JUDGMENT
S.H. Kapadia, J.
1. At the instance of the assessee, two questions of law have been referred to us for our opinion under Section 256(1) of the Income-tax Act, 1961, concerning assessment year 1977-78.
“1. Whether the Tribunal was right in holding that even if there is no positive ‘average adjusted total income’ under Explanation (ii) to Section 44C of the Income-tax Act, 1961, the provisions of Clause (a) of Section 44C are applicable and, consequently, no deduction was allowable ?
2. Whether in the absence of positive income under Clause (a) of Section 44C of the Income-tax Act, head office expenses would be allowed in accordance with the lower limits under Clauses (b) and (c) of Section 44C of the Income-tax Act ignoring Clause (a) ?”
Facts :
2. The assessee is a shipping consultant and it also supervises ship repairs. The accounting year, relevant to the assessment year in question, was the calendar year 1976. In the assessment proceedings, the assessee challenged the treatment of the head office expenses effected by the Assessing Officer and also the applicability of Section 44C after June 1, 1976. Section 44C came into force with effect from June 1, 1976. The head office expenditure in the case of a non-resident is allowable in accordance with Section 44C. This section contains a non obstante clause. Therefore, it is a code by itself. It deals with deduction in respect of head office expenditure which is restricted to the least of the following :
(a) An amount equal to five per cent. of the adjusted total income or in the case of a loss, an amount equal to five per cent. of the average adjusted total income as defined under Explanation (ii) ; or
(b) An amount equal to the average head office expenditure as defined in Explanation (iii) ; or
(c) Actual head office expenditure incurred by the assessee as is attributable to business of the assessee in India.
3. Now, in the present case as held by the Assessing Officer, on account of losses during the assessment year in question, the adjusted total income of the assessee was nil. The assessee claimed before the Assessing Officer that it had incurred average head office expenditure to the tune of Rs. 8.47 lakhs which came under Section 44C(b). According to the assessee, Clause (a) of Section 44C was not to be considered in this case as the adjusted total income of the assessee was a loss and further the assessee had suffered the losses even in the three earlier years prior to the assessment year 1977-78, According to the assessee, therefore, Clause (a) should be ignored and the applicability of Section 44C in this case should be restricted to Clause (b) and Clause (c) of Section 44C of the Income-tax Act. That, the head office expenditure incurred by the assessee after June 1, 1976, under Clause (c) was Rs. 8.69 lakhs. That, if the applicability of Section 44C was restricted to Clauses (b) and (c) then the least of the two clauses would be head office expenditure under Clause (b) amounting to Rs. 8.47 lakhs because, out of the aforestated two figures of Rs. 8.47 lakhs and Rs. 8.69 lakhs, the former figure is the least of the two. This argument has been rejected by the Department as also by the Tribunal on the ground that Clause (a) cannot be ignored ; that the adjusted total income as per Section 44C(a) was nil on account of the losses suffered by the assessee during the assessment year in question and since the adjusted total income was nil under Section 44C(a), the said sub-clause cannot be ignored. That, all the three Clauses (a), (b) and (c) were applicable and the least of the three was covered in this case by Clause (a) which in this case was nil. Therefore, deduction in respect of the head office expenditure was not allowable to the assessee. Being aggrieved, the assessee has come by way of reference to this court.
Arguments :
4. Mr. Irani, learned counsel appearing on behalf of the assessee, submitted that Section 44C refers to deduction of head office expenditure in the case of non-residents. He contended that this section is required to be read liberally. He contended that in this case, the assessee had incurred losses in three years preceding the assessment year 1977-78. That, in respect of the assessment year 1977-78, the adjusted total income was also a loss and, therefore, the proviso to Section 44C(a) brought in Explanation (ii) which defined “average adjusted total income”. He further pointed out that on the facts of this case, in view of the adjusted total income in respect of the earlier three years also having a negative figure, Explanation (ii) was also not applicable. He, therefore, contended that this was a peculiar case where for the aforesaid reasons, Clause (a) of Section 44C had to be ignored and that the applicability of Section 44C should be restricted to Clauses (b) and (c) and the least of the two would provide allowance under Section 44C to the assessee. That, on that basis if Section 44C is restricted to Clauses (b) and (c) ignoring Clause (a) then, the assessee was entitled to deduction of Rs. 8.47 lakhs under Section 44C(b) read with Explanation (in). He contended that the Legislature intended to grant benefit of allowance for head office expenses when incurred. He contended that if the interpretation of the Department was to be accepted then, the assessee would be denying the allowance under Section 44C in entirety. He contended that the emphasis of Section 44C is on expenditure and it is not on the positive or negative figure of the adjusted total income. He contended that in this case the assessee had no assessable income in the three earlier years. That, one of the Clauses (a), (b) or (c) of Section 44C contemplates a negative figure. He contended that the expression “whichever is the least” in Section 44C shows that none of the Clauses (a), (b) or (c) could apply to a negative figure. That, all the three clauses contemplate a positive figure. He, therefore, contended that in this case, Clause (a) need not be considered and that, on the facts, only Clause (b) or Clause (c) would apply and the least of the two should be allowed as deduction. He further contended that Clause (a) of Section 44C contemplated a positive income and since in this case the adjusted total income was a negative figure of loss, Clause (a) was not attracted. That, negative income stood ruled out from the expression “adjusted total income” under Clause (a) of Section 44C. He contended that in the circumstances the assessee was entitled to deduction to the tune of Rs. 8.47 lakhs under Section 44C(c) read with Explanation (iii).
Scope of Section 44C :
5.In this reference, we are concerned with the assessment year 1977-78. Section 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 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) of Section 74 or Sub-section (3) of Section 74A or the deductions under Chapter VIA;
(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. Section 44C was inserted by Section 10 of the Finance Act No. 66 of 1976, with effect from June 1, 1976. The object and the scope of Section 44C was explained by the Central Board of Direct Taxes vide Circular No. 202 dated July 5, 1976 (see [1976] 105 ITR (St.) 17). Non-residents carrying on business in India through their branches are entitled to deduction, in computing the taxable profits, for head office expenses incurred by the foreign head offices in so far as such expenses could be related to their business in India. However, it was extremely difficult for the Department to scrutinise and verify the claims in respect of such expenses. The Department further detected that foreign companies operating through branches in India used to reduce the incidence of tax in India by inflating their head office expenses. With a view to get over this difficulty, Section 44C was inserted laying down certain ceiling limits for the deduction of the head office expenses in computing the taxable profits in the case of non-resident taxpayers. Therefore, the object and scope of the section was to restrict the inflated claims of the assessee in respect of the head office expenses. This object is required to be kept in mind for deciding the matter.
Issue :
7. It is the case of the assessee that if one out of the three parameters mentioned in Clauses (a), (b) and (c) of Section 44C is not attracted then, that particular parameter should be ignored and, in that event, the least of the remaining two parameters should be taken into account. That, in this case, according to the assessee, Clause (a) should be ignored and the least of the deductions under Clauses (b) and (c) should be taken into account as the base for computing the allowance under Section 44C. For the reasons given hereinafter, we are not required to answer this issue in this matter as, on the facts, we have found that all the three parameters are attracted and, therefore, the least of the three parameters has rightly been taken into account by the Assessing Officer.
Reasons :
8. The short point which arises for consideration is whether Clause (a) of Section 44C was not applicable to the facts of this case and, therefore, that particular parameter should be ignored and the deduction for the head office expense should be confined only to Clauses (b) and (c) of Section 44C. In our view, on the facts, all the three parameters apply. Section 44C deals with deduction of head office expenditure in the case of non-residents. Section 29 to 37 of the Income-tax Act provide for deduction whereas, Section 38 onwards up to Section 44C of the Income-tax Act broadly restrict the deductions conferred by the Legislature under Section 29 to 37. Section 44C starts with a non obstante clause. It overrides Section 28 to 43A in the case of a non-resident assessee. The object of enacting Section 44C is to restrict the inflated claims on account of head office expense. This object was required to be kept in mind in order to interpret Section 44C. If one reads Section 44C, it states, inter alia, that deduction in respect of head office expenditure is restricted to the following three alternatives of expenses which form the basis of deduction under Section 44C.
(a) an amount equal to five per cent. of the adjusted total income as defined under Explanation (i) or in case of loss, five per cent., of the average adjusted total income ; or
(b) an amount equal to average head office expenditure as defined under Explanation (iii) ; or
(c) actual head office expenditure incurred by the assessee as is attributable to business of the assessee in India.
9.These are the three expenses. We have to select the least of the three under Section 44C of the Act. This is what the section requires. Each of the these parameters represents expense, which is required to be calculated as per the formula given in Section 44C read with the above three Explanations defined in the adjusted total income, the average adjusted total income and the average head office expenditure. In this case, we are basically concerned with Clause (a) of Section 44C. Deduction in respect of the head office expenditure is restricted to five per cent. of the adjusted total income under Clause (a) of Section 44C. In substance, Clause (a) represents one of the three items of expenses which is a stipulated percentage of the adjusted total income/average adjusted total income. The expression “adjusted total income” has been defined to mean the total income computed in accordance with the provisions of the Act without giving effect to the stipulated allowance/deduction. Now in the present case, the adjusted total income is nil on account of the loss suffered by the assessee during the current year. Therefore, the proviso to Section 44C comes into force. Under that proviso, deduction will be restricted to five per cent. of the average adjusted total income as defined under Explanation (ii) which states that the average adjusted total income shall mean, inter alia, one-third of the aggregate amount of the adjusted total income in respect of the previous year relevant to the three preceding years prior to the assessment year in question. Now whether one looks at Explanation (i) or Explanation (ii), it is clear that both these Explanations refer to the concept of total income. The expression “total income” has been defined under Section 2(45) to mean the total amount of income referred to in Section 5 and computed in the manner laid down under the provisions of the Income-tax Act. Therefore, the words “total income” in the two Explanations connote taxable income. Section 44C exclusively deals with deduction of head office expenditure in the case of non-residents. It provides for computation of three types of expenses on the basis of which deduction could be granted to the least of the three alternatives. In the present case, the statement given by the assessee shows that the average head office expenditure as per Clause (b) is Rs. 8.47 lakhs whereas, the actual expenditure as per Clause (c) is Rs. 8.69 lakhs. However, the expense under Clause (a) is a nil expense and since it is the least of the three alternatives, the Department was right in calculating the deduction on the basis of the nil expense. In this case, the total income of the current year of the assessee was nil on account of the losses incurred by the assessee during the current year. Similarly, the average adjusted total income was nil because of the losses incurred by the assessee during the three preceding years. Under Clause (a), we have to calculate the expense equal to five per cent. of the adjusted total income/average adjusted total income and, if the total income/taxable income was nil on account of the losses then, for the purposes of Section 44C(a), five per cent. of the nil taxable income has to be taken as nil expense. Therefore, in this case, all the three parameters are applicable and the least of the three parameters in this case stands covered by Clause (a) of Section 44C. We have to bear in mind the object of Section 44C, viz., to restrict the head office expenditure as an item of deduction. In this case, if Clause (a) is to be ignored on account of the losses suffered by the assessee and if we are required to give allowance on the basis of Clause (b) of Rs. 8.47 lakhs then, the object of the section will be defeated because the loss suffered by the assessee would stand increased by a further expenditure to the tune of Rs. 8.47 lakhs under Section 44C(b). This would defeat the object of Section 44C.
10. In the circumstances, we hold that all the three parameters in Clauses (a), (b) and (c) of Section 44C are applicable to the facts of this case and the Assessing Officer was right in restricting the deduction to the least of the three alternatives under Section 44C(a).
Conclusion.
11. For the aforestated reasons, question No. 1 is answered in the affirmative, i.e., in favour of the Department and against the assessee. In this case, we have held that the adjusted total income for the assessment year in question was nil and, therefore, the Income-tax Officer was right in allowing nil expense as the least of the three parameters mentioned in Clauses (a), (b) and (c) of Section 44C. This finding is based on the facts of this case. Consequently, question No. 2 need not be answered.
12. The reference is, accordingly, disposed of with no order as to costs.