Vasilijy Apilats, 61, of Crewe, admitted he took the painting from Chester Cathedral but said he bought it for £135 from two men he believed were cathedral officials.
Chester Crown Court heard The Raising of Lazarus painting is estimated to be worth £2,000 and was probably made between 1870 and 1880.
Mr Apilats denies theft.
Caroline Harris, prosecuting, said the icon was taken from a chapel in the cathedral in August 2014.
It was recovered from Mr Apilats' home the following month.
Ms Harris told the court he left a cheap Christmas angel in its place "laughing in the face of those he had wronged".
Mr Apilats, who lives on Edleston Road, is originally from Latvia and spoke to the court through a Russian interpreter.
He claimed he was approached by a man in the cathedral who asked him if he wanted to buy the icon for £250.
Mr Apilats said he would only pay £135 as the icon was damaged.
A second man, said by the defendant to be a supervisor, approved the sale and Mr Apilats took it home.
He denied placing the toy in the chapel.
Ms Harris said his explanation was "elaborate, fanciful and far-fetched".
The trial continues with the jury due to visit the cathedral.
A man stole a cathedral's 19th Century Greek icon and left a cheap Christmas toy in its place, a court has heard.