Revisional jurisdiction under Section 263 limited where AO made enquiries and followed administrative instruction; capital gain treatment affirmed.

Treatment of revisional jurisdiction under Section 263 is constrained where the Assessing Officer conducted inquiries, considered documentary material and followed applicable administrative instructions; mere brevity of reasoning does not establish error or prejudice and jurisdiction cannot be exercised solely because a superior authority disagrees. A post hoc conversion of stock in trade into a capital asset raised at appellate stage is impermissible absent prior findings; isolated, long held transactions without trading pattern do not support conversion. Surplus on sale of unlisted preference shares held to be long term capital gain based on intention at acquisition, holding period, solitary sale and accounting treatment. Paragraph 3(b) of Circular No.6/2016 inapplicable to unlisted shares.

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Issues: (i) Whether the revisional jurisdiction under Section 263 of the Income tax Act, 1961 was validly exercised in the facts of the case; (ii) Whether conversion of stock in trade into a capital asset immediately prior to sale was properly invoked; (iii) Whether surplus from sale of unlisted preference shares is business income or long term capital gain; (iv) Whether Paragraph 3(b) of CBDT Circular No. 6/2016 dated 29.02.2016 applies.

Issue (i): Validity of exercise of revisional jurisdiction under Section 263 of the Income tax Act, 1961.

Analysis: The Court examined whether both limbs of Section 263 (order being erroneous and prejudicial to revenue) were satisfied. It noted the Assessing Officer had issued inquiries under Section 142(1), considered documentary evidence, and adopted a view consistent with the CBDT Instruction dated 02.05.2016. Brevity of reasoning alone was not treated as absence of inquiry. The revisional order did not demonstrate the requisite failure of inquiry or illegality necessary to invoke Section 263.

Conclusion: The exercise of jurisdiction under Section 263 was not justified; conclusion in favour of the assessee.

Issue (ii): Whether a conversion of stock in trade into a capital asset immediately before sale could be sustained.

Analysis: The Court considered whether prior authorities recorded any finding of conversion and whether the revenue could raise a new factual plea at the appellate stage. The record showed no finding of conversion by the AO or in the revisional order; introducing conversion as a fresh factual premise at the appellate stage was impermissible. On merits, the isolated nature of the transaction, lengthy holding period and absence of trading pattern did not support conversion.

Conclusion: The conversion plea was untenable; conclusion in favour of the assessee.

Issue (iii): Characterisation of surplus on sale of unlisted preference shares as business income or long term capital gain.

Analysis: The Court applied established factors-intention at acquisition, period of holding, frequency and manner of transactions and accounting treatment. The shares were acquired by board resolution as investment, held for nearly six years, sold in a solitary transaction and consistently valued at cost. CBDT Instruction dated 02.05.2016 treating transfers of unlisted shares as capital gains (absent specified exceptions) was held applicable. No evidence of sham transaction or pattern of trading was found.

Conclusion: The surplus qualifies as long term capital gain; conclusion in favour of the assessee.

Issue (iv): Applicability of Paragraph 3(b) of CBDT Circular No. 6/2016 dated 29.02.2016.

Analysis: Paragraph 3(b) of Circular No. 6/2016 pertains to listed shares and an assessee's election for capital gains treatment and consistency for listed securities. The present case concerned unlisted preference shares governed by CBDT Instruction dated 02.05.2016. The revisional order did not rely on Paragraph 3(b), and the Tribunal was not required to decide issues not raised in the revisional reasoning.

Conclusion: Paragraph 3(b) is inapplicable; conclusion in favour of the assessee.

Final Conclusion: All substantial questions of law admitted at the time of admission are answered in favour of the assessee; the Tribunal correctly set aside the revisional order under Section 263 and restored the assessment order.

Ratio Decidendi: Section 263 of the Income tax Act, 1961 requires both error and prejudice to revenue to be shown; where the Assessing Officer has made relevant inquiries and adopted a plausible view supported by material and applicable administrative instructions (including CBDT Instruction dated 02.05.2016), revisional jurisdiction cannot be exercised merely because a superior authority disagrees.

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