Kiran Raj

The Supreme Court of India Division Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan on Monday, December 15, 2025, allowed the Revenue’s appeals over the extent of deductions available to non-resident assessees for head office expenditure incurred outside India in relation to their Indian business operations. The Court held that Section 44C of the Income Tax Act, 1961 applies to such “head office expenditure” whether it is a common cost or an expense claimed to be incurred exclusively for Indian branches, and that any allowance must remain within the statutory ceiling prescribed under that provision. The matters were remanded to the Income Tax Appellate Tribunal, Mumbai, to verify whether the disputed expenses meet the statutory test to qualify as head office expenditure.

For AY 1997–1998, the respondent-assessee, a non-resident banking company, claimed deductions under Section 37(1) of the Income Tax Act, 1961 for head office expenses stated to relate to its Indian branches. When asked why Section 44C should not apply, it contended that Section 44C concerns expenditure partly attributable to business outside India and does not cover expenditure incurred solely for the Indian business.

The Assessing Officer applied Section 44C and limited the allowance to its ceiling. The Commissioner (Appeals) affirmed. The Tribunal relied on a Bombay High Court decision to treat the claimed expenses as outside Section 44C and deductible under Section 37(1), and the High Court dismissed the Revenue’s appeal on that basis.

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For AY 2003–2004, another respondent non-resident bank claimed deduction for head office travelling expenses and certification fees stated to be specifically for its Indian branches. It explained that travel costs related to staff visits to India for meetings, training and internal audits, and that certification fees were paid to auditors for issuing expense certificates. The assessee maintained these items were deductible under Section 37 and outside Section 44C, while the Assessing Officer treated them as covered by Section 44C.

The Court stated, “The central issue involved in these appeals relates to the interpretation of Section 44C of the Income Tax Act, 1961 (hereinafter referred to as “the Act, 1961”), more particularly whether it merely covers ‘common expenditure’ incurred by the head office attributable to an assessee’s business in India or would also include ‘exclusive expenditure’ incurred by the head office for the Indian branches.” It also recorded, “It is a well-established rule that taxing statutes have to be strictly construed.”

On when Section 44C applies, the Court observed, “We have no doubt that for an expense to be governed by the tenets of Section 44C of the Act, 1961, two conditions must be fulfilled: (i) the assessee should be a non-resident, and (ii) the expenditure should be a ‘head office expenditure’.” It stated, “If both conditions are met, then Section 44C, being a non-obstante provision, will apply regardless of whether its principles contravene Sections 28 to 43A respectively.” It further recorded, “If the expenditures meet the above two conditions, Section 44C governs the quantum of allowable deduction.”

While examining the definition, the Court stated, “Upon close analysis of the meaning assigned to the words ‘head office expenditure’ under Section 44C of the Act, 1961, it does not appear that the legislature has limited the scope to cover only common expenditure incurred by the head office for the benefit of various branches, including those in India.” It recorded, “It does not matter whether the expense was a common expense or an expense exclusively for the Indian branch, so long as the expense incurred is for the business or profession.” The Court stated, “The necessary corollary of the aforesaid discussion is that, irrespective of whether the expenditure was ‘common’ or ‘exclusive’, the moment it is incurred by a non-resident assessee outside India and falls within the specific nature described in the Explanation, then Section 44C would come into play and become applicable.”

The judgment recorded the appellant’s submission, “once an expense qualifies as ‘head office expenditure’ under the Explanation, it must be processed strictly under Section 44C. Otherwise, the section would be rendered meaningless. In the present appeals, the expenditure claimed by the respondents, incurred by the head offices located outside India, squarely falls within the said definition, being executive and general administrative expenditure incurred outside India.”

In summarising the legal position, the Court stated, “Section 44C would apply only when the two primary conditions are met: the assessee is a non-resident and has incurred expenditure in the nature of head office expenditure.” It recorded, “It is entirely irrelevant whether such expenditure is common or exclusive.” It further stated, “Once the conditions in (b) referred to above are met, the operative part of Section 44C gets triggered. Consequently, the allowable deduction is restricted to the least of the following two amounts: (i) an amount equal to 5% of the adjusted total income; or (ii) the amount of head office expenditure specifically attributable to the business or profession of the assessee in India.”

Finally, the Court held, “We hold that Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches.”

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The Court held: “This Court, while exercising appellate jurisdiction, is not the appropriate forum to undertake this granular factual verification. Accordingly, we deem it appropriate to remand these matters to the Income Tax Appellate Tribunal, Mumbai, on this limited issue. The Tribunal is directed to examine the expenses afresh in light of the legal principles enunciated herein, more particularly to verify whether the disputed expenditures satisfy the tripartite test necessary to qualify as ‘head office expenditure’ under the Explanation to Section 44C.”

“With respect to the expenditure which the respondents do not wish to dispute, the same would fall under the ambit of Section 44C, and thereby their deduction will be governed by the limits set out therein.”

“For all the foregoing reasons, the appeals succeed and are hereby allowed.”

Advocates Representing the Parties:

For the Petitioners: Mr. Raghavendra P Shankar, A.S.G. Ms. Madhulika Upadhyay, AOR Mr. Karan Lahiri, Adv. Mr. Navanjay Mahapatra, Adv. Mr. Sarthak Karol, Adv. Mr. V C Bharathi, Adv. Ms. Priyanka Terdal, Adv.

For the Respondents: Mr. Aniruddha A Joshi, Sr. Adv. Mr. Rajeev Kumar Panday, Adv. Mr. Rajeev Maheshwaranand Roy, AOR Mr. P Srinivasan, Adv. Mr. Percy Pardiwala, Sr. Adv. Mr. Hitesh Chande, Adv. Mr. Kishore Kunal, AOR Mr. Aditya Rathore, Adv. Mr. Nishant Thakkar, Adv. Mr. Nikhil Rajan, Adv.

Case Title: Director of Income Tax (IT)-I, Mumbai v. M/S. American Express Bank Ltd.
Neutral Citation: 2025 INSC 1431
Case Number: Civil Appeal No. 8291 of 2015; Civil Appeal No. 4451 of 2016
Bench: Justice J.B. Pardiwala, Justice K.V. Viswanathan