I.T.A. No. 1599/KB of 1995-96, decided on 11th December, 2001 VS I.T.A. No. 1599/KB of 1995-96, decided on 11th December, 2001
2002 P T D (Trib.) 1029
[Income‑tax Appellate Tribunal Pakistan]
Before Inam Ellahi Sheikh, Chairman and Muhammad Ashfaque Baluch, Judicial Member
I.T.A. No. 1599/KB of 1995‑96, decided on /01/.
th
December, 2001. Income Tax Ordinance (XXXI of 1979)‑‑‑
‑‑‑‑S. 24(e)‑‑‑Deductions‑‑‑Admissibility‑‑‑Head Office expenses‑‑ Assessee a non‑resident company ‑‑‑Assessee claimed Head Office expenses in the computation chart and not in the profit and loss account‑ Admissibility ‑‑‑Assessee was not entitled to claim Head Office expenses as the same had not been shown as an expenditure in its own books of account and the Assessing Officer was not justified to allow any part of such expenses‑‑‑Income of the assessee was enhanced by disallowing the Head Office expenses in toto by the Tribunal.
Abdul Khaliq Khatri for Appellant.
Fahimul Haque, D.R. for Respondent.
Date of hearing: 11th December, 2001.
ORDER
INAM ELLAHI SHEIKH (CHAIRMAN).‑‑‑This is the further appeal of a non‑resident company directed against an order, .dated 12‑12‑1995 recorded by the learned Commissioner of Income‑tax (Appeals), Zone‑IV, Karachi to agitate various add backs in the profit and loss expenses.
2. The relevant facts in brief are that while making the assessment of this assessee the Assessing Officer made various disallowances in the profits and loss expenses including those under the heads telephone expen5Es, miscellaneous expenses, travelling expenses and excess perquisites. The assessee had claimed Head Office expenses at Rs.538,908 in. the computation chart, although such Head Office expenses had not been charged in the profits and loss account of the assessee. The ‑Assessing Officer allowed such expense at Rs.481,053. Telephone expenses were curtailed by 1/5th of the claim whereas miscellaneous expenses and travelling expenses were curtailed by 25 %. Addition of Rs.66,104 was made on account of excess perquisites. The learned Commissioner of Income‑tax (Appeals) confirmed all the aforementioned add backs against which the assessee is in appeal.
3. The parties have been heard and the relevant orders perused. Considering the departmental practice the addition in the telephone expenses is directed to be fixed at 15% of the claim. Miscellaneous expenses have been claimed at Rs.11,066 which is not a significant amount to warrant any addition. Last year the assessee had shown this expenses at Rs.52,639. Hence the addition in this account is deleted. In the travelling expenses, the assessee has shown an expenditure of Rs.20,012 as against the expenditure at Rs. 200,000 in the preceding year. Considering this situation the addition in travelling expenses is also deleted. On the issue of excess perquisites the assessee could not make out a case to invite any interference.
4. On the issue of the Head Office expenses we find that the Assessing Officer has not charged this expense in the profit and loss account. The learned Commissioner of Income‑tax (Appeals) has confirmed the add backs in the following manner:‑‑
"It has been argued that the Head Office expenses should have been allowed as the Article XVII of Double Tax Avoidance Treaty applies to the case. The contention has been found to be misconceived as the Double Taxation Agreement does not at all apply to non‑resident Companies who have their permanent establishment in Pakistan, Moreover, the appellant has himself offered the income earned in Pakistan, to tax. The Bilateral Tax Treaty allows exemption from tax on reciprocal basis whereas in the present case, the claim of exemption is not question/ consideration. It is observed that the Assessing Officer has in fact made no disallowance at all. The claim made by the appellant on account of incorrect calculation taking into account the turnover inclusive of other income, has been restricted by the Assessing Officer to the extent as the business receipts of the appellant bears to the receipts on world basis. The Head Office expenses are, therefore, correctly allowed by the Assessing Officer. No interference is called for:
5. As already mentioned, the assessee has not itself charged the Head Office expenses in its own accounts including profit and loss account. In view 'of this situation it was felt by the Bench that this expenses could not be held to be admissible at all and it has wrongly been allowed by the Assessing Officer to the extent to Rs.487,053. Hence a notice for enhancement was given to the assessee on 8‑12‑2001 and the learned AR of the assessee sought adjournment in response to such notice and to substantiate the appeal. The adjournment was allowed till 11‑12‑2001 and the learned AR of the assessee has argued his case to substantiate the claim of expense. As per the learned AR of the assessee the amount to be allowed in respect of Head Office expenses is prescribed in the provisions of .section 24(i) of the Income Tax Ordinance, 1979 (hereinafter called the 1979, Ordinance) and than there is not requirement that such amount must be charged in assessee's own account as an expense. However, this argument of the learned AR of the assessee was not found to be convincing and the learned AR of the assessee further relied on a decision of the Tribunal, dated 27‑10‑1971 recorded in ITA No. 227 etc. of 1971‑72. In this decision, dated 27‑10‑1971 a Division Bench of the Tribunal has given a clear finding on this issue in the following manner:‑‑
"We equally, find no merit in the Income‑tax Officer's objection against the non‑debiting of the expenses to the accounts of the Pakistan branch. The allocation of the expenses of Pakistan, as certified by the United Kingdom Auditors, has properly to be allowed in the determination of the real income in Pakistan. This also finds support from our decision in the cases earlier referred to. In the facts and circumstances of the case, therefore, we direct the Income‑tax Officer to allow the assessee's claim of the expenses in all the years. in appeal."
6.This decision of the Tribunal, dated 27‑10‑197‑1 has already been considered by us in the case of another non‑resident assessee while deciding the departmental appeal bearing ITA No.443/KB of 2000‑2001, dated 5‑10‑2001. In that appeal of a non‑resident Bank the same question arose and the same case‑law was perused. It would be useful to reproduce the relevant part of the Tribunal order, dated 5‑10‑2001 recorded in ITA N6.443/KB of 2000‑2001. A copy of the order, has been submitted by the learned AR of the assessee in the present case.
"We have considered the submissions of both the parties. The reliance‑ of the assessee on the provisions of subsection (2) of section 12 of the 1979 Ordinance is found to be misplaced. This provision does not permit the allowance of an expense not charged in the books of account. In the decision of the Tribunal relied upon by the learned counsel, a Division. Bench has already allowed Head Office expenses even if the same has not, been charged in the books of account. However, no specific provisions of the law have been stated in such order of the Tribunal. Even otherwise that order vas under the repealed Income‑tax Act, 1992 and the learned counsel has not established that the provisions of the law has been continued under the new law. It is not understandable as to how such expenses has not been charged in the books of account of the branch. In the absence of such entries in the books of account of branch as well as the Head Office, a double relief may be allowed in the tax proceeding of the two countries in respect of same expenditure. If the assessee is not prepared to treat this as an expense of the branch in its own books of account; under which provisions of the law the department can allow this expense? Although we may not agreed with the reason of the Assessing Officer to disallow this claim, we uphold the disallowance for the reason mentioned above."
7. Now we would like to consider the submissions of the learned AR of the assessee that there was no requirement in the law to charge the expenditure in assessee's own account as per section 24(e) of the 1979 Ordinance. It would be useful to reproduce the relevant part of section 34(e) of the 1979, Ordinance, which reads as follows:‑‑
"24. Deductions not admissible. ‑‑‑Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of---
(a) ..
(b) ..
(c) ..
(d) ..
(e) 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."
8. As is apparent from the wording of section 24, the same lays down restriction and limitation on the admissibility of expenses and it does not lay down the admissibility itself. Section 23 of the 1979, Ordinance lays down that "in computing the income under the head `Income from business or profession', the following allowances and deductions shall be made". The provisions of section 23 of the 1979, Ordinance laid down the expenditure or disallowance, which have to be allowed, and we do not find any mention of Head Office expenses therein. The provision to charge the income from business or profession to tax is curtailed in section 22 of the 1979 Ordinance and the relevant part thereof reads as follows:‑‑
"22. Income from business or profession.‑‑The following incomes shall be chargeable under the head `Income from business or profession', namely".
(a) profits and gains of any business or profession carried on or deemed to be carried on, by the assessee at any time during the income year.
9. The question arises as to how the profit and gain of a business ought to be ascertained for computing the income from business or profession to be charged to tax. In our considered view the source of this information is the assessee's own accounts, especially the profit and loss account. A perusal of the assessment order shows that the Assessing Officer has started from the figure of profit before making various additions and adjustment. Although the assessee has not produced before us the computation of income produced by it with the return, the assessment order itself shows that the assessee has claimed Head Office expenditure in the computation chart and not in the profit and loss account. Thus, we do not find any sanctity to the proposal that the expense may be claimed or allowed generally without being charged in profit and loss account of the Company by the assessee itself. We fail to appreciate as to why the assessee is shy to book this expenditure in its own account of the branch. We have also perused the contents of rule 20 of the Income‑tax Rules covering the admissibility of Head Office expenses and we do not find anything to support the contention of the assessee with regard to the admissibility of this expense without being charged in the profit and loss account.
10. Thus we are convinced that the assessee is not entitled to claim of Head Office expenses in this case as the same has not been shown as an expenditure in its own books of account and the Assessing Officer was not justified to allow any part of such expenditure. Hence the claim of the assessee in this account is totally disallowed and the Assessing Officer is directed to recompute the income considering the findings in this order. No other ground was pressed. The appeal succeeds to the extent that certain add backs in the profit and loss expenses have been deleted whereas the income has been enhanced by disallowing the Head Office expenses in toto.
C.M.A./M.A.K./218/Tax (Trib.) Order accordingly.