I.TA. NO.54/HQ OF 1989-90, DECIDED ON 29TH JANUARY, 1991. VS I.TA. NO.54/HQ OF 1989-90, DECIDED ON 29TH JANUARY, 1991.
1991 P T D (Trib.) 408
[Income-tax Appellate Tribunal Pakistan]
Before Farhat Ali Khan, Chairman
I.TA. No.54/HQ of 1989-90, decided on 29/01/1991.
(a) Income Tax Ordinance (XXXI of 1979)---
----S. 24(e) & Third Sched.---Dead Office expenditure---Scope---Non-resident assessee is entitled, to head office expenditure---Head office expenditure means and implies the expenses which pertain to executive and general expenditure including expenditure regarding items which are enumerated in S.24(e), paras. (a)', (b), (c) & (d), 'and which is incurred by the assessee outside Pakistanand for the purposes of his business or profession---Before Head Office expenses can be allowed they should fall within the definition of expenditure.
1989 PTD 989 (Trib.) ref.
(b) Income Tax Ordinance (XXXI of 1979)---
----S. 24(e)---Expression "expenditure"---Means and implies "amount or cash paid, charged, cost incurred, fund paid, investment outgo, outlay, payment, prices, spending or payment of money, act of spending, disbursing or laying out of money and payment".---[Words and phrases].
1986 PTD 855 and Black's Law Dictionary, Fifth Edn. ref.
(c) Income Tax Ordinance (XXXI of 1979)---
----S. 24(e), Explanation---Head Office expenditure---Held, before head office expenditure could be allowed it should have been incurred by the assessee and that too outside Pakistan.
(d) Income Tax Ordinance (XXXI of 1979)---
----Third Sched.---Depreciation--Concept---Computation of- depreciation-- depreciation allowance is allowed to be deducted in computing the profit and gain of a business or profession according to provisions of Third Sched., Income Tax Ordinance, 1979.
Depreciation is the loss earning through the decline in value of some assets. The tax law however does not take note of fall in value of all assets. It has restricted itself to certain type of assets. In Pakistan, Third Schedule added to the Income Tax Ordinance lays down the Rules for the computation of depreciation allowance and it allows it only on building, machinery, plant or furniture. Since such loss is the natural outcome of the use of those assets for profit generating purposes, it therefore, has been decided by the legislature that an assessee should be given benefit on some sound basis. In Pakistan, therefore, depreciation is allowed to those assessees who have not only owned any building, machinery, plant or furniture during the relevant assessment year but also have used it for the purpose of their business or profession. Consequently the estimated amount of such loss is brought into account by debiting depreciation account and crediting the account of the assets which has been depreciated. Such depreciation account is closed by the profit & loss account and the asset is shown in the balance-sheet after deducting the amount of depreciation written off. In short depreciation allowance is allowed to be deducted in computing the profit and gain of a business or profession according to provision of Third Schedule.
(e) Income Tax Ordinance (XXXI of 1979)---
----S. 24(c) & Third Sched.---Depreciation allowance cannot be called an expenditure.
(f) Income Tax Ordinance (XXXI of 1979)---
----S. 24(e) & Third Sched.---Scope of S.24(e)---Depreciation allowance to a non- resident assessee cannot be allowed as an item of expenditure connected with executive and general administration.
Explanation added to Section 24(e) shows that Legislature has enumerated various heads of expenditures in paragraphs (a), (b), (c) and (d) of aforesaid Explanation of clause (e) of Section 24. Paragraph (a) deals with legal liabilities like rates and taxes and contractual liabilities regarding assets like rent and payment for repairs and insurance. Its paragraphs (b) and (c) deal with the payment made to the employees as their salaries for the services rendered by them and allowances for reimbursing the expenditure met by them on travelling, indeed, for business or profession. However, paragraph (d) reserves the power for the C.B.R. to prescribe such other items of expenditure which are connected with executive and general administration.
Depreciation allowance to a non-resident assessee cannot be allowed as an item of expenditure connected with executive and general administration.
(g) Income Tax Ordinance (XXXI of 1979)---
----S. 24(e)---Head Office expenditure ---Definition---Head office allowance should either be ejusdem generis to the items of expenditure mentioned in paras. (a), (b) & (c) of the Explanation to S.24(e) or to be compatible with the concept of an executive and general administration type of expenditure as laid down in para. (d) of explanation to S. 24(e).
Although the definition of the Head Office expenditure is an "inclusive" definition yet depreciation allowance should either be ejusdem generis to the items of expenditure mentioned in paragraphs (a), (b) and (c) of the Explanation to S. 24(e) or be compatible with the concept of an executive and general administration type of expenditure as laid down in paragraph (d).
1988 PTD 747 (Trib.) ref.
(h) Income Tax Ordinance (XXXI of 1979)---
----S. 24 (e) & Third Sched.---Assessee who was a non-resident had claimed depreciation allowance as Head Office expenditure but had not based his said claim on any bilateral treaty regarding tax matters---Such claim by said assessee could only be examined if the same had been based on some provision of treaty.
(i) Income Tax Ordinance (XXXI of 1979)---
----S. 24(e) & Third Sched.---Depreciation allowance can be allowed to non-residents in appropriate cases.
United Netherland Navigation Co. v. C.I.T. PLD 1965 SC 412; 1967 Tax 78 (Trib.) and 1987 PTD 539 ref.
C. Nazir Ahmad, D.R. for Appellant.
Nemo for Respondent.
Date of hearing: 28th January, 1991.
ORDER
In this appeal the respondent, a non-resident company incorporated in the United Arab Emirates and deriving its income from engineering services rendered to Oil Drilling Companies, filed its return in the assessment year 1988-89 showing loss of Rs.714,042.
2. From perusal of the assessment order it appears that it claimed Head Office expenses to the tune of US $19,278 but the Income-tax Officer disallowed US $19,000 with the following observation:
"...In the head office expenses US $19,278 is claimed. This constitutes and includes depreciation component as well. This is not covered by section 24(e). Hence claim is partially disallowed at US $19,000 out of the total claim of the head office expenses..:"
3. On appeal, however, it was urged before learned Commissioner of Income-tax (Appeals) that the depreciation was allowable under section 24(e) of the Income Tax Ordinance, 1979 as an expenditure of general administration. The learned C.I.T.(A) after reproducing section 24(e) of the Income Tax Ordinance, 1979 upheld the contention with the following remark:--
"based on the contention of the appellant's A.R. and section 24(e) reproduced above the claim of the assessee is allowed in full..:"
The department, however, feels aggrieved and has come up in second appeal against the order of C.I.T.(A) dated 26-8-1989 and thus the question before this Tribunal for adjudication is as to whether depreciation can be allowed under section 24(e) of the Income Tax Ordinance?
4. Ch. Nazir Ahmad, the learned D.R. has answered this question in an emphatic "NO".
5. None for the respondents has turned up in spite of satisfactory service of hearing notice. I have, therefore, to examine this interesting point on its merits on the strength of my own research.
6. The learned C.I.T.(A) has relied upon section 24(e) of the Income Tax Ordinance. Let me, therefore, start the discussion from it. For easy reference I am reproducing it hereinbelow and it reads:
"...any expenditure in the nature of Head Office expenditure, in the case of an assessee, being a non-resident, in excess of such limits as may be prescribed...:'
Explanation.---As used in this clause "head office expenditure" means executive and general administration expenditure incurred by the assessee outside Pakistan for the purposes of the business or profession, including expenditure incurred in respect of --
(a) any rent, local rates and taxes (excluding any foreign tax corresponding to any tax leviable under this Ordinance), current repairs or insurance against risks of damage or destruction of any premises outside Pakistan used for the purposes of the business or profession;
(b) any salary paid to an employee employed by the head office outside Pakistan for the purposes of the business profession;
(c) any travelling by such employee for the purposes of business or profession; and
(d) such other matters connected with executive and general administration as may be prescribed;
(f) any allowance in respect of expenditure on entertainment in excess of such limits and in contravention of such conditions as maybe prescribed;
(ff) any expenditure incurred in respect of which payment is made on or after the first day of July, 1990 for a sum exceeding fifty thousand rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft.:'
7. In a Full Bench decision reported as (1989) P T D (Trib.) 989, I have already analysed aforesaid Explanation of above-quoted clause at page 997 and my analysis has been as follows:--
"12 ..From perusal of clause (e) of section 24 of the Income Tax Ordinance (hereinafter referred to as the "Ordinance"), it appears that if an assessee is non-resident, he is entitled to Head Office expenditure and the Explanation appended to it has laid down the scope thereof. If we analyse the Explanation it appears that the Head Office expenditure means and implies those expenses;
(i) which pertain to executive and general expenditure including expenditure regarding items which are enumerated in its clauses (a), (b) (c) and (d), and
(ii) which is incurred by the assessee outside Pakistan, and
(iii) which is incurred for the purposes of business or profession of the assessee..."
It, therefore, seems to be clear that before Head Office expenses can be allowed they should fall within the definition of expenditure. In another Full Bench decision of this Tribunal reported as (1986) P T D 855 it has been held that the expression "expenditure" means and implies "amount or cash paid, charged, cost incurred, fund paid, investment outgo, outlaw payment and prices". Relying upon Black's Law Dictionary (Fifth Edition) it has also been observed in aforesaid Full Bench decision that the word expenditure means "spending or payment of money, act of spending, disbursing, or laying out of money, payment". From perusal of Explanation added to clause (e) it also appears that before it could be allowed as Head Office expenditure it should have been incurred by an assessee and that too outside Pakistan. Thus the controversy shrinks itself into the simple question as to whether depreciation could be taken to be an expenditure incurred outside Pakistan? However, before answering this question let me find out as to what expression depreciation connotes in the domain of commerce and industry and the tax laws.
8. It can be said indisputably that depreciation is the loss earning through the decline in value of some assets. The tax law however does take note of fall in value of all assets. It has restricted itself to certain type of assets. In our country, Third Schedule added to the Income Tax Ordinance lays down the Rules for the computation of depreciation allowance and it allows it only on building, machinery, plant or furniture. Since such loss is the natural outcome of the use of those assets for profit generating purposes, it, therefore, has been decided by the legislature that an assessee should be given benefit on some sound basis. In Pakistan, therefore, depreciation is allowed to those assessees who have not only owned any building, machinery, plant or furniture during the relevant assessment year but also have used it for the purpose of their business or profession. Consequently the estimated amount of such loss is brought into account by debiting depreciation account and crediting the account of the assets which has been depreciated. Such depreciation account is closed by the profit and loss account and the asset is shown in the balance-sheet after deducting the amount of depreciation written off. In short depreciation allowance is allowed to be deducted in computing the profit and gain of a business or profession according to provision of Third Schedule.
9.Now after this discussion let me revert to the real issue involved in this appeal and keeping into consideration the definition of the expenditure and the nature of depreciation allowance it can be safely concluded that the depreciation allowance cannot be called on expenditure unless we want to distort the true and correct meaning of both the expressions, which is surely not permissible.
10. From perusal of the impugned order it appears that it was urged before the learned C I T(A) that the claim of depreciation allowance fell within the ambit of expenditure incurred for executive and general administration purposes. It further appears that the learned C.I.T.(A) has accepted this contention. Let me, therefore, examine the issue involved in this appeal from another angle.
11. If we read Explanation added to Section 24(e) it appears that legislature has enumerated various heads of expenditures in paragraphs (a), (b) (c) and (d) of aforesaid Explanation of clause (e) of Section 24. Paragraph (a) deals with legal liabilities like rates and taxes and contractual liabilities regarding assets like rent and payment for repairs and insurance. Its paragraphs (b) and (c) deal with the payment made to the employees as their salaries for the service rendered by them and allowances for reimbursing the expenditure met by them on travelling, indeed, for business or profession. However, paragraph (d) reserves the power for the C.B.R. to prescribe such other items of expenditure which are connected with executive and general administration. It has not been the case of the respondent before learned C.I.T.(A) that depreciation allowance has been "prescribed" by the C.B.R. as an item of expenditure regarding Head Office expenses. I have also failed to find out any provision under which the C.B.R. might have allowed depreciation allowance to a non-resident assessee as an item of expenditure connected with executive and general administration. As such, the finding of the learned C.I.T.(A) appears to be palpably incorrect.
12. Looking at this issue from yet another angle let me mention that although the definition of the Head Office expenditure is an "inclusive" definition yet I think that depreciation allowance should either be ejusdem generis (please see P T D 1988 (Trib.) 747 for full discussion) to the items of expenditure mentioned in paragraphs (a), (b) and (c) of the Explanation or be compatible with the concept of an executive and general administration type of expenditure as laid down in paragraph (d). The finding of the learned C.I.T.(A) on this issue; therefore, fails for this reason also.
13. Now, before parting with this issue let me mention here that though the respondent is a non-resident yet the claim has not been based on any bilateral treaty regarding tax matters. This decision, therefore, would have to be re-examined in those cases where any claim regarding depreciation allowance is based on some provision of some such treaty.
14. It would not be out of place to mention at this juncture that depreciation t allowance has all along been allowed to non-residents in appropriate cases under the Income Tax Act of 1922. The leading case on this subject has been reported from Supreme Court as P L D 1965 SC 412 United Netherland Navigation Co. v. C.I.T. and was followed by this Tribunal in a case reported as 1967 Tax (Trib.) 78 and the latest case on the subject is reported as 1987 P T D 539. However, in this appeal the claim has been examined under section 24(e) of the Income Tax Ordinance as it is the law in force in the relevant assessment years.
15. Let me also point out that I have noticed a discrepancy in the amount involved. From perusal of the assessment order, a certified copy of which ha: been filed, it appears that depreciation allowance claimed stood at US $19,000, However, from perusal of the impugned order as well as grounds of appeal the amount involved appears to be US $1900. The Income-tax officer, is, therefore, directed to ascertain the figure while giving appeal effect.
16. Now turning to other two grounds of appeal Ch. Nazir Ahmad, the learned D.R. supporting the departmental appeal submits that the learned C.I.T.(A) was very much justified in disallowing US $27,898 and 13059 out of payment made to Mr. E. Frannsen and out of engineering expenses respectively. According to him, since the I.T.O. had made aforesaid disallowances for reasons recorded by him in his assessment order, it was not open to learned C.I.T.(A) to order deletion thereof. However, from perusal of assessment order, it appears that the Income-tax Officer disallowed US $27,896 because according to him, the receipts shown against that amount were US $400 only. But from perusal of the impugned order it appears that the learned C.I.T.(A) has allowed aforesaid amount because that was in proportion to the work done by aforesaid employee in Pakistan as against the total receipt of US $ 66,754 which were pertaining to his work in Qatar and Bahrain also. The learned C.I.T.(A) appears to have reached correct conclusion. Now, as far as learned assessing officer is concerned, he appears to have confused the receipt from Corning as receipt for Corning.
17. As far as deletion of add back made out of engineering services is concerned, the order of the Income-tax Officer again appears to be not sustainable for the simple reason that he has based it on conjectures. It appears that he disallowed US $ 13,059 for the reason the respondent could not have employed the engineers from Belgium and Singapore for small jobs. However, he has neither discussed the nature of the job nor the qualifications of the engineers. There is also nothing on record to show that he called for them but the respondent failed to produce them. On the other hand from perusal of the impugned order, it appears that the claim was supported by audited account books. The order of the learned C.I.T.(A), therefore, appears to be correct and calls for no interference.
18. The upshot of entire discussion is that the departmental appeal is partly allowed and the order of the Income-tax Officer regarding disallowance of depreciation allowance of US $1,900 is hereby restored subject to verification as discussed above in paragraph 15. However, it fails regarding other two deletions.
M.B.A./970/T Appeal partly allowed.