites 10, Cited by 0]
Calcutta High Court
Principal Commissioner Of Income Tax vs Russel Credit Limited on 20 February, 2026
Author: Rajarshi Bharadwaj
Bench: Rajarshi Bharadwaj
2026:CHC-OS:63-DB
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (Income Tax)
(Original Side)
Reserved on : 10.02.2026.
Pronounced on : 20.02.2026
ITAT 153 OF 2025
With
IA No. GA 2 of 2025
Principal Commissioner of Income Tax-1, Kolkata
...Appellant
-Vs-
Russel Credit Limited
...Respondent
Present:-
Mr. Prithu Dudheria, Adv.
...for the appellant
Ms. Nilanjana Banerjee, Adv.
..... for the Respondent
Coram: THE HON'BLE JUSTICE RAJARSHI BHARADWAJ,
And
THE HON'BLE JUSTICE UDAY KUMAR
Rajarshi Bharadwaj, J:
1. The appellant/petitioner has filed this appeal under Section 260A of the
Income Tax Act, 1961 (hereinafter referred to as "the Act"), challenging the order
dated October 23, 2024 passed by the Learned Income Tax Appellate Tribunal
(ITAT), Kolkata Bench "B", for the assessment year AY 2018-19, on the
substantial questions of law formulated at the time of admission.
2026:CHC-OS:63-DB
2. The facts of the case in a nutshell are that the respondent/assessee, a
limited company, filed its return of income for Assessment Year 2018-19 on
September 29, 2018, declaring a total income of Rs.36,79,98,920/-, which it
revised on March 29, 2019 to Rs.36,18,36,450/-. The Assessing Officer
completed the assessment under Section 143(3) on March 8, 2021, at an
assessed income of Rs.39,76,74,478/-. This included treating the gain of
Rs.12,97,56,648/- from the sale of 34 unquoted preference shares of ICICI Bank
that was purchased in June 2012 and held for nearly six years before it was
sold in March 2018 as long-term capital gain, set off against brought-forward
losses from AY 2012-13, alongside allowing a Rs.96,65,106/- losses on disposal
of property, plant and equipment.
3. The Principal CIT invoked Section 263 on February 27, 2023, holding the
assessment erroneous and prejudicial to revenue interests due to the shares'
classification as stock-in-trade, excess set-off and disallowable capital loss. He
set aside the order. Thereafter, the assessee appealed to the ITAT "B" Bench,
Kolkata, which, by order dated October 23, 2024, upheld the AO's view in line
with the CBDT Instruction dated May 2, 2016. Being aggrieved by the order, the
revenue preferred the present appeals under Section 260A.
4. Learned counsel appearing for the appellant raises the issue on the
following substantial questions of law that have been admitted:
a. Whether in facts and in the circumstances of the case the Ld. Income Tax
Appellate Tribunal was not justified in law in setting aside the order u/s.
263 of the Income Tax Act, 1961 considering that the exercising of
jurisdiction u/s. 263 on the issue of dispute fell without appreciating that
"the assessment order was erroneous and prejudicial to the interest of
revenue within the scope of explaining 2(b) of Section 263 of the Income Tax
Act, 1961?
b. Whether in facts and in the circumstances of the case the Ld. Income Tax
Appellate Tribunal was not justified in law in adjudicating that conversion
2026:CHC-OS:63-DB
of stock in trade into asset is allowed within a financial year and just before
the sale of stock in trade took place?
c. Whether in facts and in the circumstances of the case the Ld. Income Tax
Appellate Tribunal was not justified in law in holding that the profit on sale
of unlisted preferential shares of ICICI Bank Ltd be considered as Long-
Term Capital Gain instead of income from business as the same was
appearing in the Balance Sheet of the company as stock in trade?
d. Whether in facts and in the circumstances of the case the Ld. Income Tax
Appellate Tribunal was not justified in law by not considering Para 3(b) of
the CBDT Circular No. 6/2016 dated 29.02.2016 clarifying that income from
transfer of shares and securities may be claimed under Capital Gain after a
period of holding 12 months before the date of transfer at the desire of the
assessee and the same principle to be followed in subsequent years?
5. We have heard the appellant-Revenue and Mr. Khaitan, learned Senior
Counsel for the respondent-assessee at length. Since the issues involved are
pure questions of law and have been settled by binding precedents of the
Hon'ble Supreme Court and this Court, we proceed to decide the appeal on
merits.
6. Firstly, section 263 of the Act, vests the Principal Commissioner with
revisional powers to call for and examine an assessment order only if it is both
erroneous and prejudicial to the revenue's interests. These twin conditions
operate conjunctively, meaning both must be satisfied simultaneously for
jurisdiction to arise. This stringent threshold prevents arbitrary interference and
upholds the finality of assessment orders where reasoned decisions have been
made.
7. Explanation 2(b) to Section 263 deems an order "erroneous" if passed
without necessary inquiries or verifications that ought to have been conducted.
However, the record herein demonstrates that the Assessing Officer (AO)
diligently inquired into the assessee's claim concerning the purchase and sale of
34 unlisted preference shares in ICICI Bank Ltd. A notice under Section 142(1)
2026:CHC-OS:63-DB
was issued, prompting the assessee to submit comprehensive evidence such as
the Board resolution dated May 21, 2012 authorizing the acquisition as an
investment, purchase and sale documents, balance sheet extracts, capital gains
computation and reliance on the CBDT Instruction dated May 02, 2016. The AO
considered this material and accepted the Long-Term Capital Gains claim,
reflecting a prima facie inquiry rather than a mechanical acceptance.
8. The Principal Commissioner's invocation of Section 263 falters on the
ground that the assessment order lacks "elaborate discussion." It is a settled
jurisprudence, as held in CIT v. Max India Ltd. reported in (2007) 295 ITR
282 (SC) that clarifies brevity in reasoning does not equate to non-inquiry or
error. Where the AO has made relevant enquiries and adopted a plausible view
supported by material, revisional jurisdiction cannot be exercised merely
because the revisional authority disagrees. This principle safeguards against
substituting superior wisdom for the AO's reasonable judgment, preserving
administrative efficiency.
9. As the AO's stance aligned with the binding CBDT Instruction dated May
02, 2016, which categorises income from unlisted shares transfers as "Capital
Gains," in absence of specified exceptions. No such exceptions were indicated or
proven herein, rendering the view not only plausible but authoritative. Thus, the
order was neither erroneous nor prejudicial to revenue, as no revenue loss
accrued from a legally tenable position.
10. Thus, the Tribunal correctly set aside the revisionary order, holding that
Section 263 requires more than mere retrospective disapproval. We answer
substantial question (a) in the affirmative, i.e., against the revenue and in favour
of the assessee.
11. Secondly, the revenue's contention before the Tribunal that the assessee
converted stock-in-trade into a capital asset shortly before the sale lacks
foundational support in the prior proceedings, rendering it untenable. Crucially,
neither the Assessing Officer nor the Principal Commissioner explicitly recorded
any finding of such conversion during the relevant previous year. This omission
2026:CHC-OS:63-DB
is pivotal, as it underscores a procedural infirmity, revisional proceedings under
Section 263 of the Act must be anchored in the factual matrix already
established. The revisional order per se did not proceed on the premise of
conversion, focusing instead on other grounds. Introducing new facts at the
appellate stage constitutes an impermissible attempt to lay a fresh factual
foundation.
12. The Tribunal's observation in this regard aligns squarely with the settled
principles of tax jurisprudence. Appellate forums, including the Income Tax
Appellate Tribunal (ITAT), operate within the confines of the record as it stood
before lower authorities. As held in CIT v. Shree Manjunatheswara Packing
Products & Camphor Works reported in (1998) 231 ITR 53 (SC), a new plea
altering the character of the transaction cannot be sprung at the appellate level
without prior ventilation. Here, the absence of any conversion finding in the
AO's assessment or PC's revision order bars the revenue from pivoting to this
argument, preventing a backdoor re-characterization of the gains.
13. Even on merits, the revenue's plea falters. The shares were acquired in
June 2012 and transferred in March 2018, reflecting a holding period of nearly
six years, far exceeding the typical tenure for stock-in-trade in trading activities.
The transaction was isolated and singular, devoid of the volume, frequency or
intent of repetitive trading. Absent evidence of business-like activity or
proximate conversion, the gains qualify as capital gains under section 45 of the
Act not business income under section 28 of the Act.
14. In these circumstances, the Tribunal did not erred in rejecting the plea.
We answer substantial question (b) in the affirmative, i.e., against the revenue
and in favour of the assessee affirming the capital asset characterization.
15. Thirdly, the core issue before this Court is whether the surplus arising
from the sale of unlisted preference shares by the assessee constitutes business
income or capital gains. This determination hinges on a fact-specific analysis,
guided by well-established judicial principles that scrutinize cumulative factors
such as the intention at acquisition, period of holding, frequency of
2026:CHC-OS:63-DB
transactions, manner of valuation and the assessee's overall conduct. In the
present case, the shares were acquired pursuant to a specific Board resolution
designating them as investments, evidencing a clear investment intent from
inception. They were held for nearly six years, a duration indicative of a long-
term investment rather than trading stock. Critically, there was no regularity or
frequency of transactions making it a solitary sale, with no pattern of repetitive
dealing. The shares were consistently valued at cost in the assessee's books,
eschewing the "lower of cost or market value" method typical of trading
activities. The assessee's conduct thus aligns squarely with that of an investor,
not a trader. It is a trite law that mere accounting nomenclature cannot dictate
the true nature of the asset or income. As held in Electronic Corporation of
Tamil Nadu Ltd. v. Dy. Commissioner of Income Tax reported in (2019) 417
ITR 283 (Mad), the substance prevails over form, reinforcing that labels alone
are inconclusive. Bolstering this position are authoritative CBDT instructions
aimed at curbing litigation and ensuring uniformity. The CBDT Instruction
dated May 02, 2016 explicitly directs that income from the transfer of unlisted
shares be assessed as capital gains, subject to narrow exceptions like sham
transactions or lack of genuineness, none of which the revenue has
substantiated herein. While CBDT Circular No. 6/2016 dated February 29, 2016
primarily addresses listed shares, it underscores the fact-dependent nature of
the inquiry and the policy thrust towards consistency, applicable by analogy.
The revenue's failure to invoke or prove exceptions, such as lifting the corporate
veil, leaves the assessee's claim unimpugned. The Assessing Officer's contrary
view, classifying the surplus as business income, lacked sustainability in light of
these binding circulars, which carry the force of law under section 119 of the
Act. The Tribunal's decision to treat the surplus as long-term capital gains was
thus justified. We answer substantial question (c) in the affirmative, i.e., against
the revenue and in favour of the assessee.
16. Lastly, the revenue's assertion that Paragraph 3(b) of Circular No. 6/2016
dated February 29, 2016 was overlooked merits careful scrutiny. That provision
2026:CHC-OS:63-DB
indeed addresses listed shares held for over twelve months, stipulating that if
the assessee elects to treat the gains as capital in nature, the Assessing Officer
shall not dispute such characterization, provided the assessee maintains
consistency in its approach. However, the instant case revolves around unlisted
preference shares, rendering Paragraph 3(b) inapposite. The governing directive
is the CBDT Instruction dated May 02, 2016, which expressly applies to unlisted
shares and mandates their treatment as capital gains, thereby obviating any
grounds for dispute by the Assessing Officer.
17. Moreover, the revisional proceedings under Section 263 of the Act were
not predicated on Paragraph 3(b) of the aforementioned Circular. The Principal
Commissioner invoked entirely distinct reasoning in initiating revision,
unconnected to the Circular's stipulations for listed shares. Consequently, the
Income Tax Appellate Tribunal was only responsible for checking if the revision
order was legally valid. It can't be blamed for not deciding on an issue that
wasn't part of the revision order's reasoning. Expecting it to do so would wrongly
force the Tribunal to go beyond what the order actually covered. We answer
substantial question (d) in the affirmative, i.e., against the revenue and in favour
of the assessee.
18. In view of the foregoing reasons recorded hereinabove, all the substantial
questions of law framed at the time of admission of the appeal are answered in
the affirmative, i.e., in favour of the assessee and against the revenue. We hold
that the Income Tax Appellate Tribunal, "B" Bench, Kolkata, committed no error
in setting aside the order passed under Section 263 of the Act and in restoring
the assessment order. The Tribunal correctly appreciated the scope and ambit of
Section 263 of the Act, the nature of enquiry conducted by the Assessing Officer
and the applicability of the relevant CBDT Circulars governing the taxability of
gains arising from transfer of shares.
19. Thus, the impugned order dated October 23, 2024 passed by the Income
Tax Appellate Tribunal relating to the Assessment Year 2018-2019 does not
warrant any interference under Section 260A of the Act. Accordingly, the appeal
2026:CHC-OS:63-DB
filed by the revenue is dismissed and the application being GA 2 of 2025 is also
dismissed.
20. There shall be no order as to costs.
21. Urgent certified copy, if applied for, be supplied upon compliance with
requisite formalities.
(RAJARSHI BHARADWAJ, J )
(UDAY KUMAR , J)
Kolkata
20.02.2026
PA(BS)
