Section 263 Revision Invalid as AO Conducted Proper Inquiry: Calcutta HC Upholds LTCG on Unlisted Shares

PCIT Vs Russel Credit Limited (Calcutta High Court)

1. Core Issue

The core issue before the High Court was whether the Principal Commissioner validly exercised revisionary jurisdiction under Section 263 of the Income Tax Act, 1961 by holding that the assessment order was erroneous and prejudicial to the interest of the revenue on the ground that profit arising from sale of 34 unlisted preference shares of ICICI Bank Ltd. was wrongly treated as Long-Term Capital Gain instead of business income, and that there was excess set-off and allowance of disallowable capital loss. The question essentially revolved around the scope of Section 263 and whether the Assessing Officer had failed to conduct necessary inquiries within the meaning of Explanation 2(b) to Section 263.

2. Facts of the Case

The assessee, a limited company, filed its original return of income for AY 2018–19 on 29 September 2018 declaring income of Rs. 36.79 crore, which was revised on 29 March 2019 to Rs. 36.18 crore. The assessment was completed under Section 143(3) on 8 March 2021 at an income of Rs. 39.76 crore.

During the relevant year, the assessee sold 34 unlisted preference shares of ICICI Bank Ltd., which had been acquired in June 2012 pursuant to a Board Resolution treating them as investment. The shares were held for nearly six years and were sold in March 2018. The gain of Rs. 12.97 crore was offered and accepted as Long-Term Capital Gain and set off against brought-forward losses of AY 2012–13. The Assessing Officer had issued notice under Section 142(1) and examined supporting documents including purchase and sale details, computation of capital gains and reliance on CBDT Instruction dated 02.05.2016.