Commissioner Of Income-Tax vs Deutsche Bank A.G. (Formerly ...
2003 Latest Caselaw 833 Bom

JUDGMENT

S.H. Kapadia, J.

1. At the instance of the Department, the following question has been referred to us for our opinion under Section 256(1) of the Income-tax Act, 1961 concerning assessment year 1984-85 involving interpretation of Section 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 Section 37(1), as Section 44C of the Income-tax Act was not applicable in the case of the assessee?

Facts:

2. The assessee is a foreign bank. On July 23, 1984, the assessee filed its return of income for Rs. 1.61 crores. This return was revised on October 27, 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 profit and loss account to the extent of Rs. 21.07 lakhs on the ground that Section 44C was not applicable as one of the three parameters mentioned in Clauses (a), (b) and (c) of Section 44C was not attracted. According to the assessee, when one of the three parameters failed, the entire Section 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 Section 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 profit and loss account under Section 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 Section 256(1) of the Act. The Tribunal has followed the judgment of the Calcutta High Court in the case of Rupenjuli Tea Co. Ltd. v. CIT reported in [1990] 186 ITR 301. In that matter, Clause (c) of Section 44C was found to be non-applicable and consequently the entire head office expenditure was allowed as deduction by the Calcutta High Court under Section 37(1) of the Income-tax Act primarily on the basis that Section 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 Section 37(1) of the Income-tax 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 Clauses (a), (b) and (c) of Section 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 Clause (b) is not fulfilled and, therefore, the Department has taken into account deduction under Clauses (a) and (c) of Section 44C and has restricted the deduction to the least of the deductions under Clauses (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 Section 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 Section 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 Section 44C which was inserted by the Finance Act of 1976 with effect from June 1, 1976 has been explained by Circular No. 202 dated July 5, 1976 (see [1976] 105 ITR (St.) 17). 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 Clause (b) of Section 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 Explanation (iii) to Section 44C. That, in the circumstances, he contended that Clause (b) should be ignored and the allowance should be restricted to the least of the remaining two expenditures falling under Clauses (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 Section 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 Section 37(1) of the Act.

Findings:

5. In this reference, we are concerned with the assessment year 1984-85. Section 44C, as it stood at the relevant time, reads as under:

44C. Deduction of head office expenditure in the case of nonresidents.-Notwithstanding anything to the contrary contained in Sections 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 Clause (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-section (2) of Section 32 or the deduction referred to in Section 32A or Section 33 or Section 33A or the first proviso to Clause (ix) of Sub-section (1) of Section 36 or any loss carried forward under Sub-section (1) of Section 72 or Sub-section (2) of Section 73 or Sub-section (1) or Sub-section (3) of Section 74 or Sub-section (3) of Section 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 on 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, managing the affairs of, any office outside India; and

(d) such other matters connected with executive and genet administration as may be prescribed.

6. Section 44C was inserted by the Finance Act No. 66 of 1976, with effect from June 1, 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, Section 44C puts a ceiling on heed office expenditure. This Section 44C deals with head office expenditures the case of non residents, it begins with the non obtstante clause. It state inter alia, that notwithstanding anything to the contrary contained in Sections 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 the case of a loss, an amount equal to 5 per cent, of the average adjust total income as defined under Explanation (ii); or

(c) an amount equal to average head office expenditure as defined Explanation (iii); or

(d) 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, Explanation (iii) which defines average head office expenditure is not applicable because under Clause (b) read with Explanation (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 assessment years 1974-75, 1975-76 and 1976-77. In the present case, the assessee commenced its business operations only in October 1980. Therefore, clause (b) of Section 44C was not attracted. This position is not disputed by the Department. The only argument advanced on behalf of the Department was that since Clause (b) was not attracted, it may be ignored and the least of the deductions under Clauses (a) and (c) of Section 44C be granted. We do not find any merit in the arguments advanced on behalf of the Department. As stated above, Section 44C begins with a non obstante clause. It restricts deduction to the least of the three parameters mentioned in. Clauses (a), (b) and (c) of Section 44C. Section 44C begins by a non obstante clause which states that notwithstanding anything to the contrary contained in Sections 28 to 43A, deduction in respect of head office expenditure shall be restricted to the least of the three deductions mentioned in Clauses (a), (b) and (c). Therefore, Section 44C overrides the provisions of Sections 29 to 37 of the Income-tax Act. Section 44C is not conferring deductions on the assessee. It is restricting the deduction under Section 37(1) of the Act by virtue of the overriding provisions contemplated by Section 44C. Therefore, when the working of Section 44C fails, the entire Section 44C becomes non-workable and consequently, the assessee would become entitled to the full deduction under Section 37(1) of the Act. Section 44C restricts the head office expenditure. Section 44C provides for three parameters in the matter of computing deduction for head office expenditure incurred by a non-resident. Section 44C specifically states that deduction for the head office expenditure should be restricted to the least of the three parameters. The expression used in Section 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 Section 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 non-workable. Hence, the entire Section 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. v. CIT [1990] 186 ITR 301 with which we respectfully agree. In fact, Clause (b) has been subsequently deleted by the Legislature in order to bring all the non-residents on par in the matter of deduction of head office expenditure. This difficulty arose because Explanation (iii) referred to the annual average of head office expenditure allowed during a base period of three previous years relevant to the assessment years 1974-75, 1975-76 and 1976-77 only. If one out of three parameters is not applicable, the entire section would become non-workable. It is for this reason, the Legislature had to delete Clause (b) from April 1, 1993, by keeping only Clause (a) and Clause (c). This deletion shows that none of the parameters could be ignored and, therefore, the Legislature had to delete Clause (b). In the circumstances, we answer the above quoted question in the affirmative, i.e., in favour of the assessee and against the Department.

2. Whether the Tribunal was right in holding that a portion of salary and perquisites allowable under the head 'Interest on securities' under Section 20 of the Act should be reduced from computation of disallowance under Section 40A(5) of the Act?

Answer:

8. In view of our decision in the case of Citibank N.A. v. CIT reported in [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.