1993 P T D (Trib.) 1237
[Income Tax Appellate Tribunal Pakistan]
Before Ch. Irshad Ahmad Judicial Member and Mukhtar Ali Khan, Accountant Member
ITAs. Nos. 256, 257 and 258/IB of 1989-90, decided on 06/03/1993.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 23 & 24---Income Tax Rules, 1982, R. 20---Scope and effect of Ss.23 & 24---Deduction of head office expenditure in the case of non-resident-- Combined effect of Ss.23 & 24 is that an assessee being non-resident, deriving income from business or profession shall be entitled to deduct from its receipts the expenditure in the nature of head office expenditure only to the extent which is within the prescribed limits---Words "such limits as may be prescribed" in S.24(2) make the prescription of limits permissive by which the authority authorised to exercise any power has the option either to exercise that power or not---If the Central Board of Revenue does not prescribe any limit of the expenditure in the nature of head office expenditure in the case of a non-resident assessee, S.23 would have unlimited effect---Non-resident assessee is authorised to deduct head office expenditure from its receipts from business or profession and C.B.R. has prescribed the limits of head office expenditure of non-resident assessee in the form of R.20 of the Income-tax Rules, 1982.
Section 23 of the Ordinance enumerates the expenditure which are deductible from the receipts earned by an assessee from business or profession to compute his income. Clause (e) of section 24 of the Ordinance, however, provides that any expenditure in the nature of head office expenditure in the case of a non-resident assessee in excess of such limits as may be prescribed shall not be deducted from the receipts earned from the business or profession. The combined effect of section 23 and clause (e) of section 24 of the Ordinance is that an assessee, being a non-resident, deriving income from business or profession shall be entitled to deduct from its receipts the expenditure in the nature of head office expenditure only to the extent which is within the prescribed limits. The words "such limits as may be prescribed" in clause (2) of section 24 make the prescription of limit permissive. A permissive provision in a statute is that by which the authority authorised to exercise any power has the option either to exercise that power or not. Thus if the C.B.R. does not prescribe any limit of the expenditure in the nature of head office expenditure in the case of a non-resident assessee section 23 of the Ordinance would have unlimited effect. Non-resident assessee is authorised to deduct head office expenditure from its receipts from business or profession. The C.B.R. has prescribed the limits of head office expenditure of non-resident assessee in the form of rule 20 of the Income Tax Rules, 1982.
(b) Income Tax Rules, 1982---
----S. 20---Income Tax Ordinance (XXXI of 1979), S.23---Non-resident assessee who has not been claiming any expenditure in the nature of head office expenditure during any previous three years would be entitled to claim any amount which he can prove that it was attributable to his business or profession in Pakistan to the satisfaction of the tax authorities.
According to rule 20 a son-resident assessee can claim head office expenditure equal to "average head office expenditure" or the amount of so much of the expenditure incurred by the assessee as is attributable to the business or profession of the assessee in Pakistan whichever is lower. The "average head office expenditure" has been defined as the average of the previous three years.
The plain reading of rule 20 leaves the impression that it applies only to such a non-resident assessee who has during any of the previous three years been claiming and allowed head office expenditure. A person who has not been an assessee during any previous year obviously would neither have claimed any expenditure nor had been allowed any such expenditure. In this way rule 20 does not seem to have prescribed any limit for him and such an assessee would be entitled to claim any amount which he can prove that it was attributable to his business or profession in Pakistan to the satisfaction of the tax authorities.
Same will thus be the case of non-resident assessee who has not been claiming any expenditure in the nature of head office expenditure during any previous three years.
(c) Interpretation of statutes---
---- Non obstante clause---Effect---Where a provision starts with non obstante clause nothing from the remaining parts of the statute is to be read into it.
(d) Income Tax Ordinance (XXXI of 1979)---
----Fifth Schedule, Part I, R.2(6) & Ss.26, 35 & 38---Assessee, a non-resident company, among other sources, deriving income from exploration of oil as a member of joint venture in Pakistan ---Assessee was not entitled to carry forward any loss which related to a period more than six years, whatever the nature of loss whether operational or depreciation.
Computation of profit and gain from exploration and production of petroleum is regulated quite distinctly from profit and gain from other business or profession. Profit and gain from exploration and production of petroleum is computed under section 26 of the Ordinance which begins with non obstante clause and where a provision starts with non obstante clause nothing from the remaining parts of the statute is to be read into it.
Although sections 35 and 38 of the Ordinance have been applied by reference to an assessee engaged in the exploration and production of petroleum but the words "so however that no portion of such excess shall be carried forward for more than six years" suffixing the sub-rule appear to emphasise that the general provision regarding carrying forward of depreciation shall not be applicable. From the language in which the prohibition against the carrying forward of losses for a period more than six years as provided in sub-rule (6) has been couched it overrides the general provisions contained in subsection (6) of section 38 of the Ordinance.
The assessee is not entitled to carry forward any loss which relates to a period more than six years whatever the nature of loss whether operational or depreciation.
(e) Interpretation of Statutes...
----Permissive provision---Construction, meaning and import.
Mansoor Ahmad, LA. and Mrs. Zareen Saleem Ansari, D.R. for Appellant.
Naseem Zafar, I.T.P. for Respondent.
Date of hearing: 6th March 1993.
ORDER
CH. IRSHAD AHMAD (JUDICIAL MEMBER): --The assessee, a non-resident private limited company, among other sources, derives income from the exploration of oil as a member of joint venture in Pakistan. The assessee's returns of income for the assessment years 1986-87, 1987-88 and 1988-89 included deductions on account of head office expenditure and setting off of losses. The losses sought to be set-off including depreciation relating to the period which was earlier than six years counted from the assessment year. The assessee had not claimed any head office expenditure during any of the three previous years. The assessing officer relying upon rule 20 of the Income Tax Rules, 1982, disallowed head office expenditure and also relying upon sub-rule (6) of rule 2 of Part I of the Fifth Schedule to the Income Tax Ordinance, 1979, disallowed the setting-off the loss which pertained to the period earlier than six years even that part of the loss which consisted of depreciation. On appeal by the assessee, the CIT(A) held that rule 20 ibid was not applicable to the case of the assessee who had not claimed any head office expenditure during any of the previous three years because the rule was applicable only to such an assessee who had claimed and been allowed any head office expenditure during any of the previous three years. The CIT(A) observed that rule 20 was defective as it did not carry out the object of the law so far as the new assessees were concerned. The CIT(A) accordingly allowed the assessee claimed head office expenditure for the assessment year 1986-87 which amounted to Rs.24,07,989. According to the CIT(A) the assessee was entitled to claim head office expenditure for the remaining two years on the basis of the allowance given for the assessment year 1986-87 as provided for by rule 20 ibid. He, therefore, ordered accordingly. The CIT(A) also allowed setting-off the depreciation element of the losses even if it pertained to the period earlier than six years for the assessment year. The CIT(A) was of the view that the limitation of those years provided for in sub -rule (6) ibid was not applicable to depreciation.
The ITO through these appeals has objected to the order of the CIT(A) on the following grounds:---
"(1)that the CIT(A), was not justified to allow head office expenses on the ground that rule 20 of the Income Tax Rules, 1982 is defective. The Law and rules have to be interpreted strictly on the language used and one cannot add any meaning to it which is not there.
(2)that the CIT (A), was not justified to allow the unabsorbed depreciation to be carried forward to more than 6 years, because under sub-rule (6) of rule 2 of the Fifth Schedule (Part I), any excess of deductions under section 23 (which also includes depreciation) over the gross receipt cannot be carried forward for more than 6 years."
We have heard Mr. Mansoor Ahmad, Legal Adviser and Mrs. Zareen Saleem Ansari, D.R. for the Income Tax Officer and Mr. Naseem War, ITP, for the assessee.
Head Office expenditure
Section 23 of the Ordinance enumerates the expenditures which are deductible from the receipts earned by an assessee from business or profession to compute his income. Clause (e) of section 24 of the Ordinance, however, provides that any expenditure in the nature of head office expenditure in the case of a non-resident assessee in excess of such limits as may be prescribed shall not be deducted from the receipts earned from the business or profession. The combined effect of section 23 and clause (e) of section 24 of the Ordinance is that an assessee, being a non-resident, deriving income from, business or profession shall be entitled to deduct from its receipts the' expenditure in the nature of head office expenditure only to the extent which is within the prescribed limits. The words "such limits as may be prescribed" in clause (2) of section 24 make the prescription of limits permissive. A ' permissive provision in a statute is that by which the authority authorised to, exercise any power has the option either to exercise that power or not. Thus, if the C.B.R: does not prescribe any limit of the expenditure in the nature of head office in the case of a non-resident assessee section 23 of the Ordinance would have unlimited effect. It is an admitted position that non-resident assessee is authorised to deduct head office expenditure from its receipts from business or profession. The C.B.R. has prescribed the limits of head office expenditure of non-resident assessee in the form of rule 20 of the Income Tax Rules 1982 which at the relevant time read as below:---
"20.Deduction of Head Office expenditure in the case of non-residents.-- (1) In the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head `Income from business or profession' in respect of so much of the expenditure in the nature of Head Office expenditure referred to in clause (e) of section 24 as is in excess of the amount computed as hereunder, namely:---
(a)an amount equal to the average Head Office expenditure: or
(b)the amount of so much of the expenditure incurred by the assessee as is attributable to the business or profession of the assessee in Pakistan, whichever is lower.
(2)For the purpose of sub-rule (1) `average Head Office expenditure' means:---
(a)in a case where any expenditure in the nature of Head Office expenditure has been allowed as a deduction in computing the income of the assessee chargeable under the head `Income from business or profession' in respect of the income years relevant to each of the three assessment years immediately preceding the relevant assessment years, one-third of the aggregate amount of the expenditure so allowed; and
(b)in case where such expenditure has been so allowed only in respect of the two of . the aforesaid three assessment years, one-half of the aggregate amount of the expenditure so allowed; and
(c)in a case where such expenditure has been so allowed only in respect of one the aforesaid three assessment years, the amount of the expenditure so allowed:
Provided that where anyone of the years involved in working the average Head Office expenditure constitutes a period of either more than or less than twelve months, the expenses for that year shall be pre-rated."
According to rule 20 ibid a non-resident assessee can claim head office expenditure equal to "average head office expenditure" or the amount of so much of the expenditure incurred by the assessee as is attributable to the business or profession of the assessee in Pakistan whichever is lower. The "average head office expenditure" has been defined as the average of the previous three years. It appears that the ITO in disallowing the expenditure read the rule as if it provided that if an assessee has not been allowed any head office expenditure during any of the previous three years he cannot claim any head office expenditure because in that case the `average head office expenditure' which would come to zero will be considered lower as compared to the amount of expenditure incurred by the assessee as is attributable to his business or profession in Pakistan. The plain reading of rule 20 ibid leaves the impression that it applies only to such a non-resident assessee who has during any of the previous three years been claiming and allowed head office expenditure. A person who has not been an assessee during any previous year obviously would neither have claimed any expenditure nor had been allowed any such expenditure. In this way rule 20 ibid not seem to have prescribed any limit for him and such an assessee would be entitled to claim any amount which he can prove that it was attributable to his business or profession in Pakistan to the satisfaction of the tax authorities. We are therefore of the view that same will be the case of non-resident assessee who has not been claiming any expenditure in the nature of head office expenditure during any previous three years. It is an admitted position that the assessee has not been claiming any head office expenditure during the assessment years 1980-81 to 1985-86. There are no indication that the assessee had not claimed any head office expenditure during the said years to bypass the limit prescribed by rule 20 ibid. Under these circumstances we are inclined to agree with the submissions of the assessee's A.R. that the assessee had not claimed any head office expenditure during the said period because in view of world over activities of the assessee the expenses attributable to its business or profession in Pakistan was negligible. The assessee's A.R. further contended that since 1987 the assessee has confined its business only in Pakistan and as such it was constrained to claim head office expenditure from the receipts in Pakistan.
Under the circumstances we are of the considered view that the treatment given by the CIT(A) appears to be unexceptionable. His view on the point is therefore confirmed.
Unabsorbed losses on account of depreciation
The learned legal adviser of the Department agreed that in view of the provision of subsection (6) of section 38 of the Ordinance for an ordinary assessee carrying forward of depreciation does not become time-barred on the expiry of six years as envisaged by section 35 of the Ordinance, but he contended that in view of the spec prohibition contained in sub-rule (6) of rule 2 ibid which was specific provision relating to the computation of income of an assessee engaged in exploration of oil any loss including the depreciation cannot be carried forward for a period beyond six years. The learned legal advisor contended that sub-rule (6) of rule 2 is a special provision as against subsection (6) of section 38, which is a general provision and in the case of a conflict between a general provision and a special provision the former must give way to the latter.
It would be worthwhile to state that computation of profits and gain from exploration and production of petroleum is regulated quite distinctly from profit and gain from other business or professions. Profit and gain from exploration and production of petroleum is computed under section 26 of the Ordinance which begins with non obstante clause and where a provision starts with non obstante clause nothing from the remaining parts of the statute is to be read into it. To appreciate whether the general provision regarding carrying forward of depreciation for any previous year for more than six years can be applied to an assessee engaged in the business of exploration and production of petroleum or not, it will be appropriate to take note of the text of sub-rule (6) of rule 2 which reads as follows:---
"(6)If in any year the deduction admissible under section 23 and sub-rules (3) and (4) exceed the gross receipts from the sale of petroleum produced in Pakistan, such excess shall be set-off against other income (not being income from dividends) and carried forward in the manner and subject to the limitation laid down in sections 35 and 38 and the Third Schedule, so however, that no portion of such excess shall be carried forward for more than six years."
It would be seen that although sections 35 and 38 of the Ordinance have been applied by reference to an assessee engaged in the exploration and production of petroleum but the words "so however that no portion of such excess shall be carried forward for more than six years" suffixing the sub-rule appear to emphasise that the general provision regarding carrying forward of depreciation shall not be applicable. From the language in which the prohibition against the carrying forward of losses for a period more than six years as provided in sub-rule (6). ibid has been couched one is constrained to hold that it overrides the general provisions contained in subsection (6) of section 38 of the Ordinance.
Under the circumstances we are of the view that the assessee is not entitled to carry forward any loss, which relates to a period more than six years whatever the nature of loss--whether operational or depreciation. On this point the findings of the CIT(A) are reversed.
The ITO's appeals on the point of head office expenditure are rejected while on the point of carrying forward of depreciation are accepted.
M.BA./2420/TOrder accordingly.