Analysis of judgement of Supreme Court delivered on 15.12.2025 in the case of Director of Income Tax, Mumbai v. M/s American Express Bank Ltd., on the issue of Deduction of head office expenditure in the case of non-residents under section 44C of the Income Tax Act, 1961

In the landmark judgement of Supreme Court delivered on 15.12.2025 in the case of Director of Income Tax, Mumbai v. M/s American Express Bank Ltd., the Supreme Court of India clarified the application of Section 44C of the Income Tax Act, 1961.

Case Law Information

Case Name :	Director of Income Tax (International Taxation), Mumbai vs American Express Bank Limited
Appeal Number :	Civil Appeal No. 8291 of 2015
Related Assessment year	Assessment Year 1997-98
Date of Ruling :	15.12.2025
Ruling in favour of :	Revenue
Section involved	Section 44C of the Income Tax Act, 1961

Operative part of Section 44C of the Income Tax Act, 1961

For clarity, the operative part of Section 44C of the Income Tax Act, 1961 can be divided into the following distinct components:

§  Section 44C applies specifically to non-resident assessees.

§  Section 44C governs the computation of income chargeable under the specific head “Profits and gains of business or profession”.

§  Section 44C mandates that no allowance under the aforementioned head shall be made in respect of ‘head office expenditure’ to the extent that such expenditure is in excess of the lesser of the following two amounts:

(a) an amount equal to 5% of the adjusted total income; or

(b) the amount of head office expenditure attributable to the business or profession of the assessee in India.

§  Section 44C is a non-obstante provision as it starts with a phrase: notwithstanding anything to the contrary contained in Sections 28 to 43A. Consequently, it has an overriding effect on Sections 28 to 43A for the specific purpose of computing head office expenditure of a non-resident assessee.

Core Issue to be determined

The principal issue for the Supreme Court’s determination was :

Whether expenditure incurred by the head office of a nonresident assessee exclusively for its Indian branches falls within the ambit of Section 44C of the Act, 1961, thereby limiting the permissible deduction to the statutory ceiling specified therein?

NOTE

The main issue was whether all head office expenses incurred outside India by a non-resident, including those exclusively for its Indian branches, were subject to the deduction limit under Section 44C. The Bombay High Court had previously held that only “common” expenses were capped, while “exclusive” expenses could be fully deducted under Section 37(1).

Facts of the Case

In the instant matter, the Respondent-assessee, M/s American Express Bank Ltd., a non-resident banking company, filed its return for Assessment Year 1997-98 declaring an income of ₹ 79,45,07,110/-.

The assessee claimed deductions under Section 37(1) in respect of (i) expenses incurred for solicitation of deposits from Non-Resident Indians, and (ii) expenses incurred at the head office directly in relation to Indian branches.

The Assessing Officer restricted the deduction to 5% of the gross total income by invoking Section 44-C, and held that the Section 44-C is a non-obstante clause overriding Sections 28 to 43-A and that the definition of “head office expenditure” covers all executive and administrative expenses incurred outside India.

Aggrieved by the aforesaid order of the Assessing Officer, the assesseet filed an appeal before the Commissioner of Income Tax (Appeals) VII, Mumbai. The Commissioner vide Order dated 26.09.2000 affirmed the decision of the Assessing Officer.

Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal, Mumbai. The Income Tax Appellate Tribunal, Mumbai, vide Order dated 08.08.2012, allowed the appeal of the assessee by relying upon the Bombay High Court’s decision in CIT v. Emirates Commercial Bank Ltd. and held that exclusive head office expenses incurred solely for Indian branches fall outside the ambit of Section 44-C and are allowable in full under Section 37(1).

The Bombay High Court dismissed the Revenue’s appeal. Aggrieved by the High Court’s order, the Revenue approached the Supreme Court.

The Court noted that the controversy lies in a narrow compass, namely, the true scope and ambit of Section 44-C of the Act, and whether the said provision admits of a distinction between “common” and “exclusive” head office expenditure.

The Court observed that Section 44-C is a special provision, introduced with a clear legislative purpose, and begins with a non obstante clause overriding Sections 28 to 43-A. Once the statutory conditions are fulfilled, the provision operates with full force and restricts the quantum of deduction otherwise allowable under the general provisions, including Section 37(1).

The Court analysed the principles governing interpretation of taxing statutes and reiterated that taxation laws must be strictly construed, and that legislative intent must primarily be gathered from the language employed by Parliament, and where the words are plain and unambiguous, courts are bound to give effect to them regardless of perceived hardship. “…there is no room for any intendment; there is no equity about a tax; nothing is to be read in and nothing is to be implied.”

On a close reading of Section 44-C, the Court held that the provision contains two decisive triggers –

(i)               the assessee must be a non-resident, and

(ii)             the expenditure must qualify as “head office expenditure” as defined in the Explanation.

The Court emphasised that the Explanation to Section 44-C is clear, exhaustive, and unambiguous, defining head office expenditure as “executive and general administration expenditure incurred by the assessee outside India,” including travelling, salaries, rent, and other administrative expenses. The provision does not draw any distinction between ‘common’ and ‘exclusive’ expenditure. The Court held that the Explanation “focuses solely on: where the expense was incurred and the nature of that expense.”

Rejecting the assessees’ attempt to read such a distinction into the statute, the Court observed that accepting such an interpretation would require adding words to the statute, which is impermissible when the language is plain.

The Court held that once expenditure is incurred outside India by a non-resident and falls within the nature described in the Explanation, Section 44-C comes into operation, regardless of whether the expenditure is incurred exclusively for Indian branches or otherwise.

With respect to Rupenjuli Tea Co. Ltd. v. CIT, 1989 SCC OnLine Cal 410, the Court clarified that the decision turned on peculiar facts, where the assessee had no business operations outside India, rendering clause (c) of Section 44C inapplicable. The ratio could not be extended to cases involving global banking entities carrying on business across multiple jurisdictions. The Court also noted that CIT v. Emirates Commercial Bank Ltd., 2003 SCC OnLine Bom 1280, observed that the decision has been misunderstood and overextended. The Court noted that the statute itself does not recognise any artificial bifurcation between exclusive and common expenditure and accepting such a distinction would defeat the very object behind the insertion of Section 44-C, namely, to curb inflated claims of foreign head office expenses which are difficult for the Indian tax authorities to verify. The Court asserted that Section 44-C does not confer a deduction; it restricts it. The Court stated that even if an expenditure otherwise satisfies the requirements of Section 37(1), the non obstante nature of Section 44-C mandates that the deduction cannot exceed the statutory ceiling prescribed therein.

Supreme Court Observations and Conclusions :

The Court answered the issue in favour of the Revenue and held that –

“Expenditure incurred by the head office of a non-resident assessee outside India, even if incurred exclusively for the Indian branches, squarely falls within the meaning of “head office expenditure” under Section 44C of the Income-tax Act, 1961 and is subject to the ceiling prescribed therein.”

The Court held that the High Courts erred in excluding exclusive head office expenditure from the operation of Section 44-C, and that such an interpretation would amount to rewriting the statute. Accordingly, the Court allowed the appeals, set aside the impugned judgments of the Bombay High Court, and remand the matters to the Income Tax Appellate Tribunal, Mumbai, for the limited purpose of verifying whether the disputed expenditures satisfy the tripartite test necessary to qualify as ‘head office expenditure’ under the Explanation to Section 44C of the Act, 1961.

§  When the words are clear and plain, the courts are obliged to accept the expressed intention of the Legislature : When interpreting taxation statutes such as the Income Tax Act, 1961, the following aspects must be strictly observed:

(i)     equitable considerations, presumptions, or assumptions should not be taken into account, and

(ii)  the statute should be interpreted according to what is clearly expressed.

Thus, if the court is satisfied that a case falls strictly within the provisions of the law, the subject can be taxed, regardless of the consequences such a levy of tax might have

Another fundamental rule of statutory interpretation is that when the language of the statute is plain and unambiguous, allowing only one meaning, then no issue of statutory construction arises as the statute speaks for itself. The reasoning behind this principle is that when the words are clear and plain, the courts are obliged to accept the expressed intention of the Legislature. 

• No Distinction: Section 44C does not distinguish between "common" and “exclusive” head office expenditure. Supreme Court observes that the statutory definition contained in Section 44C is “broad and inclusive” containing no indication that exclusive expenditure is to be excluded from its ambit and furthermore that the term ‘attributable’ in clause (c) does not create a statutory distinction between ‘common’ and ‘exclusive’ expenditure;

Therefore, Court holds the question of law formulated in favour of Revenue, opining that Section 44C applies to head office expense, regardless of whether the expense incurred by non-resident assessee is common expenditure or expense incurred exclusively for Indian branches.

• Mandatory Cap: Any executive and general administration expenditure incurred by a non-resident assessee outside India is subject to the statutory ceiling. Legislature has defined “head office expenditure” in clear and unambiguous terms to mean executive and general administration expenditure incurred by the assessee outside India, including, inter alia, travelling expenses, salaries, and other administrative costs...

Consequently, the deduction for these expenses is limited to 5% of the Indian branch’s total income, as per Section 44C. The Court noted that allowing unlimited deductions for exclusive expenses would contradict the purpose of the capping provision.

§  Clarification of the “Attributable to” Test: The Court held that expenditure incurred exclusively for India is the highest form of expenditure attributable to India. Therefore, it squarely falls within the computation under Section 44C(c). The Court reiterated that the expression ‘attributable to’ is of a much wider import than the expression ‘derived from’; while ‘derived from’ envisages a direct nexus, ‘attributable to’ also covers an indirect nexus and thus, there is no doubt that the words ‘attributable to’ in the context of clause (c) would include both common and exclusive expenditure. 

• Supremacy over Section 37: Taxpayers cannot bypass the cap by claiming exclusive expenses in full under the general deduction provisions of Section 37(1). The assessee’s argument that Section 44C cannot restrict deductions that are otherwise allowable under Section 37(1) is misplaced. If the expenditures meet the conditions, Section 44C governs the quantum of allowable deduction. This means that even if such head office expenditure can be allowed as a deduction under Section 37(1), it would not be permitted if it exceeds the ceiling limit set under Section 44C. To decide otherwise would be to overlook the non-obstante nature of Section 44C.
• Section 44C Applicability: The Court ruled that the ceiling limit under Section 44C of the Income Tax Act, 1961 applies to all head office expenditure meeting the definition in Explanation (iv), irrespective of being common or exclusive i.e. all head office expenditure, encompassing both "common" and "exclusive" expenses incurred for Indian branches.

§  Assessing Officer has to be satisfied to qualify as ‘head office expenditure’

For an expenditure to qualify as ‘head office expenditure’ within the meaning of the Explanation to Section 44C, the assessing officer has to be satisfied of the following three ingredients:

(a)   First, the expenditure must be incurred outside India.

(b)   Secondly, the expenditure must be in the nature of executive and general administration, i.e., a broad genus.

(c)   Thirdly, the said executive and general administration expenditure must fall within the specific species enumerated in clauses (a), (b), and (c), or expressly prescribed under clause (d). 

Tripartite Test:  To determine if an expense qualifies as “head office expenditure” under Section 44C. the following is part of that test?

(i)          The expenditure must be incurred outside India.

(ii)        The expenditure must be in the nature of executive and general administration.

(iii)      The expenditure must be of the type specified in clauses (a)-(c) or prescribed under clause (d) of Explanation (iv). 

§  Court expressly overruled the principle laid down while ruling in favour of Revenue on the question of law : Supreme Court distinguishes assessee’s reliance on Calcutta High Court ruling in Rupenjuli Tea Co. Ltd. as also terms as 'incorrect' the view of Bombay High Court in Emirates Commercial Bank Ltd.:

With respect to Rupenjuli Tea Co. Ltd. v. CIT, 1989 SCC OnLine Cal 410, the Court clarified that the decision turned on peculiar facts, where the assessee had no business operations outside India, rendering clause (c) of Section 44C inapplicable. The ratio could not be extended to cases involving global banking entities carrying on business across multiple jurisdictions.

The Court also noted that CIT v. Emirates Commercial Bank Ltd., 2003 SCC OnLine Bom 1280, observed that the decision has been misunderstood and overextended. The Court noted that the statute itself does not recognise any artificial bifurcation between exclusive and common expenditure and accepting such a distinction would defeat the very object behind the insertion of Section 44-C, namely, to curb inflated claims of foreign head office expenses which are difficult for the Indian tax authorities to verify. 

§  Remands the matter back to ITAT for limited purpose: The Court sent the factual assessments back to the ITAT for the limited purpose of verifying whether the disputed expenditures satisfy the tripartite test necessary to qualify as ‘head office expenditure’ under the Explanation to Section 44C of the Act, 1961 (i.e. to apply a “tripartite test” to confirm if the expenses met the statutory definition of head office expenditure). 

§  Significance

This judgment definitively interprets Section 44C, establishing that non-resident banks cannot avoid the statutory limit on head office expenses by labeling them as "exclusive" to their Indian operations. 

 

 

 

 

 

 

 

Scope of Total Income [Section 5]

The Scope of Total Income is defined by the residential status of a taxpayer. Based on whether an individual or entity is a resident, RNOR, or non-resident, different types of income will be included in their taxable income.

Objective and Purpose

The scope of total income forms the foundation of income tax law in India, determining what income is taxable and for whom. Scope of total income defined income includes all income earned by a taxpayer based on their residential status. Section 5 aim to define the scope of taxable income for residents and non-residents in India.

Section 5 of the Income-tax Act, 1961 defines the scope of total income for any person in India, determined by their residential status. The scope of total income includes all income earned by a taxpayer based on their residential status. This section outlines which income sources are taxable in India, regardless of where the income is earned or received. This section dealing with the scope of total income, brings to tax the following incomes :

§  Income received in India.

§  Income accruing/arising in India.

§  Income deemed to be received in India.

§  Income deemed to accrue or arise in India.

 

Text of Section 5 of the Income Tax Act, 1961

5.  Scope of total income.

(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which -

(a)  is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b)  accrues or arises or is deemed to accrue or arise to him in India during such year ; or

(c)  accrues or arises to him outside India during such year :

PROVIDED that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

(a)   is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b)   accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

 

Scope of Total Income for a Resident [Section 5(1)]

A resident in India is generally taxed on their global income, encompassing income received or deemed to be received in India, income accruing or arising in India, and income originating outside India during that year.

§  Income received/deemed received in India

§  Income accruing/arising or deemed to accrue/arise in India

§  Income accruing/arising outside India

Example 1: A resident individual receives dividends from an Indian company in the tax year. That dividend is "received in India" and thus included in total income under Clause 5(1)(a).

Example 2: A person who is resident but "not ordinarily resident" has rental income from property located and let outside India. Such income is included in total income only if derived from a business controlled in India or from a profession set up in India; otherwise it is excluded under Clause 5(1)(c).

Certain Examples of incomes which treated as incomes deemed to have accrued or arisen in India:

§  If Mr. X Transfer his Residential Property situated in Delhi then Capital gain arising on transfer of such Capital Asset is deemed to accrue in India. It means Capital gain arising on transfer of property situated in India.

 

§  Income from business connection in India.

 

§  Dividend paid by an Indian company.

 

§  Income from any property, asset or other source of income located in India.

 

Salary  

§  In respect of services rendered in India.

 

§  Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.

Interest income:-

§  Received from Government of India.

 

§  Received from a resident is treated as income deemed to have accrued or arisen in India in all cases,

 

Except

 

§  where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.

 

§  Received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.

Royalty

§   Received from Government of India.

 

§   Received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.

 

§   Received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fees is for business/profession/other source of income carried by the payer in India.

Exception for “Not Ordinarily Resident” (NOR):
For a Resident but Not Ordinarily Resident (RNOR), income from outside India is typically excluded unless it is from a business controlled in or a profession set up in India. 

 

Scope of Total Income for a Non-Resident [Section 5(2)]

A non-resident is taxed in India solely on income connected to India, including income received or deemed to be received in India, and income accruing or arising or deemed to accrue or arise in India during the previous year. Income with an Indian source is generally taxable for all assessees. The income of the non-resident, which is liable to tax in India would include the following .

§  Income received in India in the previous year; or

§  Income deemed to be received in India during the previous year; or

§  Income which accrues or arises in India during the previous year; or

§  Income which is deemed to accrue or arise in India

Thus

§  For non-residents, total income only includes income received, deemed to be received, accruing, or arising in India during the previous year.

§  Income accruing or arising outside India is not taxable in India for a non-resident. 

Such income, refers only to the Indian income as foreign income of a non-resident is not liable to tax in India.

Example : A non-resident performs services in India and fees for services accrue to the non-resident in India in that tax year. Those fees are included under Clause 5(2)(b).

 

Income accruing or arising outside India is not considered “received” in India merely by being shown in an Indian balance sheet [Explanation 1 to section 5]

Explanation 1 says that Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Just because you mention income from outside India in a balance sheet in India, does not mean it is considered as received in India.

Income already included on an accrual basis is not included again on a receipt basis to avoid double taxation [Explanation 2 to section 5]

Explanation 2 says that Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

In other words, if your income is already counted because it is earned or considered as earned, it would not be counted again when it is actually received or considered as received in India.

Residence and Citizenship

Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship. An Indian may be non-resident and a foreigner may be resident for income tax purposes. The residence of a person may change from year to year but citizenship cannot be changed every year.

 

Reasons for Country to Levy Tax

Country provides Welfare, Security, Basic Amenities , Infrastructure and other benefits to Residents and in return expects Residents to pay tax

Country provides an opportunity / source to earn Income for Non Residents and in return expect Non Residents to pay tax on Income earned from that country

Scope of total Income under Section 5 of Income Tax Act, 1961

 

Sr. No	Particulars	Resident Ordinary Resident (ROR)	Resident Not  Ordinary Resident (RNOR) Section 5(1)	Non-Resident (NR) – Section 5(2)
1	Income received in India	Taxed	Taxed	Taxed
2.	Income deemed to be received in India	Taxed	Taxed	Taxed
3.	Income accrues or arises in India	Taxed	Taxed	Taxed
4.	Income deemed to accrue or arise in India	Taxed	Taxed	Taxed
5.	Income accrues or arises outside India	Taxed	No	No
6.	Income accrues or arises outside India from business/profession controlled/set up in India	Taxed	Taxed	No
7.	Income Other than Above (No Relation in India)	Taxed	No	No

 

Categories of Income Included in the Scope of Total Income

(1) Income Received in India

Any income received directly in India, whether by a resident, RNOR, or non-resident, is taxable in India. Examples include salaries paid in India, rental income from properties located in India, and other receipts from Indian sources.

(2)  Income Deemed to Accrue or Arise in India

Certain incomes are considered to accrue or arise in India even if they are earned outside India. This includes income from sources like:

§  Business transactions where contracts are signed in India

§  Salaries for services rendered in India

§  Income from property, assets, or rights located in India

(3) Income Earned Outside India

§   For residents, income earned outside India is taxable.

§   For RNORs and non-residents, income from foreign sources is generally not taxable unless it is directly linked to a business or profession controlled in India.

(4)  Income from Foreign Sources

§   Residents are taxed on their worldwide income, which includes income from foreign sources.

§   Non-residents are not liable for foreign income taxes in India, and RNORs are partially exempt from this requirement.

 

Assessee, a British citizen and non-resident in India, maintained bank accounts with HSBC Bank, Geneva, in absence of material to show that deposits therein were sourced from India, mere presence of Indian address was insufficient to establish taxability and, therefore, impugned addition of peak balance was to be deleted

A non-resident, having money in a foreign bank account, cannot be taxed in India if such money has neither been received or deemed to be received in India, nor has it accrued or arisen or deemed to accrue or arise in India. Burden to prove that income falls within taxing provisions is on Assessing Officer and not on assesse. Assessee, a British citizen and non-resident in India, had maintained two bank accounts with HSBC Bank, Geneva. Information was received from French Government under DTAA regarding said accounts showing peak balance of USD 25,28,927 (Rs. 11.28 crores) as on March 2006 - Assessing Officer reopened assessment and made addition of said peak balance on ground that assessee failed to substantiate source of deposits and that such deposits were unaccounted funds sourced from India. DRP held that Indian address in bank records, even without direct evidence of business activity, was essential proof linking assessee to India and negating claim of no connection. It was observed that no material was brought on record to reasonably establish that amount standing to credit in HSBC Bank, Geneva represented income which had accrued or arisen or deemed to accrue or arise in India. Mere presence of Indian address without evidence of any business activity in India was insufficient to establish taxability and, therefore, impugned addition was unsustainable. [In favour of assessee] (Related Assessment years : 2006-07 and 2007-08) – [Pratab Gulabrai Tulsiani v. ACIT (2025) 177 taxmann.com 151 (ITAT Mumbai)]

Foreign allowance received by employee outside India for services rendered in UK is not taxable in India

Assessee qualified as a Non-resident in India during the previous year 2015-16 as evident from his stay in India during the relevant Previous year. A non-resident would be taxable in India only in respect of income received/deemed to be received in India or the income accrued / deemed to accrue in India. In the present case the assessee being a Non-Resident, has received the foreign allowances of Rs. 48,39,078 in United Kingdom for services rendered in United Kingdom. Hence ,the foreign allowance of Rs. 48,39,078 does not fall within the scope of total income under section 5(2).The foreign assignment allowance was paid by IBM India to the International Travel Card outside India. The said card is denominated in foreign currency only and can be used only outside India.

From the detailed mechanism of credit to travel, it is found that the funds are first transferred from the EEFC Account of IBM to foreign banks with whom Axis Bank has maintained the Nostro Account. Out of the transferred funds, the travel card of the employees are credited outside India upon instruction from IBM. It is therefore very clear that the funds are credited from outside India and the assessee is also in first receipt of the foreign assignment allowance outside India, i.e., both the payment and first receipt of foreign assignment allowance is outside India. It is important to mention here that Explanation 1 to Section 5(2) of the Income tax Act, 1961, the intent of legislature is to tax income on a receipt basis and in the given case as explained above in detail the first receipt of foreign assignment allowance in the hands of employee is only outside India.

Going over the discussion made above it is therefore clear that foreign assignment allowance is credited to the Axis travel currency card of the assessee outside India, i.e., place of receipt of foreign assignment allowance is outside India. Hence, keeping in the mind of Explanation 1 to Section 5(2) , receipt of salary has to be seen from the point of the recipient which in this case is outside India.

The addition of foreign allowance to the total income of the assessee which was received outside India for services rendered in United Kingdom amounting to INR 48.39 lakhs is unjustified and accordingly the same is deleted. [In favour of assessee] (Related Assessment year : 2016-17) – [Santanu Sanyal v. ACIT (2024) 165 taxmann.com 390 (Kolkata)]

If a dispute is pending before Civil Court, no income can be said to have accrued or arise to an assessee pending adjudication of said dispute for purpose of section 5

If dispute is pending before Civil Court, no income can be said to have accrued or arise to an assessee pending adjudication of said dispute for purpose of section 5. Assessee had entered into a sub-lease agreement with IDBI on annual lease rent of Rs. 3.42 lakhs. Assessee had received aforesaid rent and offered same being lease rent in its return of income for the assessment year 1981-82. In previous year 1980-81, dispute arose between assessee and IDBI and, accordingly, assessee terminated sub-lease agreement and refused to accept rent from IDBI post-termination. In year 1981, IDBI filed a Declaratory Suit in Small Cause Court and obtained injunction against assessee from terminating sub-lease agreement. Thereafter, Assessing Officer issued a garnishee notice to IDBI under section 226(3) to which IDBI deposited amount as per sub-lease agreement with Income-tax Department in spite of assessee terminating agreement. In year 1984, assessee had filed a suit for eviction against IDBI and claimed various reliefs, including compensation for wrongful use and occupation of flats wherein Small Causes Court on an application made by IDBI allowed IDBI to deposit lease rent in Court - However, assessee had not withdrawn any amount. Merely because a party to a civil dispute to protect its rights makes a payment to Income-tax Department pursuant to garnishee proceedings, it would not amount to subsistence or existence of sub-lease agreement between assessee and IDBI for bringing to tax Rs. 3.42 lakhs per annum as income for assessment year under considerations. Cross-suits filed by assessee and IDBI against each other were still pending before the Small Causes Court, Tribunal was not justified in bringing to tax sum of Rs. 3.42 lakhs as accrued income. [In favour of assessee] (Related Assessment years : 1986-87 to 1993-94) – [T. V. Patel (P.) Ltd. v. DCIT (2023) 157 taxmann.com 108 (Bom.)]

 

Assessee, an employee of Wells India, was sent on short-term assignment to Wells USA his salary was taxable in India under provisions of section 5(2)(a), but because of overriding effect of section 90, article 16 of DTAA would prevail over section 5(2)(a) and, consequently, salary received by assessee in India for services rendered in USA was not liable to tax in India

Assessee, an individual, was an employee of Wells India and was sent on short-term assignment to Wells USA and thereafter assessee was directly employed by Wells USA. Accordingly, at time of filing of Income Tax return, assessee claimed benefit under article 16(1) of DTAA and claimed that income earned from services rendered in USA was only taxable in USA and not in India. Assessing Officer disallowed claim made by assessee and held that inasmuch as assessee was under payrolls of Wells India, till his services were terminated and he was appointed by Wells USA, his employment was exercised only in India, and, thus, he was not entitled to claim benefit of article 16(1). Salary received in India by assessee was no doubt taxable in India under provisions of section 5(2)(a). Though provision under section 5(2)(a) fastened tax liability on assessee, but, because of overriding effect of section 90, article 16 would prevail over section 5(2)(a) and, consequently, salary received by assessee in India for services rendered in USA was not liable to tax in India. [In favour of assessee] (Related Assessment year : 2019-20) – [Prasanth Nandanuru v. ITO(International Taxation) [2023] 150 taxmann.com 183 (ITAT Hyderabad)]

 

TDS by IBM India on ‘foreign assignment allowance’ topped up to their Travel Currency Card by IBM India is not taxable in India, no reason to tax employees

Hyderabad ITAT allows the appeals by the Assessees, i.e., employees of IBM India (P) Ltd. and holds that the foreign assignment allowance topped up to their Travel Currency Card by IBM India is not taxable in India; Places reliance upon the co-ordinate bench ruling in Bodhisattva Chattopadhyay v. CIT (2019) 111 taxmann.com 374 (ITAT Kolkata) and concurs with Assessees’ contention that the Assessees being non-residents, for the relevant Assessment year, would not be liable to tax under Section 5(2) as the concerned foreign assignment allowance was received outside India for the services rendered outside India, thus, nothing was received or accrued or deemed to be received or accrued in India; Assessees were sent on long-term assignment to various countries and were non-residents for the Assessment year 2018-19 and their salary included the component of the foreign assignment allowance received outside India; Assessees offered to tax the portion of the salary which was received by them in India, however claimed that the foreign assignment allowances received outside India as ‘exempt income’; Revenue held Assessees’ salary income to be taxable in India on the grounds that the Assessees were on the pay rolls of IBM India even during their assignment abroad and their service conditions were being controlled and governed by the IBM India; Revenue also observed that IBM India deducted tax at source on the entire remuneration received by the Assessees, which conclusively proves that the situs of employment is in India; CIT(A) confirmed the assessment order whereas before ITAT Revenue contended that the income was received by the Assessees in India and was transferred by the Assessees from the bank accounts held in India to the nostro accounts to top it up to the Travel Currency Card, thus, the employer transferred the amount in India which makes it a receipt taxable in India; Revenue also argued that the Bank is the agent of the employee, thus, the payment to the banker is equivalent to payment to the Assessees; ITAT observes that the issue is no longer res integra and relies on the co-ordinate bench ruling in Bodhisattva Chattopadhyay, Sri Ranjit Kumar Vuppu v. ITO, ITA No. 86/Hyd/2021, dated 22.04.2021; DCIT v. Sudipta Maity (2018) 96 taxmann.com 336 (ITAT Kolkata) and Shri Venkata Rama Rao v. ITO, ITA No. 1992/Hyd/2018, dated 25.02.2021, wherein it was held that the income derived by a non-resident for performing services outside India, the accrual thereof happens outside India, such income cannot be taxed in India under section 5(2); Also observes that the co-ordinate bench in Bodhisattva Chattopadhyay, rejected Revenue’s contention on double non-taxation of the concerned amount, holding that such a fact is immaterial to decide the taxability of foreign assignment allowance in India; Thus, ITAT sets aside the CIT(A)’s order. [In favour of assessee] (Related Assessment year : 2018-19) - [Tadimarri Prasanth Reddy v. ITO (International Taxation) [TS-364-ITAT-2023(HYD)] – Date of Judgement : 28.06.2023 (ITAT Hyderabad)]

 

Addition basis French Govt.’s Base Note unsustainable qua non-resident’s Swiss Bank A/c

Mumbai ITAT upholds order deleting the addition made on account of balance and deposits in HSBC Geneva bank account held by a non-resident individual; Holds that Assessee cannot be taxed in India on account of alleged deposits and balance in the foreign bank account under Section 5(2) as Revenue failed to discharge the burden to prove that the Assessee’s income is falling within the definition of income chargeable to tax in his hands under Section 5(2); Further holds that even though the information received from French Government (Base Note) demonstrates that Assessee has an undisclosed bank account outside India, the same information cannot be used against Assessee, since the Assessee is a non-resident and is not obliged to disclose his assets situated outside India in the return of income filed in India and can only be asked to file the details with respect to the income falling under Section 5(2); Assessee, a non-resident based in Belgium, was issued reassessment notice for Assessment years 2006-07 and 2007-08 on the basis of the Base Note wherefrom the Revenue discovered that Assessee holds an account with HSBC Geneva; For Assessment year 2006-07, Revenue made the addition of Rs. 30.33 Lacs by rejecting Assessee’s submission that he is a non-resident since Assessment year 2001-02 and is employed in Belgium and had no business connection in or outside India; Revenue held that the said deposits are from Assessee’s operation of diamond business in India, since Assessee and his family members are still based in India and are in the diamond business; CIT(A) deleted the additions by accepting Assessee’s submission of non-residency and no business connection in India; On Revenue’s appeal ITAT notes that Assessee is an employee in Belgium and derives income from interest on fixed deposits in India, which is duly disclosed in the return of income; Observes that a non-resident is chargeable to tax in India under Section 5(2) only if the income is received or accrues or arises in India or deemed to be received or deemed to accrue or arise to him in India; Further observes that Assessee being a non-resident can only be asked to file the details with respect to the income falling under Section 5(2), thus, opines that Assessee is not obliged to disclose his assets situated outside India in the return of income filed in India; States that even though the ‘base note’ shows Assessee to be the account holder, however it could be used to tax the income in Assessee’s hand only if the Assessee would have been resident in India; Points out that foreign bank accounts belonging to non-resident Indians cannot be illegal since the non-resident Indians are bound to have their bank accounts outside India; Observes that Revenue failed to clarify the reason behind taxing the same income in the hands of Assessee’s wife; Notes that identical amount was once again taxed in the hands of the Assessee and his wife in Assessment year 2007-08 and observes that there is no evidence available with the Revenue that there is an amount deposited in the concerned bank account by the Assessee during the relevant Assessment year; Thus, upholds CIT(A)’s order deleting the impugned additions. – [DCIT v. Manish Vijay Mehta [TS-844-ITAT-2022(Mum)] – Date of Judgement ; 31.10.2022 (ITAT Mumbai)]

 

IBM India employee’s foreign assignment allowance for rendering services in Switzerland, not taxable in India

Kolkata ITAT rules that foreign assignment allowance received by assessee [an employee of IBM India] outside India for rendering services in Switzerland was not taxable in India under section 5(2)(b) for Assessment year 2014-15, rules that “admittedly no services were rendered in India for which the foreign assignment allowance was received by the assessee, the same was not chargeable to tax in India even in terms of the deeming provisions of Section 9(1)(ii)”, quashes revision under section 263; During relevant Assessment year, assessee was sent to Switzerland on account of IBM India’s foreign assignment and by virtue of his stay beyond 182 days outside India, he had acquired the non-resident” status, moreover, as IBM India had deducted TDS on the entire emoluments paid to assessee including the foreign assignment allowance [which was received outside India], assessee had claimed refund in his return contending that the foreign assignment allowance component pertained to the services rendered outside India, and was not taxable in India; While assessee’s claim was accepted by Assessing Officer, CIT had invoked Section 263 revision on the ground that the taxability of the foreign assignment allowance required reconsideration in view of Section 5(2)(b), rejects CIT’s contention that the ‘point of payment’ was the ‘point of receipt’ itself, and therefore since the allowance payment [denominated in INR] originated from the employer’s bank account in India with Deutsche Bank, the income was said to be received in India and therefore liable for tax in India under section 5(2)(b); Remarks that “Going by the ld. CIT’s conclusion in case of every international transaction where the payment made to non-resident originates from a bank situated in India, the income of the non-resident shall be deemed to be received in India, and therefore liable to tax in India.”, distinguishes CIT’s reliance on co-ordinate bench decision, in Tapas Kr Bandopadhyay case on facts, relies on Sudipta Maity’s judgment ; Moreover observes that Assessing Officer had accepted assessee’s claim in the assessment proceedings, after considering all requisite documentary evidences showing that the foreign assignment allowance had suffered applicable tax in Switzerland, further Assessing Officer had also obtained declaration from the employer that the allowance was paid in relation to services rendered in Switzerland, thus holds section 263 invocation was not warranted; ITAT further holds that CIT was factually incorrect in holding that the payment of foreign assignment allowance was first received by the assessee in India and thereafter remitted to his TCC [Travel Currency Card] at his express directions, tracing the entire modus operandi for receiving the said allowance, remarks that it is evident that the funds were transferred outside India to the foreign currency denominated account of the employer at the express direction of the employer and even the payment towards TCC was made on the instructions of the employer.”; Lastly, takes cognizance that although the allowance in question may have been received by the assessee pursuant to his employment contract with a company which was a tax resident in India, as also the contract of employment was executed in India, however, clarifies that for such fact alone it cannot be held that assessee’s right to receive the entire remuneration accrued or deemed to accrue in India. Admittedly the assessee would not have been entitled to receive the allowance, “if the services were rendered or performed by the assessee in India.”, and therefore allows assessee’s appeal; Explicates that “All these facts and documents considered show that the Assessing Officer had indeed called for information and after due application of mind passed the assessment order under section 143(3)” in favour of assessee. – [Bodhisattva Chattopadhyay v. CIT(IT & TP), Kolkata [TS- 715-ITAT-2019(Kol)] – Date of Judgement : 15.11.2019 (ITAT Kolkata)]

Note:

Section 9(1)(ii) makes it abundantly clear that income chargeable under the head “Salary” constitutes income deemed to accrue in India only if the services are rendered in India.

Section 5(2) provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

 

Assessee, an employee of Indian company, rendered his services outside India and during relevant year his residential status was non-resident, foreign assignment allowance received by him abroad, was not liable to tax in India under section 5(2)

Assessee was an employee of IBM India. During relevant financial year, he was sent on short-term assignment to Switzerland. He had stationed in Switzerland for 331 days during year under consideration and, accordingly, his residential status was Non-Resident. Assessee claimed that foreign allowances received on account of services rendered outside India did not form part of total income under section 5(2). Assessing Officer opined that foreign assignment allowance was received by assessee pursuant to employment contract entered in India and thus same was liable to tax in India. Since services of assessee were utilised outside India and, moreover, both accrual and receipt of income happened outside India, same was outside ambit of tax as per provisions of section 5(2). Therefore, impugned addition was to be deleted. [In favour of assessee] (Related Assessment year : 2013-14) – [DCIT v. Sudipta Maity (2018) 96 taxmann.com 336 (ITAT Kolkata)]

 

Salary credit in non-resident marine engineer’s NRE-account taxable applying ‘receipt’ test under section 5

Assessee, a non-resident, rendered services as a marine engineer on board a ship outside territorial waters of any country, salary received by him in India by way of fund transfer from foreign companies directly to his NRE account in India, would be taxable in India under section 5(2)(a).

The assessee was engaged with ‘G’ and ‘B’ Ltd. Singapore in the capacity as a Marine Engineer. He worked in international waters during relevant year and received remuneration from aforesaid concerns. The assessee claimed that he had to float on foreign water to render services during the course of voyage and, accordingly, when he would stay more than 182 days outside India or on foreign water, his residential status would be treated as ‘non-resident’ as per provision of law and his salary income which were received outside India in foreign currency would not be taxable under section 5. The Assessing Officer opined that income received in India was taxable in India in all cases (whether accrued in India or elsewhere) irrespective of residential status of the assessee. He also observed that it was significant to know the meaning of income received in India. If the place, where the recipient got the money (on first occasion) under his control, was in India, it was said to be income received in India. In the instant case all the income was remitted by the employer to the bank accounts of the assessee maintained in India. Therefore, the assessee got the money under its control for the first time in India. Accordingly, the Assessing Officer brought salary income to tax in India. The Commissioner (Appeals) upheld the addition made by the Assessing Officer. On second appeal:

Held : The provisions of section 5(2)(a) are probably enacted keeping in mind that income has to suffer tax in some tax jurisdiction. Such provisions would exist in tax legislation of all countries. If the argument of the assessee is accepted, then it would make the provisions of section 5(2)(a) redundant. The argument of assessee was that the salary was received on the high seas and by way of a convenient arrangement, the same was directed to be deposited in the NRE account of the assessee in India. The question that arises for consideration is can a person receive salary on high seas. The only possibility of receiving salary on board of a ship on high seas is to receive in hot currency. It is not the case of the assessee that the hot currency got deposited in the NRE account. On the other hand, the money was transferred from the employer’s account outside India to the assessee’s NRE account in India. In such circumstances, it is difficult to accept the contention of the assessee that salary was not received in India.

The income in the present case did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. The receipt in the NRE account in India is the first point of receipt by the assessee and prior to that it cannot be said that the assessee had control over the funds that had been deposited in the NRE account from the employer. In view of above, it was held that the salary received in India is taxable in India in terms of section 5(2)(a). In the result, appeal of assessee is dismissed. [In favour of revenue] (Related Assessment year : 2010-11) – [Tapas Kr. Bandopadhyay v. Deputy Director of Income-tax, (International Taxation) [2016] 180 TTJ 702 : 159 ITD 309 : 70 taxmann.com 50 : [TS-310-ITAT-2016(Kol)] (ITAT Kolkata)]

 

Scope of term ‘Total Income’ under section 5 cannot be used for determining additional tax for settlement applications

For computing additional tax for settlement application, definition of 'total income' under section 5 is not applicable in view of deeming fiction contained in clause (ii) of sub-section (1B) of section 245C whereby total income has to be considered as if aggregate of total income returned and income disclosed would be total income. Such deeming fiction must be allowed in its full effect. [In favour of revenue] (Related Assessment year : 2005-06) – [Unipon (India) Ltd. v. Income Tax Settlement Commission (2014) 44 taxmann.com 250 (Guj.)]

 

Section 5(2)(a) - Receipt of income is at place where services are rendered. In case of payment by cheque, DD,TT etc. receipt of income is at place where cheque is given or posted or dispatched to payee - and not where cheque is realized and bank account of payee is credited

Section 5 of the Income-tax Act, 1961 [Corresponding to section 4(1) of the Indian Income-tax Act, 1922] - Income - Accrual of - As between sender and addressee, it is request of addressee that cheque be sent by post that makes post office agent of addressee and after such request, addressee cannot be heard to say that post office was not his agent. Assessee-company, manufacturing certain articles in Indian State of Aundh, made supply thereof to Government of India. Assessee submit bill in prescribed form and requested Government to remit amount by cheque in favour of assessee on any bank in Bombay by post - Cheques were posted by Government at Delhi, they were received by assessee in Aundh and cashed through its bank at Bombay. Posting in Delhi, in law, amounted to payment in Delhi and, therefore, income, profits and gains made by assessee in respect of Sales made to Government of India was received by him in British India within meaning of section 4(1)(a) of 1922 Act. (Related Assessment years : 1941-42 to 1945-46) – [CIT v. Ogale Glass Works Ltd. (1954) 25 ITR 529 (SC)]