(a) Income Tax Rules, 1982‑‑‑

‑‑‑‑R.20‑‑‑Income Tax Ordinance (XXXI of 1979), S.24(e)‑‑‑Assessee a multinational non‑resident Banking Company‑‑ ‑Deduction of Head Office expenditure ‑‑‑Non‑resident assessee‑‑‑Expenditure incurred and expenditure allowed‑‑‑Distinction and .scope‑‑‑Rule 20(1) of Income Tax Rules, 1982, envisaged two situations for deduction: first average Head Office expenditure; and second actual Head. Office expenditure incurred by assessee, whichever was lower‑‑‑Average expenses as defined ‑ in R.20(2) of ‑Income Tax Rules, 1982 would be allowed in first situation, whereas in second situation, expenditure as defined in Expln. to S.24(e) of Income Tax Ordinance, .1979, would be allowed‑‑ Assessing Officer had to make two exercises for ascertaining as to which limit would be allowed to a non‑resident assessee‑‑‑Where actual Head Office expenditure incurred by assessee attributable to his business /profession in Pakistan was lower than average expenses, then actual expenses, would be allowed and for this purpose, the expense incurred in a particular foreign currency would be calculated first and then same would be converted in Pakistan currency for allowing the same under Income Tax Ordinance, 1979‑‑‑Where actual expenditure incurred by assessee was alleged to be higher than the average expenses, then assessee would be allowed average expenses as defined in R.20(2) of Income Tax Rules, 1982 and in such a case, the expenditure incurred in foreign currency would become immaterial as the expenditure was ultimately allowed in terms of Pakistan currency in assessment made under Income Tax Ordinance, 1979.

(b) Income‑tax‑‑‑

‑‑‑‑Currency of a sovereign State‑‑‑Importance‑‑‑Currency is one of attributes of sovereignty‑‑‑Currency of a sovereign State is always to be considered for the purposes of working out‑the taxes to be charged in that State‑‑‑Tax is to be charged and expenditure is to be allowed in terms of Pakistan currency in every assessment made under Income Tax Ordinance, 1979.

(c) Income Tax Rules, 1982‑‑‑

‑‑‑‑R.20‑‑‑Income Tax Ordinance (XXXI of 1979), Ss.24(e) & 136(1)‑‑ Deduction of Head Office expenditure ‑‑‑Assessee a multinational non‑resident Banking company‑‑‑Method of working out average expenditure ‑‑‑Assessee claimed such expenses by working out the average expenditure in U.S. Dollars and then calculated its equivalent in terms of Pakistan currency‑‑‑Assessing Officer did not accept said method, but worked out the same in terms of Pakistan currency‑‑‑First Appellate Authority and. Tribunal upheld the treatment given by Assessing Officer‑ ‑‑Validity‑‑‑Assessee had been allowed such expenses in three preceding years in Pakistan currency‑‑‑Tribunal had rightly concluded that for the purpose of computing the average Head Office expenditure of the company under R.20 of Income Tax Rules, 1982 read with S. 24(e) of Income Tax Ordinance,. 1979, the expenditure allowed for the last three‑ years would be taken in Pakistan currency and not in foreign currency, in which expenditure was incurred‑‑‑High Court answered the question in the affirmative.

Commissioner of Income‑tax v. Premier Bank Ltd. and Messrs, City Bank N.A., Karachi 1999 SCMR 1213 ref.

Fazle Ghani Khan for Applicant..

Jawaid Farooqui for Respondent.

Date of hearing: 7th March, 2002.

JUDGMENT

MUHAMMAD MUJEEBULLAH SIDDIQUI, J.‑‑‑--In this reference under section 136(1) of the Income Tax Ordinance, 1979, at the instance of assessee, the Income‑tax Appellate Tribunal, Karachi Bench, has referred the following questions for our opinion:‑‑‑

"(1) Whether on the facts and circumstances of the case the learned Income‑tax ‑Appellate Tribunal was justified in holding that the penal interest charged by the State Bank for bursting the credit ceiling under section 25 of the Banking Companies Ordinance, 1962 was not admissible as an expense by placing reliance on its own decision reported as 1981 PTD (Trib.) 71 dealing with penalty for violating the provision of legal requirements contained in subsections (4), (5) and (8) of section 36 .of the State Bank of Pakistan Act, 1956?

(2)Whether on the facts and circumstances of the case the learned Income‑tax Appellate Tribunal was justified in holding that for the purpose of computing the average. Head Office expenditure under rule 20 of the Income Tax Rules, 1982 read with section 24(e) of the Income Tax Ordinance, 1979, the expenditure allowed for the last three years, shall be taken in Pak Rupee and. not in the foreign currency in which the expenditure was incurred and converting it into Pak currency at the prevailing rate?"

Heard Mr. Fazle Ghani Khan, learned counsel for the applicant and Mr. Jawaid Farooqui, learned counsel for the respondent.

The learned counsel for the applicant/assessee has candidly conceded that the Question No. 1 already stands decided by the Hon'ble Supreme Court of Pakistan, in the case of Commissioner of Income‑tax v. Premier Bank Ltd. and Messrs Citibank N.A., Karachi 1999 SCMR 1213. Respectfully following the law laid down by the Hon'ble Supreme Court in the above judgment, the Question No. 1 , is answered in affirmative.

So far, the second question is concerned, the relevant facts are that the applicant a non‑resident Banking Company, claimed Head Office expenses which were allowed in accordance with rule 20 of the Income Tax Rules, 1982, as it `stood in the relevant assessment year i.e. 1983‑84. It was provided in the rule 20 of the Income Tax Rules, 1982, that the Head Office expenses equal to average Head Office expenses allowed in the preceding three years were permissible. The applicant claimed the expenses by working out the average in U.S. Dollars and thereafter calculated its equivalent in terms of Pakistan currency. The Assessing Officer, did not accept this method of working out the average in the terms of U.S. Dollars and worked out the same in terms of Pakistan currency. Thus, the assessee as well as Revenue both agreed on the method of working out the admissible, Head Office expenditure, but differred on the point whether the average of preceding three years is to be worked out initially in terms, of U.S. Dollars and then is to be converted into Pak Rupee, at the prevailing rate in the year under assessment or average Head Office expenditure is to be worked out in terms of Pakistan rupees thereby eliminating the process of conversion from U.S. Dollars to. Pakistan rupees.

The applicant, being dissatisfied with the working of average Head Office expenditure in terms of Pakistan rupees preferred first appeal before the C.I.T. (Appeals). The learned C.I.T. (Appeals), did not accept the contention of the applicant and upheld the treatment given by the Assessing Officer.

The applicant still feeling aggrieved preferred second appeal raising the same contention without any success.

The applicant not satisfied with the finding of the Tribunal submitted reference application seeking opinion of this Court.

The case of Revenue is that the Head Office expenditure is to be allowed in terms of rule 20 of the Income Tax Rules, 1982, according to which Head Office expenditure means; 1 /3rd of the aggregate amount of expenditure which 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 year. The Assessing Officer, has worked out the admissible Head Office expenditure in terms of the above rule. In the three preceding years, the Head Office expenditure was allowed in terms of Pakistani rupee, therefore, the average Head Office expenditure was correctly worked out accordingly by the Assessing Officer.

On the them hand, the case of applicant/assessee is that the Head Office of the applicant Company is situated in United States and the expenses have been incurred in dollars, therefore, the Head Office expenses should be worked out in first instance in the U.S. Dollars and thereafter it should be converted into Pakistan Rupees.

Before we embark on considering the respective contentions of the parties, it would be appropriate to reproduce rule 20 of the Income Tax Rules, 1982 (as it stood in the assessment year 1983‑84). which reads as follows:‑‑‑

Deduction of Head Office expenditure in 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 se 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 in the average Head Office 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 year, 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 al‑lowed only in respect of one of the aforesaid three assessment yea is, the amount of the expenditure so allowed: '

Provided that where any one 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 prorated."

The above rule was made for working out the limit of Head Office expenditure referred to in section 24(e) of the Income Tax Ordinance, 1979, which reads as follows:‑‑‑

"S.24. Deduction not admissible. ‑‑‑Nothing contained in section 23 shall be so construed as to authorise the allowance or deduction of-----

(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.

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 business or profession;

(c)any travelling by such employee for the purposes of business or

(d)such other matters connected with executive and general administration as may be prescribed."

A perusal of the above section shows that it provides a limit which is to be applied on account of expenditure in the nature of Head Office expenditure in case of non‑resident assessee. The Explanation to section 24(e) has defined the Head Office expenditure. Rule 20, sub rule (1) envisages two situations, the first being the average Head Office expenditure and the other being the actual Head Office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in Pakistan, whichever is lower. Thus, in the first eventuality the average Head Office expenditure is to be allowed which is defined in sub‑rule (2) of Rule 20. In the second situation Head Office expenditure is to be allowed which is defined in Explanation to section 24(e) of the Income Tax Ordinance. In order to ascertain as to which limit is to be allowed to a particular non‑resident assessee the Assessing Officer is supposed to make two exercises, first, of computing the actual expenditure incurred by the assessee in the nature of Head Office expenditure and secondly to work out the average Head Office expenditure in the manner provided in sub‑rule (2) of rule 20. It the actual Head Office expenditure incurred by assessee attributable to his business or profession in Pakistan is lower than the average Head Office expenditure then only the contention raised on behalf of the applicant/ assessee becomes relevant and material. The reason being that in that case the actual Head Office expenditure incurred is to be allowed. For this purpose the expenditure incurred in a particular currency is to be calculated first, and then it is to be converted in Pakistani rupee for allowing the same in accordance with the Income Tax Ordinance, 1979. A non‑resident international company may incur expenses in the nature of Head Office expenditure attributable to its business in Pakistan in various currencies. For example, Dollar, Mark, Yen, Frank, Sterling,' Pound, etc. and in such situation first the expenses incurred in each currency is to be calculated separately and then it is to be converted in Pakistani rupee and finally added together for working out the admissible Head Office expenditure. However, if the actual Head Office expenditure incurred by an assessee is alleged to be higher than the average Head Office expenditure then all these questions become immaterial as the Assessing Officer is not supposed to work out the actual expenditure incurred but has to allow the average Head Office expenditure as defined ‑in sub‑rule (2) of rule 20 of the Income Tax Rules, 1982, which means 1/3rd of the aggregate amount of expenditure allowed in respect of the said years relevant to each of the three assessment years immediately preceding the relevant assessment year. In this situation the relevant consideration would not be the actual expenditure incurred in the nature of Head Office expenditure but the expenditure allowed (emphasis provided by us) in the three preceding assessment years. In applying this method an expenditure incurred in Dollar or any other foreign currency would become immaterial because the expenditure is ultimately allowed in terms of rupees to the assessment made under the 'Income Tax A Ordinance, 1979. The currency is one of the attributes of a sovereignty of a sovereign State and, therefore, in every assessment made under the Income Tax Ordinance, 1979 the expenditure is to be allowed in terms of Pakistani Rupee and the tax is also be charged' in terms of the Pakistan Rupee. It is admitted position that in the three immediately preceding assessment years the Head Office expenditure has been allowed to the respondent in rupees.

In addition to the above reason, we are further of the opinion that the Assessing Officer would not be able to work out the average Head Office expenditure on the basis of actual expenditure incurred, firstly because the respondent is multi‑national, non‑resident company having branches in several countries of the world. The expenditure in the nature of Head Office expenditure means executive and general administration expenditure incurred by the assessee outside Pakistan for the purpose ‑of business or profession, according to the definition of terms in clause (e) of section 24 and, therefore, the expenditure outside Pakistan may be in several currencies the details of which have not been supplied by the applicant to the Assessing Officer. It may be argued that since the Head Office is situated in United States, therefore, the expenditure is claimed in terms of dollars. However, it would not be the end of matter because the Head Office expenditure is not restricted to, the Head Office only, but it spreads to every executive and general administration expenditure incurred by the assessee outside Pakistan for the purposes of business or profession attributable to its business in Pakistan and, therefore, the expenditure may be in various currencies, Thus, if the expenditure is to be worked out by, converting various expenditures in various currencies, in one currency, then there is no reason fox converting the same in terms of dollars instead of converting it in. terms of Pakistan rupee as the expenditure is being worked out for the purposes of taxation in Pakistan, in accordance with the Pakistan statute. The right to impose tax is one of the attributes of sovereignty and, therefore, the, currency of a sovereign State is always to be D considered for the purposes of working out the taxes to be charged in the said State.

On a careful reading of section 24(e) of the Income Tax Ordinance, 1979 and rule 20 of the Income Tax Rules, 1982, we further find that, two teems have been used, to wit, "head office expenditure" and "average Head Office expenditure", therefore, both the‑terms have to be given their distinctive connotations. The question of considering E the actual expenditure in a foreign currency would be relevant only if the Head Office expenditure is allowed under para. (b), sub‑rule (1) of rule 20. However, if average Head Office expenditure is to be allowed under para. (a) of sub-rule (1) of rule 20 then the only material consideration for the purposes of working out the Head Office expenditure in terms of sub‑rule (2) of rule 20 would be the expenditure `allowed' in the three assessment years immediately preceding the relevant assessment years. The distinction between "expenditure incurred" and "expenditure allowed" is pertinent and is always to be kept in view. Whatever amount is incurred, is reflected in the accounts of an assessee; it may be in terms of Pak rupees or any other currency. However, when assessment is made by Assessing Officer, he allows expenditure in Pak Rupees. The assessee incurs and claims .an expenditure; while the Assessing Officer, allows or disallows the expenditure. Rule 20 of the Income Tax Rules, 1982, which provides ceiling on Head Office expenses, says that the expenditure is to be restricted to the moving average of earlier years; and the moving average has to be calculated with the help of Head Office expenses allowed in the earlier years. The word used in the rule is "allowed". In every assessment made under the Income Tax Ordinance, 1979, the expenses are always allowed in terms of rupees. They are never allowed in terms of foreign currency; though foreign currency disbursements are taken into consideration for calculating the expenditure to be allowed in rupees.

For the foregoing reasons, it is held that the Income‑tax Appellate Tribunal has rightly concluded that for the purpose of computing the average Head Office expenditure, under rule 20 read with section 24(e) of the Income Tax Ordinance, 1979, the expenditure allowed for the last three years shall be taken in Pak rupees and not in foreign currency, in which the expenditure was incurred. The question No.2, is also answered in affirmative.

A copy of this judgment shall be sent under the seal of this Court and signature of the Registrar, to the Registrar, Income‑tax Appellate Tribunal Mom wft4mr

S.A.K./M.A.K./C‑47/KOrder accordingly.