Rupenjuli Tea Co. Ltd. Vs. Commissioner Income-tax - Court Judgment

Ajit K. Sengupta, J.

1. In this reference made under Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question for the opinion of this court for the assessment year 1977-78 :

'Whether, on the facts and in the circumstances of the case and on a proper interpretation of Section 44C of the Income-tax Act, 1961, as inserted by the Finance Act, 1976, read with the Explanation with regard to the insertion of this section, as contained in the 'Memorandum explaining the provisions of the Finance Bill, 1976', 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-company was that Section 44C had no application in this case inasmuch as although the assessee-company was a non-resident company, its entire business operations were confined to this country. The entire expenditure in the London head office was incurred by the assessee-company in connection with its Indian business. It was also contended by the assessee-company that Section 44C applied only to those non-resident companies, which had only a branch office in this country and which carried out various business operations overseas. This submission of the assessee-company was accepted by the Commissioner of Income-tax (Appeals). But, on further appeal by the Revenue, the Tribunal upheld the stand of the Revenue. Hence this reference.

3. At the hearing before us, Dr. Pal, learned counsel appearing for the assessee, invited our attention to the legislative objects behind the insertionof Section 44C and contended that the said section had no application to the facts and circumstances of this case, since the entire business operations of the assessee-company were carried out in India and the expenses incurred at the London head office were wholly attributable to the business carried on by it in this country. Dr. Pal also drew our attention to the admitted position that the assessee-company had no business operations outside India and its London head office was only attending to the statutory functions. Since the London office expenses were incurred by the assessee-company wholly in connection with its business operations in India, it was submitted that Section 44C could not be invoked in this case.

4. Mr. S. K. Mitra, learned counsel for the Revenue, on the other hand, laid stress on the plain language of Section 44C and submitted that the intention of the statute should be gathered from its plain language, which is clear and unambiguous and the court should, therefore, give a literal construction and uphold the order passed by the Tribunal in this case.

5. We have considered the rival contentions. At the outset, it would be convenient to set out the provisions of Section 44C :

'44C. 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 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-section (3) of section 74 or Subsection (3) of Section 74A of the deductions under Chapter VI-A ;

(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 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. 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]102ITR187(Mad) ), 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 limits for the deduction of head office expenses in computing the taxable profits in the case of non-resident taxpayers. Under the proposed provision, the deduction in respect of head office expenditure will broadly 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 period of three previous years, i.e., the previous years relevant to the assessment years 1974-75 to 1976-77 ; or

(iii) the actual amount of head office expenditure attributable to the business in India,

whichever is the least.

7. In a case where the adjusted total income of the non-resident for the relevant year is a loss, the rate of 5 per cent, referred to in (i) above will be applied with reference to the average adjusted total income of the non-resident for three previous years immediately preceding the relevant assessment year. The term 'head office expenditure' as defined for the purposes of this provision means executive and general administration expenditure incurred by the non-resident assessee outside India, including expenditure in respect of-

(a) rent, rates, taxes, repairs or insurance of premises, outside India ;

(b) salary, bonus, commission, etc., paid to any employee or other person employed in, or managing the affairs of, any office outside India ;

(c) travelling by any such employee or other person outside India ;and

(d) such other matters connected with executive and general administration as may be prescribed by the Board.

The expressions 'adjusted total income', 'average adjusted total income' and 'average head office expenditure' have been defined in the relevant provision.'

8. After the enactment of Section 44G, the Central Board of Direct Taxes issued a public Circular No. 202 dated July 5, 1976 (see [1976] 105 ITR 17). This circular explains the substance of the provisions relating to the Income-tax Act and other direct taxes contained in the Finance Act, 1976. Paragraph 25 of the said circular seeks to explain the provisions of the new Section 44C. Paragraph 25.1 of the said circular which is relevant for our purposes almost reproduces paragraph 36 of the said memorandum which was placed in Parliament along with the Finance Bill, 1976. Paragraph 25.1 reads thus :

'Non-residents 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 period of three previous years, namely, the previous years relevant to the assessment years 1974-75 to 1976-77 ; or

(iii) the actual amount of head office expenditure attributable to the business in India,

whichever is the least.

In cases where the adjusted total income of the resident for the current year is a loss, the rate of 5 per cent, referred to at (i) above will be applied with reference to the average adjusted total income of the nonresident for the three previous years immediately preceding the relevant assessment year.'

9. On a combined reading of the said Explanatory Memorandum as well as the said circular issued by the Central Board of Direct Taxes, it is clearthat 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.

10. 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 other words, a part of the expenditure at least must not be attributable to the business operations carried on in India. Where an assessee does not have any business overseas 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]128ITR294(SC) , 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 any one or more of the base figures forming part of computations under Clauses (a), (b) or (c) ofSection 44C are not conceivable in a particular case, it must be held that the non obstante provisions contemplating disallowance of ''head office expenditure' under Section 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 a 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 under Section 44C in the facts and circumstances of this case.

12. 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]131ITR597(SC) :

'It is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and the purpose for which the legislation was enacted. This is in accord with the recent trend in juristic thought not only in western countries but also in India that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. . . . The rule of construction by reference to contemporanea expositio is a well established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and umambiguous ....

But the construction which is commending itself to us does not rest merely on the principle of contemporanea expositio ...'

13. 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.

14. In this view of the matter, we answer the question in the negative and in favour of the assessee.

15. There will be no order as to costs.

Bhagabati Prosad Banerjee, J.

16. I agree .