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.
