1989 (8) TMI 23 - HC - Income Tax

Interpretation Of Statute - Applicability of Sec 44C - Head Office Expenditure - Non-resident - HELD THAT - On a combined reading of the Explanatory Memorandum as well as the circular issued by the Central Board of Direct Taxes for enactment of section 44C, it is clear that this section is intended to be made applicable only in the cases of those non-residents who carry on businesses in India through their branches. It has been made very clear that the said section was introduced with a view to getting over difficulties in scrutinising and verifying claims in respect of general administrative expenses incurred by the foreign head offices in so far as such expenses can be related to their business or profession in India having regard to the fact that foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. The objective behind the aforesaid legislation is also clear from a bare persual of the earlier portion of the said section which provides, inter alia, the manner in which the disallowable amount is to be computed. The expenditure to be disallowed is the difference between the expenditure in the nature of head office expenditure and the least of the following three computations (a) an amount equal to 5 per cent. of the adjusted total income; (b) an amount equal to the average head office expenditure; (c) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India. The language of clause (c) clearly postulates that the expenditure in question should be incurred not only in connection with the business in India, but also business outside India. In view of the observations of the Supreme Court in CIT v. B. C. Srinivasa Setty 1981 (2) TMI 1 - SUPREME COURT , we are inclined to hold that if any one or more of the base figures forming part of computations under clauses (a), (b) or (c) of section 44C are not conceivable in a particular case, it must be held that the non obstante provisions contemplating disallowance of head office expenditure u/s 44C would not apply. On a fair reading of clause (c), it appears that the expression so much of the expenditure as is attributable to business in India contemplated that at least part of the expenditure is referable to a business outside India. In the case before us, it is an admitted position that the assessee-company did not have any business operations outside India and the entire expenditure incurred at its London head office was wholly attributable to its business activities in this country. If that be so, it is clear that clause (c) cannot have any application in this case and, therefore, no disallowance can be made u/s 44C in the facts and circumstances of this case. That section 44C applies only when a foreign company operates through its branches in India is made clear even in the explanatory note appended to the Finance Bill, 1976. In this context, it may not be out of place to refer to the following observations of the Supreme Court in the case of K. P. Varghese v. ITO 1981 (9) TMI 1 - SUPREME COURT . The difficulties of the nature as stated in the said memorandum as well as in the said circular of the Central Board of Direct Taxes cannot exist in a case where the entire head office expenditure is for the purpose of business in India. It is, therefore, clear that the provisions of section 44C have been introduced to cover cases where a non-resident assessee was incurring expenditure abroad and the business activities of such non-resident assessee were not only confined to India but were also being carried on overseas. Thus, we answer the question in the negative and in favour of the assessee.

Summary

Issues Involved:
1. Applicability of Section 44C of the Income-tax Act, 1961.
2. Interpretation of legislative intent behind Section 44C.
3. Allocation of head office expenditure for non-resident companies.

Issue-Wise Detailed Analysis:

1. Applicability of Section 44C of the Income-tax Act, 1961:

The primary issue was whether Section 44C of the Income-tax Act, 1961, applied to the assessee, a non-resident company with its head office in the United Kingdom and business operations confined to India. The assessee incurred head office expenses amounting to Rs. 4,70,074 and claimed it as business expenditure. The Income-tax Officer disallowed Rs. 21,441 based on Section 44C, which limits the allowance of head office expenditure. The Tribunal upheld this disallowance, leading to the reference to the High Court.

2. Interpretation of Legislative Intent behind Section 44C:

The assessee contended that Section 44C did not apply since its entire business operations were in India, and the London head office only attended to statutory functions. The legislative intent behind Section 44C, as explained in the Finance Bill, 1976, and the Central Board of Direct Taxes (CBDT) Circular No. 202, was to address difficulties in scrutinizing claims of general administrative expenses by foreign companies operating through branches in India. The provision aimed to prevent foreign companies from inflating head office expenses to reduce tax liability in India.

3. Allocation of Head Office Expenditure for Non-Resident Companies:

Section 44C limits the allowance of head office expenditure to the least of three computations: 5% of adjusted total income, the average head office expenditure, or the actual expenditure attributable to the business in India. The court noted that the language of clause (c) implied that the expenditure should be attributable to both Indian and overseas business operations. Since the assessee had no business operations outside India, the entire expenditure was attributable to its Indian business. Thus, the allocation of expenditure under Section 44C could not apply, as there was no overseas business to allocate expenses to.

Judgment:

The court concluded that Section 44C was intended for foreign companies with business operations both in India and overseas. Since the assessee's business was entirely in India, the provision did not apply. The court answered the reference in the negative, favoring the assessee, and held that no disallowance could be made under Section 44C in this case. There was no order as to costs.