Supreme Court: S. 44C Income Tax Act Applies To “Head Office Expenditure” Regardless Of Whether It’s Incurred Exclusively For Indian Branches

The Supreme Court held that Section 44C of the Income Tax Act, 1961 (ITA) applies to "head office expenditure" regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches.

The Court held thus in Civil Appeals in which the central issue was related to the interpretation of Section 44C of ITA, more particularly whether it merely covers ‘common expenditure’ incurred by the head office attributable to an assessee’s business in India or would also include ‘exclusive expenditure’ incurred by the head office for the Indian branches.

The two-Judge Bench comprising Justice J.B. Pardiwala and Justice K.V. Viswanathan observed, “… it is manifest that the plain language of Section 44C, when viewed against the backdrop of the specific mischief it sought to curtail, is unambiguous. The statutory definition is broad and inclusive, containing no indication that ‘exclusive expenditure’ is to be excluded from its ambit. Furthermore, the term ‘attributable’ in Clause (c) does not create a statutory distinction between ‘common’ and ‘exclusive’ expenditure. … the question of law formulated by us is squarely answered in favour of the Revenue. We hold that Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches.”

The Bench said that Section 44C does not create a distinction between common and exclusive head office expenditure.

Additional Solicitor General (ASG) Raghavendra P. Shankar appeared on behalf of the Appellant, while Senior Advocates Percy Pardiwala and Aniruddha A. Joshi appeared on behalf of the Respondents.

Brief Facts

M/s American Express Bank (Respondent-Assessee), was a non-resident banking company engaged in the business of providing banking-related services. The Respondent filed its income tax return (ITR) in 1997, declaring an income of INR 79,45,07,110. It claimed deductions for the following expenses under Section 37(1) of ITA: (i) INR 6,39,13,217 incurred for solicitation of deposits from Non-Resident Indians (NRIs); and (ii) INR 13,50,87,275 incurred at the head office directly in relation to the Indian branches. The Respondent vide notice was asked to explain why the expenses in question should not be subjected to the ceiling specified in Section 44C of ITA and thus be disallowed.

Vide reply, the Respondent clarified that the expenses in question could not have been classified as head office expenditure for the reason that Section 44C presupposes that at least a part of the expenditure is attributable to the business outside India. The Assessing Officer (AO) vide its Assessment Order limited the deduction to 5% of the gross total income by applying Section 44C, having regard to the view taken by the Income Tax Appellate Tribunal (ITAT) in the Respondent’s own case for Assessment Year (AY) 1987-88. Aggrieved by the AO’s Order, the Respondent filed an Appeal and the Commissioner of Income Tax (Appeals) [CIT(A)] affirmed the AO’s decision. This was challenged and the ITAT allowed the Respondent’s Appeal. The Appellant-Revenue approached the Bombay High Court, which dismissed its Appeal. Hence, the case was before the Apex Court.

Reasoning

The Supreme Court in view of the above facts, noted, “… exclusive expenditure, without contrary legislative intent, which is absent in clause (c), must necessarily be treated as part of attributable expenditure. When the statute uses the term ‘attributable’, it brings into its fold all things concerned with the Indian business, whether they are common expenses allocated to India or expenses incurred exclusively for India.”

The Court summarised the following important points –

a) Taxation statutes require strict interpretation.

b) Where the words are plain and unambiguous, the Court is bound to give effect to their plain meaning.

c) The determination of whether language is ‘plain and unambiguous’ is not a mechanical exercise, and it necessitates interpreting words within their specific context rather than in isolation.

d) The legislative intent is primarily to be gathered from the specific words used by the legislature. Reference to the object and purpose becomes crucial in those situations where the language is ambiguous and capable of multiple constructions.

e) Under ordinary circumstances, it is impermissible for the Court to add or read words into the statute, especially when the language is plain and unambiguous, on the notion that such words would appear to better serve the legislative object or purpose.

The Court reiterated that the expression ‘attributable to’ is of a much wider import than the expression ‘derived from’; while ‘derived from’ envisages a direct nexus, ‘attributable to’ also covers an indirect nexus and thus, there is no doubt that the words ‘attributable to’ in the context of clause (c) would include both common and exclusive expenditure.

“Section 44C would apply only when the two primary conditions are met: the assessee is a non-resident and has incurred expenditure in the nature of head office expenditure. …. the definition of ‘head office expenditure’ in the Explanation keeps in mind two factors: the nature of the expense (executive and general administration) and its geographic location (incurred outside India). It is entirely irrelevant whether such expenditure is common or exclusive”, it explained.

The Court added that clause (c) mandates computation on an actual basis, and the phrase “attributable to” as present in clause (c) is wide enough to encompass both the shared expenses allocated to India branches and exclusive expenses incurred for India branches.

“We, therefore, find no merit in the contention of the respondents that exclusive expenditure falls outside the purview of this section. Consequently, we hold that the view expressed by the Bombay High Court in Emirates Commercial Bank (supra) regarding the applicability of Section 44C is incorrect and does not declare the position of law correctly”, it remarked.

The Court enunciated that for an expense to be categorized as “head office expenditure”, the Assessing Officer must be satisfied on three distinct fronts: (i) the expenditure must have been incurred outside India; (ii) it must be in the nature of ‘executive and general administration’ expenditure; and (iii) the said executive and general administration expenditure must fall within the specific categories enumerated in clauses (a), (b), or (c) respectively of the Explanation, or prescribed under clause (d).

“This Court, while exercising appellate jurisdiction, is not the appropriate forum to undertake this granular factual verification. Accordingly, we deem it appropriate to remand these matters to the Income Tax Appellate Tribunal, Mumbai, on this limited issue. The Tribunal is directed to examine the expenses afresh in light of the legal principles enunciated herein, more particularly to verify whether the disputed expenditures satisfy the tripartite test necessary to qualify as ‘head office expenditure’ under the Explanation to Section 44C. With respect to the expenditure which the respondents do not wish to dispute, the same would fall under the ambit of Section 44C, and thereby their deduction will be governed by the limits set out therein”, it directed.

Conclusion

The Court further took note of the following points regarding Section 44C of ITA –

a) Section 44C is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident assessee that qualifies as ‘head office expenditure’.

b) For an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The assessee claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of ‘head office expenditure’ as provided in the Explanation to the Section.

c) The Explanation prescribes a tripartite test to determine if an expense qualifies as ‘head office expenditure’ - (i) The expenditure was incurred outside India; (ii) The expenditure is in the nature of ‘executive and general administration’ expenses; and (iii) The said executive and general administration expenditure is of the specific kind enumerated in clauses (a), (b), or (c) respectively of the Explanation, or is of the kind prescribed under clause (d).

d) Once the conditions in (b) referred to above are met, the operative part of Section 44C gets triggered. Consequently, the allowable deduction is restricted to the least of the following two amounts: (i) an amount equal to 5% of the adjusted total income; or (ii) the amount of head office expenditure specifically attributable to the business or profession of the assessee in India.

The Court also observed that the authorities have not satisfactorily dealt with the question whether the impugned expenditure actually constitutes ‘head office expenditure’ as defined in the statute.

“It also appears that the authorities below conceived the meaning of ‘head office expenditure’ in a broad and inclusive sense, which we have held is not a correct reading of the exhaustive definition provided in the Explanation. In other words, there is no factual finding on whether the expenses fulfil the three specific criteria we have elucidated in this judgment. … As an appellate court, we should not embark upon such a fact finding exercise. Consequently, we remand the matters to the Income Tax Appellate Tribunal, Mumbai, for the limited purpose of verifying whether the disputed expenditures satisfy the tripartite test necessary to qualify as ‘head office expenditure’ under the Explanation to Section 44C of the Act, 1961”, it concluded.

Accordingly, the Apex Court allowed the Appeals and remanded the case to the ITAT.

Cause Title- Director of Income Tax (IT)-I, Mumbai v. M/s. American Express Bank Ltd. (Neutral Citation: 2025 INSC 1431)

Appearance:

Appellant: ASG) Raghavendra P. Shankar, AOR Madhulika Upadhyay, Advocates Karan Lahiri, Navanjay Mahapatra, Sarthak Karol, V C Bharathi, and Priyanka Terdal.

Respondent: Senior Advocates Percy Pardiwala, Aniruddha A. Joshi, AORs Rajeev Maheshwaranand Roy, Kishore Kunal, Advocates Rajeev Kumar Panday, P Srinivasan, Nishant Thakkar, Hiten Thakkar, and Nikhil Ranjan.

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