TMI Blog1989 (8) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;, the Tribunal was correct in holding that section 44C applies to the case of the assessee? 2. The facts leading to this reference are that the assessee, a sterling company, having its head office in the United Kingdom, owns a tea garden in India. The entire business operations of the assessee-company are carried out in India and only the statutory functions are attended to from the head office in the United Kingdom. During the relevant previous year, the assessee-company incurred an expenditure of Rs. 4,70,074 at its London head office on account of secretarial remuneration, warehouse charges, brokerage, directors' fees and emoluments. The whole of this amount was claimed by the assessee-company as business expenditure in computing its total income chargeable to tax in India under the Income-tax Act, 1961. The Income-tax Officer held that the allowance of head office expenditure was subject to the limits laid down in section 44C of the Income-tax Act, 1961. By applying the formula laid down in section 44C of the said Act, the Income-tax Officer disallowed a sum of Rs. 21,441 out of the aggregate London head office expenditure of Rs. 4,70,074. The contention of the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure 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 purpose 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-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The said section was inserted in the Income-tax Act by the Finance Act, 1976. Paragraph 36 of the memorandum explaining the provisions in the Finance Bill, 1976 (see [1976] 102 ITR (St.) 187), underlined the legislative intention of introducing the said section. The said paragraph reads as under: 36. Ceiling limits in respect of head office expenses.-In the case of foreign companies operating in India through branches, a proportion of the general administrative expenses incurred by the foreign head office is claimed as a deduction in the computation of taxable profits. It is extremely difficult to scrutinise and verify such claims, particularly in the absence of account books of the head office which are kept outside India. 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. With a view to getting over these difficulties, it is proposed to lay down certain ceiling l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying on any business or profession in India through their branches are entitled to a deduction, in computing the taxable profits, 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. It is extremely difficult to scrutinise and verify claims in respect of such expenses, particularly in the absence of account books of the head office which are kept outside India. 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. With a view to getting over these difficulties, the Finance Act, 1976, has inserted a new section 44C in the Income-tax Act, laying down certain ceiling limits for the deduction of head office expenses in computing the taxable profits in the case of non-resident taxpayers. Under this provision, the deduction in respect of head office expenses will be limited to - (i) an amount equal to 5 per cent. of the adjusted total income of the taxpayer for the relevant year; or (ii) the annual average of the head office expenditure allowed during a base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the entire operations are carried out by it in this country only, the question of allocating a part of the expenditure in question to the business carried on in India cannot arise. 11. In CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, the Supreme Court held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Referring to section 48(ii), the Supreme Court further observed that this section contemplated an asset in the acquisition of which it was possible to envisage a cost. None of the provisions pertaining to the head Capital gains suggests that they include an asset in the acquisition of which no cost at all can be conceived. Further, the date of acquisition of the asset was a material factor in applying the computation provisions pertaining to capital gain ; but, in the case of goodwill generated in a new business, it was not possible to determine the date when it came into existence. In view of these observations of the Supreme Court, we are inclined to hold that if an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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