Section 44C applies to exclusive expenditure by head office by non resident assessee – SC

Section 44C applies to exclusive expenditure on head office for the Indian branches incurred by non resident assessee’s.

In a recent judgment, Hon’ble Supreme Court has held that Section 44C of Income Tax Act is not limited to mere common expenditure incurred by the head office attributable to a non-resident assessee’s business in India but also include exclusive expenditure incurred by the head office for the Indian branches.

ABCAUS Case Law Citation:
4937 (2025) (12) abcaus.in SC

In the instant case, the issue involved was related to the interpretation of Section 44C of the Income Tax Act, 1961 (the Act) as to whether it merely covers ‘common expenditure’ incurred by the head office attributable to a non-resident assessee’s business in India or would also include ‘exclusive expenditure’ incurred by the head office for the Indian branches.

The respondent assessee was a non resident company which had claimed large amount of deduction towards expenditure incurred at the head office directly in relation to the Indian branches. 

The Income Tax Department sought to subject the expenses in question to the ceiling specified in Section 44C of the Act. The assessee submitted that expenses in question could not have been classified as head office expenditure for the reason that Section 44C of the Act, 1961 presupposes that at least a part of the expenditure is attributable to the business outside India. If this presumption does not hold true, and the entire expenditure is incurred solely for the business in India, then clause (c) does not apply. Consequently, Section 44C would not be applicable to such expenses.

However, the Assessing Officer, vide its Assessment Order limited the deduction to 5% of the gross total income by applying Section 44C of the Act. The ITAT allowed the appeal of the respondent assessee. The Hon’ble High Court dismissed the appeal of the Revenue as it conceded that the question regarding the application of Section 44C for the exclusive expenditure incurred by the head office for the Indian branches had been decided against the Revenue by a division bench of the High Court.

Section 44C of the Act 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’ in India. Section 44C of the Act provides that 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 in excess of (a) an amount equal to five per cent of the adjusted total income 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.

The Hon’ble Supreme Court observed that 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) to Explanation (the actual expenditure specifically attributable to the Indian business) does not create a statutory distinction expenditure between ‘common’ and ‘exclusive’ expenditure.

The Hon’ble Supreme Court held that Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches.

The Hon’ble Supreme Court opined that the authorities had not satisfactorily dealt with the question whether the impugned expenditure actually constitutes ‘head office expenditure’ as defined in the statute. Also, the authorities below conceived the meaning of ‘head office expenditure’ in a broad and inclusive sense, which 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 as per Explanation to the Section 44C.

As a result, the Hon’ble Supreme Court remanded the matters to the Income Tax Appellate Tribunal, 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.

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