TMI Blog2003 (7) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... JUDGMENT The judgment of the court was delivered by S.H. KAPADIA J.-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: 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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: 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyed 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." Section 44C was inserted by section 10 of the Finance Act No. 66 of 1976, with effect from June I, 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. 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 pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 44e. 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: 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 clau ..... X X X X Extracts X X X X X X X X Extracts X X X X
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