Non-Examination of Head Office Expense Allocation in S. 80-IA Claims Makes Assessment Erroneous: Calcutta HC

The Calcutta High Court has upheld the Principal Commissioner of Income Tax's decision to revise assessments holding that the Assessing Officer (AO) failed to examine the allocation of common Head Office expenses while computing profits eligible for deduction under Section 80-IA. The bench of Justice Rajarshi Bharadwaj and Justice Uday Kumar dismissed three appeals filed by the companies and affirmed the Income Tax Appellate Tribunal's order sustaining revision proceedings initiated under Section 263 and concluded that the assessment orders suffered from a "lack of inquiry" on a crucial aspect affecting the quantum of tax-exempt profits and therefore warranted revision. Background of the DisputeKey Question Before the CourtDoctrine of Merger Does Not Bar RevisionTransfer Pricing Proceedings Not a ShieldNo Protection Under the "Plausible View" DoctrineImpact of Search Assessment ProceedingsFour Important Legal Principles Laid DownFinal OutcomeCase Details Background of the Dispute The controversy arose from deductions claimed under Section 80-IA in respect of captive power plants operated by the companies. These power-generating units qualified as eligible businesses entitled to profit-linked tax deductions. Since electricity generated by the captive power plants was primarily supplied to the companies' own manufacturing facilities, the valuation of such transfers became subject to the specified domestic transaction provisions under Chapter X of the Income Tax Act. Following a search and seizure operation conducted on the Shyam Group in January 2019, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determination of the arm's length price of the inter-unit power transfers. During the proceedings, the companies argued that only expenses having a direct nexus with power generation should be allocated to the captive power plants and that common corporate expenses incurred at the Head Office level should not be charged to these units. The TPO accepted this methodology but made adjustments to the transfer pricing rate of power supplied by the captive power plants. The assessment order ultimately reduced the Section 80-IA deduction to nil. Subsequently, the Commissioner (Appeals) recalculated the eligible profits and directed the allowance of a deduction exceeding ₹42 crore. While appellate proceedings regarding the quantum of deduction were ongoing, the Principal Commissioner invoked Section 263 and alleged that the Assessing Officer had failed to verify whether common Head Office expenses, including finance costs, employee benefit expenses and administrative overheads, ought to have been proportionately allocated to the eligible units. Key Question Before the Court The principal issue before the High Court was whether the Principal Commissioner could exercise revisionary jurisdiction under Section 263 after the deduction claim had already been examined by the Commissioner (Appeals) and after transfer pricing proceedings had been completed by the TPO. The companies argued that the issue had merged with the appellate order and that transfer pricing proceedings had already examined the allocation methodology. They further contended that the Assessing Officer had adopted a legally sustainable "Direct Nexus" approach and therefore revision under Section 263 was impermissible. The Revenue, however, maintained that the Assessing Officer had failed to conduct any meaningful inquiry into the expense side of the deduction claim and that such non-inquiry rendered the assessment both erroneous and prejudicial to the interests of the Revenue. Doctrine of Merger Does Not Bar Revision Rejecting the taxpayers' arguments, the High Court held that the doctrine of merger operates only in respect of issues actually considered and decided by the appellate authority. According to the Court, the Commissioner (Appeals) had focused solely on determining the correct valuation of electricity supplied by the captive power plants and had not examined the allocation of common Head Office expenses. The Court observed that income valuation and expense allocation constitute two separate components of profit determination. Since the issue of cost apportionment was never considered during appellate proceedings, it remained open to revision under Section 263. The Bench emphasized that Explanation 1(c) to Section 263 creates only an issue-specific bar and not a blanket prohibition against revision once an appeal has been decided. Transfer Pricing Proceedings Not a Shield The Court also rejected the argument that transfer pricing proceedings insulated the assessment from revision. It held that the TPO's jurisdiction is confined to determining the arm's length price of transactions and does not extend to examining the overall computation of profits eligible for deduction under Section 80-IA. According to the Bench, while the TPO may determine the valuation of power transfers, the responsibility of ensuring that eligible units bear an appropriate share of corporate overheads remains with the Assessing Officer. The Court noted that the TPO had expressly confined his findings to valuation issues and had not adjudicated the allocation of Head Office expenses. As a result, the Assessing Officer could not rely on the TPO's silence as a substitute for his own independent inquiry. No Protection Under the "Plausible View" Doctrine One of the most significant aspects of the ruling is the Court's analysis of the "plausible view" doctrine. The companies argued that the Assessing Officer had consciously accepted the Direct Nexus theory and that such acceptance represented a legally sustainable view immune from revision. The High Court disagreed. It held that a plausible view can exist only when the Assessing Officer has actively examined the issue and applied his mind to the relevant facts. In the present case, the Court found no evidence of any inquiry into the allocation of substantial finance costs, personnel expenses or administrative overheads reflected in the companies' consolidated accounts. The Bench memorably observed that "silence is not the exercise of a choice; it is the abdication of a duty." It concluded that the assessment order reflected an investigative vacuum rather than a conscious adoption of one of two possible views. Impact of Search Assessment Proceedings The Court further held that the assessment year in question was an "abated" year under Section 153A due to the search proceedings conducted in January 2019. Consequently, the Assessing Officer possessed full powers to determine the total income of the assessee and was not restricted solely to issues arising from incriminating material seized during the search. The Bench clarified that the principle laid down by the Supreme Court in Abhisar Buildwell regarding completed assessments did not apply to abated assessment years. Therefore, the absence of specific incriminating material concerning expense allocation did not prevent either the Assessing Officer or the Principal Commissioner from examining the issue. Four Important Legal Principles Laid Down The Court crystallized four important principles emerging from the case: First, the doctrine of merger under Section 263 is issue-specific and does not protect matters that were never examined in appellate proceedings. Second, transfer pricing approval of transaction valuation does not relieve the Assessing Officer of the duty to examine overall profit computation. Third, the plausible view doctrine is unavailable where the assessment order reflects complete non-inquiry rather than conscious decision-making. Fourth, in abated search assessments, the Assessing Officer enjoys broad powers to scrutinize all aspects of total income irrespective of whether incriminating material exists on a particular issue. Final Outcome The Calcutta High Court upheld the validity of the Section 263 revision and directed the Assessing Officer to undertake a fresh examination limited to the allocation of common Head Office expenses to the eligible power units. The Court instructed the Assessing Officer to provide the assessees an opportunity to substantiate their Direct Nexus theory and complete the exercise within six months. Case Details Case Title: Shyam Sel And Power Limited Vs Principal Commissioner Of Income Tax Citation: JURISHOUR-1504-HC-2026(DEL) Case No.: ITA 24 OF 2026 Date: 07/05/2026 Counsel For Petitioner: J.P. Khaitan, Ld. Sr. Adv. Counsel For Respondent: Amit Sharma, Ld. Adv. Click Here To Read Order Read More: Bogus Share Transaction Case Exempted from CBDT Low-Tax-Effect Circular: Delhi HC

Non-Examination of Head Office Expense Allocation in S. 80-IA Claims Makes Assessment Erroneous: Calcutta HC

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