Calcutta High Court
Shyam Sel And Power Limited vs Principal Commissioner Of Income Tax … on 7 May, 2026
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE
ITA 24 OF 2026
SHYAM SEL AND POWER LIMITED
VS
PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL),
KOLKATA - 1
ITA 22 OF 2026
SHYAM METALICS AND ENERGY LIMITED
VS
PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL),
KOLKATA - 1
ITA 27 OF 2026
SHYAM METALICS AND ENERGY LIMITED
VS
PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL),
KOLKATA - 1
BEFORE:
THE HON'BLE JUSTICE RAJARSHI BHARADWAJ
AND
THE HON'BLE JUSTICE UDAY KUMAR
For the Appellant : Mr. J.P. Khaitan, Ld. Sr. Adv.
Mr. Sanjay Bhowmik, Ld. Adv.
Mr. Pratyush Jhunjhunwala, Ld. Adv.
Ms. Sruti Dutta, Ld. Adv.
Ms. Sakshi Singhi, Ld. Adv.
For the Respondent : Mr. Amit Sharma, Ld. Adv.
Mr. A.K. Agrahari, Ld. Adv.
2 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
Hearing concluded on : 17.04.2026
Judgment on : 07.05.2026
Uday Kumar, J:-
I. INTRODUCTION
1. These three appeals, out of which ITA 24 of 2026 has been preferred
by the Appellant-Assessee, M/s Shyam Sel and Power Limited and
remaining two appeals have been preferred by Shyam Metalics and
Energy Limited, under Section 260A of the Income Tax Act, 1961,
calls into question the orders of the Learned Income Tax Appellate
Tribunal “A” Bench, Kolkata, all dated August 13, 2025, passed in ITA
No. 1018/KOL/2024 for the Assessment Year 2017-18, in ITA No.
1016/KOL/2024 for the Assessment Year 2017-18 and in ITA No.
1017/KOL/2024 for the Assessment Year 2018-19 respectively. By
the impugned order, the Tribunal sustained a revisionary intervention
by the Principal Commissioner of Income Tax (PCIT) under Section
263 for the Assessment Year 2017-18. At the heart of this forensic
contest lies a perceived “investigative vacuum” in the Assessing
Officer’s scrutiny regarding the allocation of Head Office expenses, a
vacuum which the Revenue decries as “erroneous and prejudicial,”
but which the Appellant defends as territory already fully occupied by
the rigors of specialized audit and appellate scrutiny.
3 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
2. The factual narrative originates with the Appellant, an industrial
house engaged in the manufacture of iron and steel, which
established three Captive Power Plants (CPPs) at Mangalpur and
Jamuria to achieve operational self-sufficiency. These plants,
qualifying as “eligible businesses” under the fiscal incentive umbrella
of Section 80-IA, were entitled to a cent per cent deduction of their
profits for ten consecutive assessment years. However, as these units
primarily served the Appellant’s own manufacturing facilities, the
inter-unit pricing mechanism became a matter of acute statutory
significance; under Section 80-IA(8), such transfers must strictly
correspond to “Market Value” a requirement that triggered the
“Specified Domestic Transaction” (SDT) provisions of Chapter X.
3. A pivotal shift in the trajectory of the assessment occurred on
January 17, 2019, following a search and seizure operation conducted
upon the Shyam Sel Group. In the ensuing scrutiny, the Assessing
Officer, mindful of the complexity inherent in internal power
transfers, made a formal reference to the Transfer Pricing Officer
(TPO) under Section 92CA for the determination of the Arm’s Length
Price (ALP). It is here that the facts take a critical turn as the TPO did
not merely evaluate the revenue generated by the power units but
specifically requisitioned details regarding the allocation of costs. In
response, the Appellant submitted its Transfer Pricing Study Report,
advocating for a “Direct Nexus” theory, contending that only
expenses possessing a clear causal link to power generation should
4 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026be debited, while common Head Office costs should remain stayed
with the non-eligible units.
4. By an order dated January 25, 2021, the TPO accepted this
methodology of cost allocation but proposed a significant downward
adjustment to the price of power, reducing the rate to 2.48 per unit.
When the Assessing Officer passed the final assessment order on
August 25, 2021, he acted in strict conformity with these specialized
findings as mandated by Section 92 CA(4). The result was a
mathematical inevitability of the eligible profits of the power plants
were extinguished, the deduction under Section 80-IA was reduced to
NIL, and the tax liability was correspondingly enhanced.
5. Seeking redress, the Appellant approached the CIT(Appeals), where a
fresh calibration of grid rates resulted in a re-calculation of the
eligible profit at ₹42,18,20,214 and directed the Assessing Officer to
allow the deduction accordingly. While the Revenue challenged this
before the Tribunal, the matter was remanded for the limited purpose
of verifying these revised figures. It was at this precise juncture,
while the quantum of the deduction was being distilled through the
appellate and remand processes, that the PCIT invoked his
revisionary powers.
6. On February 9, 2024, the PCIT issued a show-cause notice to the
appellant alleging that the original assessment was “erroneous” for
the AO’s failure to ensure a proportionate distribution of Head Office
expenses among the units. Despite the Appellant’s vehement
5 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
objection that the issue had merged with the appellate decree and
had already been scrutinized by the TPO, the PCIT persisted, setting
aside the assessment on March 18, 2024. The Tribunal has since
upheld this revision, viewing the “allocation of expenses” as a
distinct, unexamined issue.
7. Against this backdrop of procedural friction, we are tasked with
determining whether the law permits such a surgical intervention into
a specific accounting component of a claim that has otherwise been
adjudicated as a composite whole in appeal. To resolve this conflict
between the finality of assessment and the Revenue’s corrective
mandate, we formulate the following Substantial Questions of Law:
II. Substantial Questions of Law
8. To resolve this conflict between the finality of assessment and the
Revenue’s corrective mandate, we formulate the following Substantial
Questions of Law:
i. Whether the PCIT possessed the requisite jurisdiction under
Section 263 to revisit the quantum of a Section 80-IA
deduction when the said deduction had already been the
subject matter of an adjudication by the CIT(Appeals)?
ii. Whether the jurisdiction under Section 263 could be validly
exercised to revisit cost-quantification after the same had
6 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026undergone the specialized rigor of Transfer Pricing
proceedings under Section 92CA?
iii. Whether the acceptance of the “Direct Nexus” theory by the
Assessing Officer (AO) and Transfer Pricing Officer (TPO)
constituted a “plausible view,” thereby rendering the
assessment immune to revision under the established
parameters of Section 263?
III. SUBMISSIONS ON BEHALF OF THE APPELLANT-ASSESSEE
9. Assailing the revisionary order on a multi-layered jurisdictional
foundation, Mr. J.P. Khaitan, the learned senior counsel for the
Appellant-Assessee, contended that the PCIT’s intervention is a
product of jurisdictional overreach that overlooks the specialized
architecture of Transfer Pricing and the finality of appellate decrees.
He anchors his address in the proposition that the Revenue has failed
to respect the statutory perimeter erected by the legislature through
Chapter X. For the Assessment Year in question, the inter-unit
transfer of power between the captive power plants (CPPs) and the
manufacturing units exceeded the ₹20 crore threshold, thereby
crystallizing these transactions as “Specified Domestic Transactions”
(SDT) under Section 92BA(iii). Consequently, by the mandate of
Section 92(2A), the determination of any allocation of cost or
expense is governed exclusively by the provisions requiring such
7 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026computation to be made having regard to the Arm’s Length Price
(ALP).
10. Mr. Khaitan emphasizes that once a formal reference was made to
the Transfer Pricing Officer (TPO) under Section 92CA, the TPO’s
jurisdiction became not merely advisory but exclusive. The TPO
specifically requisitioned the Transfer Pricing Study Report, wherein
the Appellant defended its “Direct Nexus” theory, arguing that
common Head Office expenses lacked a causal link to power
generation. By accepting this methodology in his order dated January
25, 2021, the TPO effectively occupied the field of cost-allocation.
Under Section 92CA (4), the Assessing Officer (AO) was statutorily
bound by these findings. Mr. Khaitan argues that since Chapter X is a
“complete code,” any perceived error in the TPO’s acceptance could
only be corrected by a specialized Commissioner of Transfer Pricing;
the jurisdictional PCIT cannot, through a general revision, “second-
guess” the results of a specialized audit.
11. Building upon this foundation, the Appellant mounted a secondary
challenge based on the exhaustion of jurisdiction. It is argued that by
the time the PCIT invoked Section 263, the original assessment order
had already lost its independent existence, having merged into the
superior decree of the CIT(Appeals) dated June 2, 2023. A claim for
deduction under Section 80-IA is not a collection of disparate items
but an integrated subject matter where income and expenses are two
sides of the same fiscal coin. Since the CIT(Appeals) re-adjudicated
8 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
the quantum of the deduction, arriving at a revised figure of
₹42,18,20,214, the appellate authority is deemed to have
“considered” the profitability of the units in its entirety.
12. Invoking the “surgical” restriction in Explanation 1(c) to Section
263(1), Mr. Khaitan submits that once the first appellate authority
puts its seal of approval on the quantum of a deduction, every
accounting component, including the allocation of expenses, stands
merged. To hold otherwise would violate the doctrine of finality and
administrative discipline, effectively permitting the PCIT to “reverse
the clock” on a settled appellate decree.
13. Transitioning to the merits, the Appellant submitted that the non-
allocation of Head Office expenses was a deliberate adherence to the
judicially sanctioned “Direct Nexus” theory. The AO adopted a legally
sustainable view that only expenditures possessing a direct causal
link to an industrial undertaking can be debited against its profits.
Relying on settled precedents in Zandu Pharmaceuticals Works Ltd
vs. CIT (350 ITR 366) and CIT vs. Micr Electronics Ltd (77
taxmann.com 67), Mr. Khaitan contended that common finance costs
of a parent company cannot be arbitrarily loaded onto an eligible unit
unless a direct benefit is demonstrated.
14. The Appellant argued that the PCIT’s intervention is merely an
attempt to substitute a “preferable view” for a “plausible view,” which
the Apex Court in CIT vs. Max India Ltd (295 ITR 282) and this Court
in PCIT vs. Russel Credit Limited (2026) have held to be jurisdictional
9 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
excess. Where an AO has conducted an inquiry and adopted a
sustainable position, the revisionary power must remain dormant.
The direction to “proportionately allocate” costs is characterized as a
subjective accounting preference that ignores the functional reality of
CPP operations, which require minimal head-office intervention.
15. Finally, Mr. Khaitan emphasizes that since this assessment was
framed under Section 153A following a search, the Revenue’s power
is strictly tethered to the discovery of “incriminating material.” As the
expense allocation was a routine accounting matter reflected in
regular books, it remained beyond the reach of both the AO and the
PCIT. Relying on PCIT vs. Abhisar Buildwell P. Ltd. (2023) and CIT vs.
Kabul Chawla (380 ITR 573), Mr. Khaitan argued that once an
assessment reaches finality, it can only be reopened on the strength
of tangible, incriminating evidence. In the absence of tangible,
incriminating evidence, the AO’s acceptance of the reported profits
was the only legally sustainable course.
16. To allow a revision on a purely “notional” basis of expense allocation
would, in the Appellant’s view, circumvent the rigorous protections
provided to taxpayers under the search regime. Mr. Khaitan,
therefore, prayed that the questions of law be answered in favor of
the Assessee and the revisionary order be quashed as being coram
non judice.
10 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
IV. SUBMISSIONS ON BEHALF OF THE RESPONDENT-REVENUE
17. Countering these submissions, Mr. Amit Sharma, the learned Counsel
for the Revenue characterized the assessment order as a manifest
case of “absolute non-inquiry” resulting in a substantial loss to the
exchequer. He submitted that the PCIT was statutorily obligated to
intervene because the AO failed to act as an investigator, particularly
regarding the “expense side” of the Section 80-IA claim.
18. Regarding the Doctrine of Merger, the Revenue contended that the
Appellant’s reliance is jurisprudentially flawed. Under Explanation
1(c) to Section 263(1), revisionary power is only eclipsed on those
specific “matters” actually considered and decided in appeal. Since
“profit” is the numerical result of two distinct variables i.e., receipts
and expenditure, a decision on the “receipt” variable (the rate of
power) does not automatically adjudicate the “expenditure” variable.
The CIT(Appeals) was exclusively occupied with valuation rates,
leaving the allocation of common Head Office expenses entirely
untouched. As this issue was never raised, questioned, or adjudicated
upon, it remained a jurisdictional vacuum that the PCIT was entitled
to fill.
19. On the TPO’s mandate, the Revenue submitted that the Appellant
seeks to construct a “jurisdictional no-fly zone.” Under Section 92CA,
the TPO’s role is confined to determining the Arm’s Length Price. The
allocation of costs to an “eligible unit” for the purpose of computing
11 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
“Net Profit” remains the primary, non-delegable duty of the AO. The
TPO’s silence on cost-allocation cannot be construed as a binding
finding, as he was never tasked with adjudicating the internal
accounting distribution of corporate overheads.
20. The Revenue forcefully rebutted the “Plausible View” defense,
asserting that a view can only be “plausible” if it is born out of an
inquiry. Learned Counsel characterized this as a case of “absolute
non-inquiry” rather than “inadequate inquiry.” Despite the glaring
disparity between the massive administrative overheads in the
consolidated Profit & Loss accounts and the “cost-free” nature of the
Power units, the AO failed to record a solitary note to justify this lack
of allocation. While the “Direct Nexus” theory is a valid legal concept,
it is a factual claim that requires proof; by accepting it without
verification, the AO failed to bridge the gap between the TPO’s rate-
valuation and the actual profitability of the unit.
21. Finally, regarding the search assessment under Section 153A, the
Revenue submitted that the “incriminating material” doctrine offers
no sanctuary to the Appellant for AY 2018-19. As the assessment was
“pending” or “abated” at the time of the search, the AO’s jurisdiction
was restored to its full, plenary strength to determine “total income”
irrespective of whether specific seized material existed. The failure to
examine the apportionment of common costs during this “reset”
assessment was a jurisdictional lapse which the PCIT was entitled to
rectify.
12 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
22. In sum, the Revenue contended that the PCIT acted within the four
corners of his mandate to prevent a leakage of revenue, ensuring
that the total income for the search year is computed accurately and
in accordance with the law.
V. JUDICIAL ANALYSIS AND DISCUSSION
A. ON THE DOCTRINE OF MERGER & SEARCH JURISDICTION (SQL
NO. 1)
23. Having delineated the factual matrix and the rival submissions, we
proceed to resolve the first substantial question of law, is relating to
‘Whether the Principal Commissioner’s jurisdiction under Section 263
was eclipsed by the intervention of the first appellate authority.’ This
inquiry compels us to determine whether the Assessing Officer’s
order of August 25, 2021, retained an independent identity capable of
revision, or whether it had undergone a total legal metamorphosis,
merging into the superior decree of the CIT(Appeals).
24. The Appellant invokes the Doctrine of Merger as an absolute
jurisdictional shield, relying on the premise that a deduction under
Section 80-IA is a “singular, integrated claim.” Under this theory,
once the CIT(Appeals) re-computed the deduction to arrive at a
revised figure of ₹42,18,20,214, the entire “subject matter” of the
unit’s profitability stood adjudicated and, consequently, merged. The
Revenue, however, seeks to pierce this protection by invoking the
13 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
specialized “carve-out” enshrined in Explanation 1(c) to Section
263(1).
25. We find it necessary to distinguish the present matrix from the ratio
in Nirma Chemicals Works (P) Ltd. In that instance, the dispute
concerned the fundamental eligibility of the industrial undertaking,
the very root of the claim. In the case before us, eligibility is a settled
fact; the controversy centres on a distinct accounting variable: the
allocation of common Head Office expenses. We observe that this
specific component was never highlighted, debated, or touched upon
during the appellate proceedings.
26. The legislative intent behind Explanation 1(c) explicitly clarifies that
the bar of merger is not a blanket immunity; it is “issue-specific” and
restricted only to those “matters” that were actually considered and
decided in appeal. This position is fortified by the Hon’ble Supreme
Court in CIT vs. Shri Amitabh Bachchan, which holds that the
Commissioner’s revisionary power remains vibrant regarding issues
that did not form the subject matter of the appellate challenge. The
Appellant’s reliance on Smt. Renuka Phillip vs. ITO is misplaced, as
the issue revised in that case was the identical capital gains
computation the CIT(A) had already scrutinized.
27. This jurisdictional clarity is further amplified by the “search” status of
the assessment. Since Assessment Year 2018-19 was in an “abated”
status at the time of the search, the Assessing Officer’s (AO)
jurisdiction was restored to its full, plenary strength. In this “reset”
14 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
jurisdiction, the AO had a non-delegable duty to determine “total
income” by scrutinizing both pillars of profitability: revenue and
expenditure.
28. We find that the CIT(Appeals) was engaged exclusively in a valuation
exercise concerning receipts (the “grid rate” of power). It did not
conduct a comprehensive audit of the consolidated corporate
expenses. To accept the Appellant’s theory that “Net Profit” is a
monolithic whole would allow an assessee to strategically immunize
an investigative lapse by filing an appeal on a minor peripheral point.
Such an interpretation would render the remedial purpose of Section
263 illusory.
29. In the context of an abated search assessment, where the AO’s
power of inquiry is at its zenith, the failure to verify the “expense
side” of the ledger creates a jurisdictional void. Since this void was
not addressed by the appellate authority, no merger occurred. The
AO’s order, therefore, retained its independent identity regarding the
un-probed costs, leaving it open to the PCIT’s corrective intervention.
30. Furthermore, we must address the “Plausible View” defence. As
observed in PCIT vs. Russel Credit Limited, revision is barred if the
AO adopts one of two possible views. However, a “view” is a product
of active deliberation; it requires the visible application of mind to a
contested fact. In the present record, the AO’s order is characterized
by a “desert of silence” regarding the proportionate distribution of
15 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
Finance Costs and Personnel Expenses. Silence is not the exercise of
a choice; it is the abdication of a duty.
31. We find the Revenue’s reliance on CIT vs. Maithan International to be
particularly germane. This Court has held that where an AO fails to
undertake an inquiry on a point that “provokes an inquiry,” the
resulting order is inherently erroneous and prejudicial. Here, the AO’s
passive adoption of the TPO’s valuation of revenue, while ignoring the
expense side of the ledger, created a jurisdictional vacuum that the
PCIT was not only entitled but obligated to fill.
32. Consequently, we hold that the issue of “Head Office expense
allocation” was a distinct matter that remained un-adjudicated and
un-considered by the CIT(Appeals). The Doctrine of Merger,
therefore, does not operate as a jurisdictional bar. The “carve-out” in
Explanation 1(c) is squarely attracted, preserving the PCIT’s mandate
to rectify an investigative void.
33. Accordingly, the first Substantial Question of Law is answered in the
affirmative, in favour of the Revenue and against the Assessee. We
conclude that the Principal Commissioner possessed the requisite
jurisdiction to invoke Section 263, as the specific issue of expense
apportionment had not lost its identity through the process of
appellate merger.
16 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
B. ON JURISDICTIONAL EXCLUSIVITY & TRANSFER PRICING (SQL
NO. 2)
34. Having confirmed that the appellate decree did not extinguish the
Principal Commissioner’s jurisdiction, we turn to the second limb of
the challenge: Whether the specialized regime of Transfer Pricing
under Chapter X divests the PCIT of his revisionary powers. The
Appellant’s defence is anchored in the “Doctrine of Jurisdictional
Exclusivity,” contending that because the inter-unit power transfers
were Specified Domestic Transactions (SDT), the entirety of the
Section 80-IA deduction, including the “allocation of any cost or
expense,” passed into the exclusive and binding mandate of the
Transfer Pricing Officer (TPO).
35. We have meticulously analyzed the statutory architecture of Section
92CA. The Appellant suggests that since the TPO requisitioned the
Transfer Pricing Study Report and subsequently proposed
adjustments only on the “income side,” his silence on the
“expenditure side” must be interpreted as a tacit but binding approval
of the cost-allocation methodology. Under this theory, the Assessing
Officer (AO) was merely a conduit for the TPO’s findings, mandated
by Section 92CA(4) to adopt the resulting figures without further
question.
36. However, we find this interpretation to be an impermissible
overextension of the TPO’s functional role. The TPO is a specialized
17 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
authority tasked with valuation, specifically the determination of the
Arm’s Length Price (ALP) of a transaction to prevent price distortion.
His mandate, however, does not encompass the holistic computation
of “Net Profit” required for a tax holiday under Section 80-IA. The
duty to ensure that an “eligible undertaking” is debited with its fair
share of corporate overheads, thereby preventing the artificial
shifting of profits from taxable manufacturing units to non-taxable
power units, remains the primary, non-delegable duty of the
Assessing Officer.
37. The record reveals a significant “Mandate Gap.” The TPO’s order of
January 25, 2021, contained an explicit disclaimer: his findings were
confined to the valuation of the power rate. He did not, and legally
could not, adjudicate upon the internal accounting distribution of
Head Office Finance Costs or Employee Benefit Expenses. By
adopting the TPO’s revenue valuation while failing to bridge the gap
regarding expense allocation, the Assessing Officer allowed an
investigative vacuum to persist in the final assessment.
38. We must reject the Appellant’s contention that the AO was “bound”
by the TPO’s silence. In the realm of fiscal jurisprudence, an officer is
bound by a positive determination; he cannot be bound by an
omission. If the TPO did not adjudicate the allocation of Head Office
expenses because it fell outside the scope of the ALP determination,
there was no “finding” to bind the AO. As we observed in CIT vs.
Maithan International, the AO is an investigator who cannot remain
18 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
passive when a return “provokes an inquiry.” The failure to question
why the Power units remained “expense-light” despite a massive
corporate infrastructure is a failure of general assessment, not a
failure of transfer pricing.
39. Furthermore, the specialized revisionary mechanism provided in
Circular No. 23 of 2022 for Transfer Pricing orders does not divest the
jurisdictional PCIT of his power under Section 263. While the TPO
determines the fairness of the price, the AO remains the guardian of
the completeness of the Profit & Loss account. Where the AO fails to
reconcile these two distinct variables, the resulting order is both
“erroneous” and “prejudicial.”
40. Accordingly, the second Substantial Question of Law is answered in
the affirmative, in favour of the Revenue and against the Assessee.
We hold that the specialized mandate of Chapter X does not provide
a “jurisdictional immunity” to the Assessing Officer for investigative
lapses in the general computation of tax-exempt profits
C. ON THE “PLAUSIBLE VIEW” DOCTRINE (SQL NO. 3)
41. We now address the third bastion of the Appellant’s defence:
Whether the acceptance of the “Direct Nexus” theory constituted a
“plausible view,” thereby rendering the assessment immune to
revision. The learned counsel for the Assessee contends that the
decision to accept the non-allocation of Head Office (HO) expenses
was not a lapse of duty, but a conscious choice rooted in a judicially
19 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026sanctioned accounting methodology. They rely upon the “Direct
Nexus” theory, as articulated in Zandu Pharmaceuticals Works Ltd vs.
CIT, suggesting that for an expense to be loaded onto an industrial
undertaking, there must be a visible, causal link.
42. However, we must scrutinize this contention through the lens of
modern corporate reality and the specific mandate of Section 80-
IA(8). The Appellant’s argument rests on a “Myth of Operational
Isolation,” the notion that a captive power plant, producing energy
worth crores, can exist in a state of administrative and financial
vacuum. In reality, the Head Office functions as the nerve centre,
providing the essential infrastructure, finance, human resource
management, and strategic oversight that sustain the eligible unit.
43. To suggest that these common overheads have no nexus with the
profitable units is an accounting fiction that the law cannot endorse
without verification. While the “Direct Nexus” theory is a valid legal
principle, its application is not an automatic right; it requires a
forensic examination of facts rather than a passive acceptance of an
assessee’s assertions.
44. The Appellant seeks sanctuary in the “Plausible View” doctrine, as
established in Max India Ltd and Russel Credit Limited, which
protects an Assessing Officer’s choice between two legally sustainable
positions. Yet, we must distinguish a deliberate “choice” from an
investigative “void.” For a view to be characterized as “plausible,” it
must be the result of a visible application of mind to a contested fact.
20 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
In the present record, we find an investigative silence that borders on
the absolute. The AO adopted the TPO’s valuation of revenue but
failed to ask a single question regarding the massive Finance Costs or
Personnel Expenses appearing in the consolidated books but
conspicuously absent from the power unit’s accounts.
45. As this Court held in CIT vs. Maithan International, an AO is not a
mere tax collector but an investigator whose duty is triggered the
moment a return “provokes an inquiry.” The absence of any
allocation of HO expenses in the Form 10CCB, contrasted with the
heavy corporate overheads in the main P&L account, was a “red flag”
that demanded a bridge of logic. By ignoring this disparity, the AO
did not take a “view”; he simply failed to see.
46. We find the argument regarding “test-checking” to be unpersuasive.
Verifying the validity of individual vouchers is a routine audit
function; it is not a substitute for the statutory duty under Section
80-IA(8), which requires the profits of the undertaking to be
computed as if it were a separate, standalone entity. A standalone
entity would necessarily bear its own administrative and financial
burden. By allowing the units to remain “expense-light,” the AO
permitted an artificial inflation of tax-exempt profits. This passivity
does not constitute a “plausible view”; it constitutes a manifest
failure to protect the interests of the Revenue.
47. As established in Malabar Industrial Co. Ltd., an assessment order
passed without supporting material or inquiry is inherently erroneous
21 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
and prejudicial. The “Plausible View” doctrine cannot be used as a
shield for non-inquiry. A view can only be legally sustainable if it is
born out of an audit of facts; it cannot be born out of investigative
silence.
48. Accordingly, the third Substantial Question of Law is answered in the
negative, in favour of the Revenue and against the Assessee. We
conclude that the AO’s failure to challenge the “Direct Nexus” theory
in the face of patent accounting anomalies rendered the assessment
order liable to revision.
VI. THE JURISDICTIONAL INTEGRITY OF SEARCH ASSESSMENTS
49. Having resolved the substantive questions of law, we find it
imperative to address the specialized “search” status of the
assessment under Section 153A. The Appellant has sought to invoke
the restrictive shield of the Hon’ble Supreme Court’s ratio in PCIT vs.
Abhisar Buildwell P. Ltd., contending that in the absence of tangible
seized evidence or “incriminating material” discovered during the
search, the Revenue is precluded from disturbing the reported
income.
50. We must clarify the specialized “status” of the assessment year in
question. The ratio in Abhisar Buildwell establishes that for
“completed” or “unabated” assessments, the Assessing Officer’s
jurisdiction is indeed tethered to incriminating material. However, the
law carves out a distinct path for “pending” or “abated” years. In the
22 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
present matrix, the search was conducted on January 17, 2019;
consequently, the Assessment Year 2018-19 was in an “abated”
status by operation of the second proviso to Section 153A(1).
51. The legal effect of “abatement” is the total restoration of the
Assessing Officer’s plenary powers. For an abated year, the AO’s
jurisdiction is not a narrow, evidence-centric window, but a wide, all-
encompassing door, co-extensive with a regular scrutiny under
Section 143(3). In this “reset” jurisdiction, the AO is mandated to
determine the “total income” of the assessee from all sources. This
mandate exists independently of whether specific components of that
income–such as the internal allocation of corporate overheads–were
reflected in seized documents.
52. It follows, therefore, that the “search” status of the assessment
offered no jurisdictional immunity for AY 2018-19. On the contrary, it
vested the AO with a heightened mandate to verify the legitimacy of
the Section 80-IA deduction and the accuracy of the underlying cost-
allocation. By failing to exercise this plenary power to investigate
patent accounting anomalies, the AO passed an order that was both
erroneous and prejudicial. The absence of specific “incriminating
material” regarding Head Office expenses offered no sanctuary
against the rectification of this investigative vacuum.
53. Where the AO’s jurisdiction is restored to its full strength under the
search regime, the PCIT’s revisionary power under Section 263
follows suit. The Principal Commissioner was well within his mandate
23 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
to identify the lack of inquiry into the “expense side” of the
profitability equation, as this was a vital component of the “total
income” that remained unverified during the search-assessment
VII. JUDICIAL CONCLUSIONS
54. In view of the exhaustive deliberations conducted herein, we
conclude that the resolution of this appeal rests upon a foundational
pillar of fiscal law: a tax holiday under Section 80-IA is not an
unconditional entitlement but a statutory bounty predicated on the
mathematically accurate computation of “Net Profit.” Our analysis of
the substantial questions of law reveals that the Assessing Officer’s
failure to scrutinize the “expense side” of the profitability equation
created a manifest jurisdictional error. By passively adopting the
Transfer Pricing Officer’s valuation of revenue while ignoring the non-
allocation of common Head Office expenses, specifically Finance
Costs, Personnel Expenses, and Administrative Overheads, the
Assessing Officer permitted an artificial inflation of eligible profits.
This investigative silence cannot be shielded by the “Plausible View”
doctrine; a view is legally sustainable only if it is born out of an active
application of mind. Where there is no inquiry, there can be no view,
only an investigative void.
55. Furthermore, we determine that the procedural defences regarding
the Doctrine of Merger and Transfer Pricing Exclusivity are
jurisprudentially flawed. Under Explanation 1(c) to Section 263(1),
24 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
the jurisdiction of the PCIT remains intact for matters not specifically
“considered and decided” by the appellate authority. Since the
CIT(Appeals) was exclusively occupied with the “rate” of power (the
receipt side) and not the “apportionment” of costs (the expense
side), the two variables remained legally distinct, preventing a
merger of the subject matter under revision. Similarly, the TPO’s
mandate is restricted to the valuation of transactions; it does not
divest the Assessing Officer of the primary duty to audit the Profit &
Loss account to ensure the “eligible unit” bears its fair share of
corporate costs.
56. Finally, this Court clarifies that the “search” status of the assessment
offers no sanctuary for the year in question. As Assessment Year
2018-19 was in an “abated” status at the time of the search, the
Assessing Officer possessed plenary powers to determine “total
income” beyond the scope of specific seized material. The failure to
exercise this power to verify a substantial tax claim resulted in an
order that was both erroneous and prejudicial to the interests of the
Revenue, squarely inviting the PCIT’s revisionary intervention.
VIII. LEGAL PRINCIPLES EVOLVED FROM THE DISCUSSION
57. Through the analysis of these facts and the application of cited
precedents, we deduce the following four principles of law, which are
hereby crystallized:
25 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026I. The Doctrine of Merger under Explanation 1(c) to Section 263
is “surgical” and “issue-specific.” A profit-linked deduction
rests on two independent pillars: income valuation and
expense apportionment. An appellate decision on one does
not result in the merger of the other, leaving the un-
adjudicated vacuum open for revisionary intervention.
II. The TPO is an authority on valuation, whereas the AO is the
primary authority on computation. The TPO’s silence on
internal cost-allocation does not constitute a “finding.” The AO
cannot delegate the duty to audit the Profit & Loss account;
any failure to verify the “Net Profit” computation remains a
revisable error regardless of TPO clearance.
III. A “Plausible View” requires a prior “Application of Mind” and is
unavailable in cases of non-inquiry. Where patent “red flags”
exist, such as massive unallocated corporate overheads in a
tax-holiday unit, investigative silence is a jurisdictional defect
that renders an order per se erroneous and prejudicial.
IV. In abated search assessments under Section 153A, the AO’s
investigative powers are as wide as a regular scrutiny and are
not restricted to “incriminating material.” The absence of
specific seized material regarding a particular expense does
not immunize the AO’s failure to verify a substantial tax claim.
26 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026IX. FINAL DECREE AND CONSEQUENTIAL DIRECTIONS
60. The cycle of our judicial inquiry is completed. All legal paths, be they
the Doctrine of Merger, the exclusivity of Transfer Pricing, or the
limits of Search Assessments, lead to the same destination: the
assessment order was a product of a “lack of inquiry” on a vital
accounting component of a profit-linked deduction.
61. Therefore, we passed the following orders:-
(i) The appeals, ITA 24 of 2026, ITA 22 of 2026 and ITA 27 of
2026, filed by the Appellant-Assessee are hereby dismissed.
(ii) The order of the Learned Tribunal sustaining the revision
under Section 263, is affirmed.
(iii) The Assessing Officer is directed to carry out a fresh
assessment for Assessment Year 2018-19, strictly confined
to the proportionate allocation of common Head Office
expenses (including Finance Costs, Employee Benefits, and
Administrative Overheads) to the eligible units.
(iv) During the remand proceedings, the AO shall grant the
Assessee a fair opportunity to substantiate its “Direct Nexus”
theory with evidence and shall pass a speaking order
concluding the proceedings within six months from the date
of receipt of this order.
(v) The pending applications, if any, stands disposed of.
(vi) Interim order/ orders, if any, stands vacated.
27 ITA 24 OF 2026
ITA 22 OF 2026
& ITA 27 OF 2026
62. Parties are directed to bear their own costs.
63. Urgent photostat certified copy of this judgment, if applied for, be
supplied to the parties upon compliance with all requisite formalities.
I AGREE
(RAJARSHI BHARADWAJ, J.) (UDAY KUMAR, J.)
(Judgment signed and pronounced in Open Court)
