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1989 (8) TMI 23 - HC - Income TaxInterpretation Of Statute - Applicability of Sec 44C - Head Office Expenditure - Non-resident - HELD THAT:- On a combined reading of the Explanatory Memorandum as well as the circular issued by the Central Board of Direct Taxes for enactment of section 44C, it is clear that this section is intended to be made applicable only in the cases of those non-residents who carry on businesses in India through their branches. It has been made very clear that the said section was introduced with a view to getting over difficulties in scrutinising and verifying claims in respect of general administrative expenses incurred by the foreign head offices in so far as such expenses can be related to their business or profession in India having regard to the fact that foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. The objective behind the aforesaid legislation is also clear from a bare persual of the earlier portion of the said section which provides, inter alia, the manner in which the disallowable amount is to be computed. The expenditure to be disallowed is the difference between the expenditure in the nature of head office expenditure and the least of the following three computations : (a) an amount equal to 5 per cent. of the adjusted total income; (b) an amount equal to the average head office expenditure; (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. The language of clause (c) clearly postulates that the expenditure in question should be incurred not only in connection with the business in India, but also business outside India. In view of the observations of the Supreme Court in CIT v. B. C. Srinivasa Setty [1981 (2) TMI 1 - SUPREME COURT], we are inclined to hold that if any one or more of the base figures forming part of computations under clauses (a), (b) or (c) of section 44C are not conceivable in a particular case, it must be held that the non obstante provisions contemplating disallowance of "head office expenditure" u/s 44C would not apply. On a fair reading of clause (c), it appears that the expression "so much of the expenditure as is attributable to business in India" contemplated that at least part of the expenditure is referable to a business outside India. In the case before us, it is an admitted position that the assessee-company did not have any business operations outside India and the entire expenditure incurred at its London head office was wholly attributable to its business activities in this country. If that be so, it is clear that clause (c) cannot have any application in this case and, therefore, no disallowance can be made u/s 44C in the facts and circumstances of this case. That section 44C applies only when a foreign company operates through its branches in India is made clear even in the explanatory note appended to the Finance Bill, 1976. In this context, it may not be out of place to refer to the following observations of the Supreme Court in the case of K. P. Varghese v. ITO [1981 (9) TMI 1 - SUPREME COURT]. The difficulties of the nature as stated in the said memorandum as well as in the said circular of the Central Board of Direct Taxes cannot exist in a case where the entire head office expenditure is for the purpose of business in India. It is, therefore, clear that the provisions of section 44C have been introduced to cover cases where a non-resident assessee was incurring expenditure abroad and the business activities of such non-resident assessee were not only confined to India but were also being carried on overseas. Thus, we answer the question in the negative and in favour of the assessee.
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