(a) Income-tax---

----Revenue income ---Assessee, a Banking Company, making investment in Government securities to meet liquidity requirements prescribed by the State Bank of Pakistan for earning interest and keeping the Securities as stock-in-trade--- Investment of assessee, in circumstances, was part of his business of banking and could not be separated from the said business---Income of assessee from such securities, therefore, was taxable.

Messrs Citi Bank v. C.I.T. ITR 26 of 1985; 1991 PTD 687; 1985 PTD 329 Messrs Grindlays Bank v. CIT (1985) 51 Tax 102 distinguished.

ITA No.1361/KB of 1985-86; ITA No.83/KB of 1991-92; Punjab Cooperative Bank v. C.I.T. (1940) 10 ITR 635 and Californita Copper Syndicate v. Harris 5 Tax Cas. 159 ref.

(b) Income Tax Rules, 1982---

----R. 20---Convention for the Avoidance of Double Taxation between Pakistan and United States of America, Art.XVII---Rule 20, Income Tax Rules, 1982 is not contrary to the provisions of Art.XVII of the Convention for the Avoidance of Double Taxation between Pakistan and United States of America.

12th Edn., p.54 published by Tripathi by Maxwell ref.

(c) Interpretation of statutes--

--- International Conventions---Use in an International Convention of words different from those employed in the corresponding domestic legislation does not give rise to any presumption that a different meaning was intended, for such Conventions do not employ the terms of art of the municipal law of any single country.

12th Edn., 0.54 published by Tripathi by Maxwell ref.

(d) Income-tax---

----Non-resident---Allowances laid down in the statute of a country will have to be computed in the currency of the same country.

E.U. Khawaja for Appellant. Ilyas Shaikh, D.R. for Respondent.

Date of hearing: 12th September, 1994.

ORDER

ABDUL MALIK (ACCOUNTANT MEMBER).--In this case the assessee is in appeal against order of the CIT(A) on a number of issues which are discussed below.

2. The assessee is a non-resident banking company, engaged in the business of ordinary banking. It is an U.S. Corporation.

CAPITAL GAINS ON SECURITIES:

3. Ground at No.2 has been preferred to assert that the I.T.O. was not justified in treating income from sale of investments as revenue income instead of capital gains. The arguments of the learned A.R. were that the assessee has invested sums in the purchase of Government securities like Treasury Bills in order to meet reserve requirements of the State Bank of Pakistan. According to him 35% of the total time deposits was the requirement which the assessee had to meet. Out of this 30% was to be kept in approved securities, out of which treasury bills is one security and 5% have to be kept in the form of cash with State Bank. The learned A.R. further stated that Government gives 6% profits on these securities. It is not a profitable investment but has to be made due to the margin requirements. Accordingly he claimed that it is of the nature of capital investment and profits on these securities is of the nature of capital gains. On the other hand the learned CIT(A) dealing with the arguments of the assessee had held that profit on sale securities at Rs.14,706,153 was ordinary profits. The learned counsel has raised the issue of this matter being subject of litigation before us as well as the Honourable High Court. The C.I.T. (A) having agreed with the I.T.O. held the profits taxable.

4. The learned A.R. contended before us that a judgment has been recently given at I.T.R. 26 of 1985 M/s. Citi Bank v. C.I.T. This is an unreported judgment and he drew our attention to question No.2 which was as follows:

"Whether on the facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the applicant was liable to tax on income on sale/realisation of securities including treasury bills"?

The direction of their Lordships was as follows:

"The questions Nos.l and 2 in ITR No. 26 of 1985 have already been decided in the negative in the decision contained in case reported as 1991 PTD 687 and (1985) 51 Tax 102 respectively. We have gone through those judgments and find no reason to add anything to the conclusions reached therein and we answer the reference on these two questions accordingly."

From-the above it is apparent that their Lordships have answered the question in terms of a reported judgment which was of M/s. Grindlays Bank v. CIT (1985) 51 Tax 102 (H.C. Kar). The headnotes of the case are as follows:

"Loss ---Assessee-company carried on banking business in Pakistan-- Loss suffered on redemption of Government loans ---Assessee's failure to show that securities were held as stock-in-trade---Whether Tribunal justified in holding that the securities were held by way of investment---Held yes---Whether Tribunal's finding on fact---Held yes---Whether a capital loss and not deductible from profit---Held yes.

The finding recorded by their Lordships was:--

"From the material on record, it is clear that the Tribunal had proceeded on the basis that the securities were held by way of investment. We are of the opinion that the above conclusion of the Tribunal on the facts and in the circumstances of the case, has got to be sustained. We are of the view that, it was for the Tribunal to gave its decision on facts."

5. From the quotations noted above it is easily ascertainable that the question before their Lordships in the cited case was; "whether the securities in question were stock-in-trade or not"? The issue was decided on the facts of that case as a question of fact. In the present case the argument being taken by the learned A.R. is quite different. His assertion is that since he has to make investment in certain types of securities which are not a commercially viable investment, therefore, this investment is of the nature of capital and profits therefrom are capital gains.

6. The question dealt with in the cited authority by the learned A.R. is completely different. Now here the question is, whether the assessee will be able to carry on his business of banking without meeting margin requirements and abiding by the rules of the State Bank of Pakistan. If he cannot carry on his business of banking in absence of margin requirement then the investment is part of the business of banking. The wisdom of making these investments could be financial prudence of the banking business required of all of them by the controlling authority. For example, if there is a rush on the bank for some reason the bank might easily encash these securities and pay to its creditors and depositors. Therefore, to assert that the bank could make entire investment in most lucrative ventures is not in keeping with the banking practice. Banks arrange their investments in a manner that they invest part of their capital in easily encashable securities even at lower rate of profit and part in loss liquid but more profitable investments.

7. Another Bench of this Tribunal in their Order vide ITA No.1361/KB of 1985-86 ... ... ... ... ... ....ITA No.83/KB of 1991-92 dated 11-4-1994 held that their Lordships of the High Court referred to the case of Punjab Cooperative Bank v. C.I.T. reported as (1940) 10 ITR 635. This case was also confirmed by the Privy Council. In that case it was held that such securities are stock-in- trade. In the case of M/s. Grindlays Bank reported as (1985) 51 Tax 102 the issue was decided more as a question of fact than of law. A fact can be different in one year and it may be quite different in another year. Investment in Government securities is made to meet liquidity requirements prescribed by the State Bank for earning interest and keeping the securities as stock-in-trade.

8. To quote from Californita Copper Syndicate v. Harris 5 Tax Cases 159 "Where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at the enhanced price is not profit, but it is quite equally established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of the business". As pointed out above, meeting margin requirements is an objective reality of banking business. The assessee under these circumstances cannot claim that he can carry on his business without meeting the requirements. His investment under the circumstance in securities is part of his business of banking. It cannot be separated from the said business. Under these circumstances the action of the I.T.O. and the direction of the CIT(A) on this issue is maintained.

HEAD OFFICE EXPENSES: RS.1,349,779

9. Grounds Nos.3 and 4 deal with the same issue. The learned A.R. stated that Rule 20 was enacted in year 1982. It places a restriction by prescribing an upper limit on the claim of expenses. This upper limit is to be calculated with reference to average of last three years. The learned A.R. said that the application of this rule is challenged on the following grounds:

(a) Restriction is contrary to the US-Pak treaty.

(b) Even if the rule was to apply the ratio prescribed in the rule should be calculated in US Dollars.

The observation of the learned CIT(A) was that the assessee challenged before him Rule 20 saying that it is contrary to provisions of Articles XVII of the Tax Treaty between Pakistan and U.S.A. This Article stipulates that in determination of income of a U.S. enterprise there will be no discrimination between a U.S. enterprise and a Pakistan resident. According to learned A.R. since no such restriction applies to a Pakistan resident the application of Rule 20 is contrary to the provisions of the treaty. The CIT(A) relying upon decision of his predecessor did not accept this position. In another case decided by D.R. of this Tribunal dealt with similar arguments and noted the provisions as follows:-----

(1) The citizens or nationals of one of the contracting States shall not, while resident in the other contracting State, be subjected in such other State to taxes or any requirements connected therewith which is either higher or more burdensome than the taxes and connected requirements to which the citizens or nationals of such other State resident therein are or may be subjected.

(2) The term "citizens" or "nationals" as used in this Article includes all legal persons, partnerships and associations and deriving their status from, or created or organized under the laws, in force in the respective contracting States.

(3) Nothing contained in this Article shall be construed--

(a) as obliging either of the contracting States to grant to persons not resident in its territory those personal allowances, reliefs and reductions for tax purposes which are by law available only to persons who are so resident;

(b) as affecting any provisions of the law of Pakistan regarding the imposition of tax on a non-resident or the grant of rebate of tax to Companies fulfilling specified requirements regarding the declaration and payment of dividends, unless those requirements are fulfilled."

After having noted the provisions as above, the said D.B. came to the conclusion that-- .

(a) the tax is not more burdensome than those who are ordinarily resident in Pakistan;

(b) impact of the rule will vary from case to case since the requirement is with reference to expenses claimed by the assessee himself; all that the rule achieves is to relate back the claim to the expenses claimed by the assessee himself and reduce discretionary powers of the Department;

(c) in some cases the rule might adversely affect while in other it would be liberal depending upon the volume of business.

An additional ground raised by the learned A.R. was that subject of taxation are profits and those can only be arrived at after deducting all expenses connected with it. Application of rule 20 will have the effect of subjecting to tax sums which are not profits, and so in violation of the agreement of avoidance. This agreement presumes a definition of profits different from those containing in the Income Tax Ordinance, 1979. It is a settled principle that different meaning cannot be attributed to any expression except those which have been defined in the agreement Maxwell has recorded the following on this issue (the Twelfth Edition, page 54 published by Tripathi):

"The use in an International Convention of words different from those employed in the corresponding domestic legislation does not give rise to any presumption that a different meaning was intended, for International Conventions do not employ the terms of art of the municipal law of any single country."

Under these circumstances the argument of the assessee on this issue is rejected.

10. Claim of the assessee that the ratio of expenses should be calculated in U.S. Dollars and then it should be allowed. It has been held in a number of cases that allowances laid down in the Act of a country will have to be computed in the Currency of the same country. This is well-established principle which has been confirmed in a number of cases reported in various law journals. This argument of the learned A.R. therefore, is rejected and treatment of the authorities below on this issue of Head Office expenses is maintained.

The appeal of the assessee stands disposed of as discussed above.

M.B.A./672/TOrder accordingly.