AO Must Examine Allocation of Head Office Expenses Before Granting S. 80-IA Deduction: Calcutta High Court Upholds S. 263 Revision

The Calcutta High Court has upheld the exercise of revisionary jurisdiction under Section 263 of the Income Tax Act against companies of the Shyam Group, holding that the Assessing Officer cannot allow profit-linked deductions under Section 80-IA without properly examining the allocation of common Head Office expenses to eligible units. The Bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar has observed that a captive power plant generating substantial profits could not realistically operate in complete administrative isolation from the Head Office. The finance, HR, and managerial support functions inherently contribute to the operations of such units and therefore require examination while computing tax holiday deductions. The dispute arose from assessments relating to captive power plants established by the assessees, which claimed 100% deduction under Section 80-IA as eligible undertakings. The controversy centred on whether common Head Office expenses such as finance costs, employee benefits, and administrative overheads should have been proportionately allocated to the power units while computing eligible profits. The Court noted that during the original scrutiny proceedings, the Assessing Officer had referred the matter to the Transfer Pricing Officer (TPO) because the inter-unit transfer of power constituted “Specified Domestic Transactions” under Section 92BA. The assessees had defended a “Direct Nexus” theory, arguing that only expenses directly connected with power generation should be allocated to the captive power plants and that common Head Office expenses should remain with non-eligible units. The TPO accepted the methodology relating to cost allocation but revised the transfer price of electricity. Subsequently, the Assessing Officer completed the assessment in line with the TPO’s findings, resulting in the Section 80-IA deduction initially being reduced to nil. However, the CIT(A) later recalculated the deduction by adopting revised grid rates and allowed a deduction exceeding ₹42 crore. Thereafter, the PCIT invoked powers under Section 263 on the ground that the Assessing Officer had failed to investigate whether Head Office expenses had been properly apportioned to the eligible units. The assessees challenged this action by arguing that the issue had already merged with the appellate proceedings and that the TPO’s examination barred any further revision. Rejecting these arguments, the High Court held that the doctrine of merger under Explanation 1(c) to Section 263 is “issue-specific” and not absolute. The Bench observed that while the CIT(A) examined the “receipt side” relating to power valuation, the allocation of Head Office expenses constituted a separate and unexamined issue. The Court made an important distinction between valuation functions of the TPO and the broader duty of the Assessing Officer to compute real profits. According to the Bench, the TPO’s mandate is restricted to determining the Arm’s Length Price of transactions and does not extend to verifying whether the eligible undertaking bore its fair share of common corporate overheads. The High Court further held that the Assessing Officer cannot escape scrutiny merely because the TPO remained silent on the issue of expense allocation. The Court stated that “an officer is bound by a positive determination; he cannot be bound by an omission.” The Bench rejected the assessee’s reliance on the “plausible view” doctrine. The Court observed that a plausible view can exist only where there has been active application of mind by the Assessing Officer. In the present case, the assessment order contained what the Court described as a “desert of silence” regarding the allocation of substantial Head Office expenses. The High Court clarified that where an assessment year is “abated” at the time of search, the Assessing Officer enjoys plenary powers similar to a regular scrutiny assessment and is not confined only to incriminating material found during the search. The Court crystallised several legal principles through the judgment, including that the doctrine of merger under Section 263 is “surgical” and issue-specific, that the TPO is an authority on valuation while the AO remains the authority on computation, and that the “plausible view” defence is unavailable in cases involving complete non-inquiry. The High Court dismissed all the appeals and affirmed the revisionary proceedings initiated by the PCIT. The Bench directed the Assessing Officer to conduct a fresh assessment confined to the proportionate allocation of common Head Office expenses to the eligible units and to grant the assessees an opportunity to substantiate their “Direct Nexus” theory with evidence. Case Details Case Title: Shyam Sel And Power Limited Vs Principal Commissioner Of Income Tax (Central), Kolkata – 1 Citation: JURISHOUR-1241-HC-2026(CAL) Case No.: ITA 24 OF 2026 Date: 07.05.2026 Counsel For Petitioner: J.P. Khaitan, Sr. Adv. Counsel For Respondent: Amit Sharma, Ld. Adv. Click Here To Read Order Read More: Former ITAT Member in Rs. 30 Lakh Bribery Case Denied Bail: Rajasthan HC

AO Must Examine Allocation of Head Office Expenses Before Granting S. 80-IA Deduction: Calcutta High Court Upholds S. 263 Revision

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