High Court Of Bombay
CIT vs. Deutsche Bank A.G.
Section 44C
Asst. Year 1984-85
S.H. Kapadia & J.P. Devadhar, JJ.
IT Ref. No. 139 of 1997
24th July, 2003
Counsel Appeared
R.V. Desai with P.S. Jetly & Ms. S.V. Bharucha, for the Revenue : P.J. Pardiwala with B.D. Damodar, for the Assessee
JUDGMENT
S.H. Kapadia, J. :
At the instance of the Department, the following question has been referred to us for our opinion under s. 256(1) of the IT Act, 1961 concerning asst. yr. 1984-85 involving interpretation of s. 44C as it stood at the relevant time :
“1. Whether the Tribunal was right in holding that the entire head office expenditure of Rs. 21.07 lakhs was allowable under s. 37(1), as s. 44C of the IT Act was not applicable in the case of the assessee ?”
Facts :
2. The assessee is a foreign bank. On 23rd July, 1984, the assessee filed its return of income for Rs. 1.61 crores. This return was revised on 27th Oct., 1986 and the income was reduced to Rs. 1.47 crores. The reason for revising the return was the claim of the assessee for deduction of the full amount of head office expenses debited to the P&L a/c to the extent of Rs. 21.07 lakhs on the ground that s. 44C was not applicable as one of the three parameters mentioned in cls. (a), (b) and (c) of s. 44C was not attracted. According to the assessee, when one of the three parameters failed, the entire s. 44C also could not be applied. That, when one of the three parameters failed, the entire computation of deduction would collapse and, therefore, the ceiling on expenditure contemplated by s. 44C would not be attracted and, therefore, the assessee was entitled to the total head office expenditure of Rs. 21.07 lakhs debited to the P&L a/c under s. 37(1) of the Act. This position of the assessee has been accepted by the Tribunal. Hence, the Department has come by way of reference to this Court under s. 256(1) of the Act. The Tribunal has followed the judgment of the Calcutta High Court in the case of Rupenjuli Tea Co. Ltd. vs. CIT (1991) 92 CTR (Cal) 37 : (1990) 186 ITR 301 (Cal). In that matter, cl. (c) of s. 44C was found to be non- applicable and consequently the entire head office expenditure was allowed as deduction by the Calcutta High Court under s. 37(1) of the IT Act primarily on the basis that s. 44C was in the nature of a computation section and if that section is not attracted then full deduction would be available to the assessee under s. 37(1) of the IT Act. Issue :
3. In this case, the point which arises for consideration is whether the Department was right in contending that if one out of the three parameters contained in cls. (a), (b) and (c) of s. 44C fails, then the Department could ignore that parameter and grant allowance restricted to deductions under the remaining two parameters. In this case, according to the Department, the parameter in cl. (b) is not fulfilled and, therefore, the Department has taken into account deduction under cls. (a) and (c) of s. 44C and has restricted the deduction to the least of the deductions under cls. (a) and (c). Secondly, if this Court comes to the conclusion that in the event of the failure of one out of the three parameters, the entire s. 44C becomes non-applicable, whether the Tribunal was justified in granting deduction for the entire head office expenses to the tune of Rs. 21.07 lakhs under s. 37 (1) of the Act ? Arguments
4. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department, contended that the object of s. 44C which was inserted by the Finance Act, 1976 w.e.f 1st June, 1976 has been explained by Circular No. 202 dt. 5th July, 1976. That, as per the said circular, a ceiling has been put on head office expenses incurred by the foreign head offices in order to curtail inflated claims by the assessees in respect of head office expenses. He contended that cl. (b) of s. 44C, as it stood at the relevant time, was not applicable as the case of the assessee did not fall within the definition of average head office expenditure as defined in Expln. (iii) to s. 44C. That, in the circumstances, he contended that cl. (b) should be ignored and the allowance should be restricted to the least of the remaining two expenditures falling under cls. (a) and (c). That, if one out of the three parameters was not applicable, the Department was entitled to ignore that parameter and calculate the allowance on the basis of the least of the remaining two parameters. Mr. Desai, learned counsel for the Department next contended that assuming for the sake of argument that with the failure of one out of the three parameters the entire s. 44C became non-workable, even then the Tribunal erred in holding that, in that event, the assessee was entitled to deduction for the entire head office expenses amounting to Rs. 21.07 lakhs under s. 37(1) of the Act. Findings :
5. In this reference, we are concerned with the asst. yr. 1984-85. Sec. 44C, as it stood at the relevant time, reads as under : “44C. Deduction of head office expenditure in the case of non-residents.—Notwithstanding anything to the contrary contained in ss. 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head ‘Profits and gains of business or profession’, in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely : (a) an amount equal to five per cent of the adjusted total income; or (b) an amount equal to the average head office expenditure; or (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, whichever is the least : Provided that in a case where the adjusted total income of the assessee is a loss, the amount under cl. (a) shall be computed at the rate of five per cent of the average adjusted total income of the assessee. Explanation.—For the purposes of this section,— (i) ‘adjusted total income’ means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in sub-s. (2) of s. 32 or the deduction referred to in s. 32A or s. 33 or s. 33A or the first proviso to cl. (ix) of sub-s. (1) of s. 36 or any loss carried forward under sub-s. (1) of s. 72 or sub-s. (2) of s. 73 or sub-s. (1) or sub-s. (3) of s. 74 or sub-s. (3) of s. 74A or the deductions under Chapter VI-A; (ii) ‘average adjusted total income’ means,— (a) in a case where the total income of the assessee is assessable for each of the three assessment years immediately preceding the relevant assessment year, one-third of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid three assessment years; (b) in a case where the total income of the assessee is assessable only for two of the aforesaid three assessment years, one-half of the aggregate amount of the adjusted total income in respect of the previous years relevant to the aforesaid two assessment years; (c) in a case where the total income of the assessee is assessable only for one of the aforesaid three assessment years, the amount of the adjusted total income in respect of the previous year relevant to that assessment year; (iii) ‘average head office expenditure’ means,— (a) in a case where any expenditure in the nature of head office expenditure has been allowed as a deduction in computing the income of the assessee chargeable under the head ‘Profits and gains of business or profession’ in respect of each of the three previous years relevant to the assessment years commencing on the 1st day of April, 1974, the 1st day of April, 1975, and the 1st day of April, 1976, one-third of the aggregate amount of the expenditure so allowed; (b) in a case where such expenditure has been so allowed only in respect of two of the aforesaid three previous years, one-half of the aggregate amount of the expenditure so allowed; (c) in a case where such expenditure has been so allowed only in respect of one of the aforesaid three previous years, the amount of the expenditure so allowed; (iv) ‘head office expenditure’ means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of— (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India; (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) such other matters connected with executive and general administration as may be prescribed.”
6. Sec. 44C was inserted by the Finance Act No. 66 of 1976, w.e.f. 1st June, 1976, because foreign companies operating through their branches in India used to inflate head office expenses in order to reduce the incidence of tax in India. Therefore, s. 44C puts a ceiling on head office expenditure. This s. 44C deals with head office expenditures in the case of non-residents, it begins with the non obtstante clause. It states, inter alia, that notwithstanding anything to the contrary contained in ss. 28 to 43A deduction in respect of head office expenditure is restricted to the least of the following : (a) an amount equal to 5 per cent of the adjusted total income or in the case of a loss, an amount equal to 5 per cent of the average adjusted total income as defined under Expln. (ii); or (b) an amount equal to average head office expenditure as defined in Expln. (iii); or (c) actual head office expenditure incurred by the assessee as is attributable to the business of the assessee in India.
7. Now, in the present case, Expln. (iii) which defines average head office expenditure is not applicable because under cl. (b) r/w Expln. (iii), as it stood at the relevant time, deduction in respect of head office expenses was limited to the annual average of head office expenditure allowed during a base period of three previous years relevant to the asst. yrs. 1974-75, 1975-76 and 1976-77. In the present case, the assessee commenced its business operations only in October, 1980. Therefore, cl. (b) of s. 44C was not attracted. This position is not disputed by the Department. The only argument advanced on behalf of the Department was that since cl. (b) was not attracted, it may be ignored and the least of the deductions under cls. (a) and (c) of s. 44C be granted. We do not find any merit in the arguments advanced on behalf of the Department. As stated above, s. 44C begins with a non obstante clause. It restricts deduction to the least of the three parameters mentioned in cls. (a), (b) and (c) of s. 44C. Sec. 44C begins by a non obstante clause which states that notwithstanding anything to the contrary contained in ss. 28 to 43A, deduction in respect of head office expenditure shall be restricted to the least of the three deductions mentioned in cls. (a), (b) and (c). Therefore, s. 44C overrides the provisions of ss. 29 to 37 of the IT Act. Sec. 44C is not conferring deductions on the assessee. It is restricting the deduction under s. 37(1) of the Act by virtue of the overriding provisions contemplated by s. 44C. Therefore, when the working of s. 44C fails, the entire s. 44C becomes non-workable and consequently, the assessee would become entitled to the full deduction under s. 37(1) of the Act. Sec. 44C restricts the head office expenditure. Sec. 44C provides for three parameters in the matter of computing deduction for head office expenditure incurred by a non-resident. Sec. 44C specifically states that deduction for the head office expenditure should be restricted to the least of the three parameters. The expression used in s. 44C is “whichever is the least”. This expression shows that the least of the three parameters should be taken into account for computing allowance under s. 44C for head office expenditure incurred by the non-resident.
Therefore, in the absence of one of the parameters out of the three parameters, the entire section becomes nonworkable. Hence, the entire s. 44C stands ruled out. This is the ratio of the judgment of the Calcutta High Court also in the case reported in Rupenjuli Tea Co. Ltd. vs. CIT (supra) with which we respectfully agree. In fact, cl. (b) has been subsequently deleted by the legislature in order to bring all the nonresidents on par in the matter of deduction of head office expenditure. This difficulty arose because Expln. (iii) referred to the annual average of head office expenditure allowed during a base period of three previous years relevant to the asst. yrs. 1974-75, 1975-76 and 1976-77 only. If one out of three parameters is not applicable, the entire section would become nonworkable. It is for this reason, the legislature had to delete cl. (b) from 1st April, 1993, by keeping only cl. (a) andcl. (c). This deletion shows that none of the parameters could be ignored and, therefore, the legislature had to delete cl. (b). In the circumstances, we answer the above quoted question in the affirmative, i.e., in favour of the assessee and against the Department.
Question No. 2 “2. Whether the Tribunal was right in holding that a portion of salary and perquisites allowable under the head ‘Interest on securities’ under s. 20 of the Act should be reduced from computation of disallowance under s. 40A(5) of the Act ?”
Answer :
8. In view of our decision in the case of Citibank N.A. vs. CIT (2003) 183 CTR (Bom) 294 : (2003) 262 ITR 47 (Bom), we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Department. Conclusion :
9. Accordingly, the reference is disposed of with no order as to costs.
[Citation : 284 ITR 463]
