The Calcutta High Court on 20 February held that revisional powers under Section 263 of the Income Tax Act, 1961 cannot be invoked merely because the Principal Commissioner holds a different opinion on the nature of income.
A Division Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar, dismissed an appeal filed by the Principal Commissioner of Income Tax, Kolkata, and upheld the order of the Income Tax Appellate Tribunal setting aside revisionary proceedings against Russel Credit Limited for the Assessment Year 2018–19.
Reiterating that a change of opinion does not render an assessment order erroneous and prejudicial to the interests of the revenue, the Bench held that:
“The Tribunal correctly set aside the revisionary order, holding that Section 263 requires more than mere retrospective disapproval.”
Section 263 of the Income Tax Act authorises the Principal Commissioner or Commissioner to revise an assessment order passed by an Assessing Officer only if the order is both erroneous and prejudicial to the interests of the revenue.
Russel Credit Limited had filed its return declaring a total income of Rs. 36 crore. During assessment, the Assessing Officer examined the sale of 34 unlisted preference shares of ICICI Bank, which had been acquired in June 2012 and sold in March 2018 after being held for nearly six years.
The Assessing Officer treated the gain of about Rs. 12.97 crore as long-term capital gains and allowed set-off against brought-forward losses, and also permitted a loss on disposal of property, plant and equipment.
Subsequently, the Principal Commissioner invoked Section 263 and held that the assessment order was erroneous and prejudicial to the interests of the revenue on the grounds that the shares constituted stock-in-trade, excess set-off had been allowed, and the capital loss was disallowable. The assessment order was set aside, following which Russel Credit Limited approached the Income Tax Appellate Tribunal.
The Tribunal allowed the appeal, noting that the Assessing Officer had issued notices, called for detailed explanations, examined board resolutions authorising acquisition of the shares as investments, verified the holding period, accounting treatment and computation of capital gains, and relied on the Central Board of Direct Taxes (CBDT) Instruction dated 2 May 2016 governing tax treatment of unlisted shares.
Upholding the Tribunal's order, the High Court reiterated that the twin conditions of “erroneous” and “prejudicial to the interests of the revenue” must coexist for invoking Section 263.
The Court noted that the shares were held for nearly six years, the transaction was isolated, there was no frequency or regularity indicating trading activity, and the shares were consistently valued at cost.
The Bench further observed:
“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.”
The Court also held that the CBDT Instruction dated 2 May 2016, which mandates treatment of gains arising from transfer of unlisted shares as capital gains barring exceptional circumstances, was binding on the tax authorities.
Accordingly, the Court dismissed the appeal filed by the revenue and upheld the Tribunal's decision restoring the assessment order.
For Petitioner: Advocate, Prithu Dudheria
For Respondent: Advocate, Nilanjana Banerjee