No Carve-Out for ‘Exclusive’ Overseas Expenses; Section 44C Overrides Section 37 for Non-Resident Entities
Meetu Kumari | Dec 18, 2025 |
Supreme Court Settles Section 44C Debate: Head Office Expense Cap Applies Across the Board
The dispute before the Supreme Court concerned non-resident banks, including American Express Bank Ltd. and Oman International Bank, which claimed full deduction of head office expenses incurred outside India—such as costs for soliciting NRI deposits, overseas travel, and certifications, on the ground that these were incurred exclusively for their Indian branches. The claims were made under Section 37(1) of the Income-tax Act, 1961.
The Assessing Officer restricted the deduction by applying the statutory cap under Section 44C, which limits head office expenditure to 5% of adjusted total income. While the ITAT and the Bombay High Court allowed the full deduction by distinguishing between “common” and “exclusive” head office expenses, the Revenue appealed.
Main Issue: Whether head office expenditure incurred exclusively for Indian branches can be fully deducted under Section 37(1), or whether it is mandatorily subject to the ceiling under Section 44C.
SC’s Ruling: The Supreme Court allowed the Revenue’s appeals and overturned the High Court’s view. The Court held that Section 44C is a non-obstante provision which expressly overrides Sections 28 to 43A, including Section 37. Once an expenditure falls within the statutory definition of “head office expenditure,” the ceiling under Section 44C applies automatically.
The Court categorically rejected the distinction between “common” and “exclusive” head office expenses, observing that such a classification finds no place in the statutory scheme. It held that the definition of head office expenditure under the Explanation to Section 44C is exhaustive and covers all executive and general administrative expenses incurred outside India. The Court noted that Section 44C was enacted to prevent erosion of the Indian tax base by inflated or unverifiable overseas administrative claims. Thus, even expenses incurred solely for Indian operations are subject to the statutory cap, and cannot be fully deducted under Section 37(1).
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