Messrs CALTEX OIL (PAK.) LIMITED through Nuruddin Damani VS COMMISSIONER OF INCOME TAX, COMPANIES II, KARACHI, 2006 PTD-KARACHI-HIGH-COURT-SINDH 2378 (2002)

Income Tax Ordinance (XXXI of 1979)---

----Ss. 9, 24 & 136---Income Tax Rules, 1982, R.20---Assessment---Charge of Income Tax---Reference to High Court--Wader charging S.9 of Income Tax Ordinance, 1979, the law in vogue in the assessment year would govern the assessment, notwithstanding the ending of the income year---Income of previous year was assessable in subsequent assessment year---Assessment was to be made in accordance with the law in force at the beginning of assessment year in respect of income years preceding to the said assessment year---Petitioner/assessee's income year, in the present case, ended on 31-12-1981 thus assessment year would be 1982-83 i.e. from 1-7-1982 to 30-6-1983--Rule 20 of Income Tax Rules, 1982, in circumstances had not been applied retrospectively--Income Tax Appellate Tribunal in circumstances, had rightly rejected reference application under S. 136(1) of Income Tax Ordinance, 1979, to which no exception could be taken.

CIT v. Isthmian 20 ITR 572; Jayakumari v. CIT 165 ITR 792; Maharajah of Pithapuram v. CIT 13 ITR 221; Government of West Pakistan v. Nasir M. Khan PLD 1965 SC 106; Faizullah Khan v. Government of Pakistan PLD 1974 SC 291; Income Tax Officer, Alleppey v. M.C. Ponnoose and Income Tax Officer, Alleppey v. Excel Productions (1970) 75 ITR 174 SC; Rehmatullah v. Province of Punjab PLD 1978 Lah. 207; Sanghal Sugar Mills Ltd. v. Federation of Pakistan1991 CLC 456; Pakistan WAPDA v. Shamim Kamal 1998 SCMR 2571 = 1998 PLC (C.S.) 1306; Anis Ahmed v. Government of Pakistan PLD 1979 Kar. 709; Muhammad Bashir Butt v. Taheri PLD 1980 Kar. 458; Collector of Customs and Central Excise v. Rais Khan Ltd. 1996 SCMR 83; Commissioner of Sales Tax v. Kruddsons Ltd. PLD 1974 SC 180 and Ittefaq Foundaries v. Deputy Collector of Customs, Dry Port, Lahore 1988 MLD 2272 ref.

Abdul Ghaffar Khan for Applicant.

Nasarullah Awan for Respondent.

ORDER

In this reference application under section 136(2) of the Income Tax Ordinance, 1979, (for short the Ordinance, 1979) the applicant, a non-resident corporation, engaged in the business of the distribution of Oil in Pakistan, has raised the following law points pertaining to the assessment year 1982-83:

??????????? "(a) Whether on the facts and circumstances of the case the learned Income Tax ?????????? Appellate Tribunal was justified in holding that the Rule 20 of the Income Tax ?? Rules, 1982 read with section 24(e). of the Income Tax Ordinance, 1979 is ??????????? applicable for the assessment year 1982-83?

??????????? (b) Whether the Income Tax Rules, 1982, brought into force on July 1st 1982 ? have retrospective operation and will apply to the income which accrued and the expenditure which was made prior to the framing of these Rules?

??????????? (c) Whether the Income Tax Rules, 1982 being a subordinate delegated legislation ??????? can effect the vested rights of the applicant to claim deduction in accordance with ? the law and practice prevalent at the time when the expenditure was incurred?

??????????? The facts connected with the present application are that during the assessment year 1982-83 for income year ending on 31-12-1981, the Assessing Officer has ???????? followed "head office expense" of Rs.1,257,740 as against claimed in the sum of ??? Rs.3,474,202. Section 24(3) permits the deduction of "Head Office expenses" not ??????? exceeding such limit as may be prescribed. Rule 20 permits the mode of ????? calculation for allowance deduction of "Head Office expenditure" as follows:--

??????????? (a) on amount equal to the average Head Office expenditure; or

??????????? (b) the amount of so much of the expenditure in the nature of 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 allowed only in respect of one of ??????? the aforesaid three assessment years, the amount of the expenditure so allowed."

The applicant aggrieved by the order of assessment filed appeal before Commissioner Income Tax (Appeals) Zone-II, Karachi. The learned Commissioner Income Tax (Appeals) Zone-II, Karachi accepted contention of the applicant that financial year ends on the 31-12-1981, whereas, the provisions of the Rules 1982 were enforced w.e.f. 1-7-1982, therefore, the provisions of rule 20 thereof would not be applicable for the assessment year beginning from 1st July, 1982 whereby the expenses on account of head office are to be restricted. Learned CIT (Appeals) was of the view that the applicant acquired the vested right of the allowance of the related expenses as these were incurred in 1981 and the rule changing the method of claiming such expenses was promulgated in July, 1982 without any retrospective effect. Therefore, disallowed expenses were found not be justified. The addition made by the ITO on this account accordingly was deleted.

The Department filed appeal before the Income Tax Appellate Tribunal, wherein the main ground agitated was that the learned Commissioner of Income Tax (Appeals) Zone-II, Karachi was not justified in deleting the Head Office Expenses on the ground that Rule 20 of the Income Tax Rules has no retrospective effect.

The learned Tribunal concluded that learned CIT appears to have been influenced with the principles relating to the right of appeal without adverting to the proposition that the law relating to assessment is entirely different. Though the subject of the charge is the income of previous year, the law to be applied is that in force in the assessment year unless otherwise stated or implied. Any amendment which is in force at the beginning of relevant assessment year must govern the case though the amendment is made after the income under assessment is earned. The learned Tribunal quoted the following passage from commentary on section 4 (Charging Section) from Law and Practice of Income Tax by Kanga and Palkhivala's, Eight Edition, Volume I page 110:--

??????????? "Though the subject of the charge is the income of the previous year, the law to be ??????? applied is that in force in the assessment year, unless otherwise staled or implied; ????? and any amendment which is in force at the beginning of the relevant assessment ????? year must govern the case though the amendment is made after the income under ????????? assessment is earned. In other words, the Income Tax Act as it stands amended on ??? the 1st April of a financial year must apply to the assessment year for that year."

The above statement of law is based on Judicial Pronouncements in (i) CIT v. Isthmian (20 ITR 572), (ii) Jayakumari v. CIT (165 ITR 792), (iii) Maharajah of Pithapuram v. CIT (13 ITR 221). It was observed by learned Tribunal that it is settled law, that assessment is to be made in accordance with the law as in force at the beginning of assessment year in respect of income year preceding, the said assessment year. After quoting the definition of "Assessment Year" and "Income Year" as defined in section 2(8) and (26) of Income Tax Ordinance, learned Tribunal concluded that notwithstanding the ending of income year on 31-12-1981, the assessment year for the purpose of assessment in the facts and circumstances of the case would be deemed to begin on the 1st day of July, 1982 and the law in force on 1st July, 1982 shall govern the assessment for the income year ending 31st December, 1981.

The learned Income Tax Appellate Tribunal further concluded that the Income Tax Officer rightly resorted to the provisions of Rule 20 for computing admissible Head Office expenses and made addition on the basis thereof, and the learned CIT(A) was not justified in deleting the addition so made and, therefore, the order was and the order of Income Tax Officer was restored and the order of CIT (Appeals)'was set aside.

The applicant through an application under section 136(1) of the Ordinance, 1979 approached the Income Tax Appellate Tribunal for reference to the question of law to the High Court. The question was as follows:--

??????????? "Whether on the facts and circumstances of the case, the learned Income Tax ?? Tribunal was justified in holding the Rule 20 of the Income Tax Rules, 1982 read ??? with section 24(c) of the IncomeTax Ordinance, 1979 is applicable to the ??????????? assessment year of 1982-83?"

The learned Tribunal declined to refer the question proposed on the ground that it is patently clear and there can be no doubt that the finding by the Tribunal is in accordance with the law.

We have heard Mr. Abdul Ghaffar Khan, learned counsel for the applicant and Mr. Nasaraullah Awan, learned counsel for the respondent.

During the hearing, Mr. Nasarullah Awan has maintained that in fact the only question No.(a) is material and rest questions are the ancillary:--

??????????? (a) "Whether in view of the facts and circumstances of the case, the Income Tax ?????????? Appellate Tribunal was correct in making Rule 20 of the Income Tax Rules, 1982 ???????? read with section 24(e) of the Income Tax Ordinance, 1979 applicable to the ????????? assessment year 1982-83?"

??????????? The contention of Mr. Abdul Ghaffar Khan, learned counsel for the applicant, was ??????? that Rule 20 of the Income Tax Rules, 1982 has been given retrospectively though the same came into force on 1st July, 1982 and cannot adversely affect, the ??????? expenditure incurred in the previous year. His further contention was that the ???? notification will be effective from the date mentioned therein and referred the ?????????? following case-law in support of his contention:--

??????????? (i) Government "of West Pakistan v. Nasir M. Khan (PLD 1965 SC 106), (ii) ? Faizullah Khan v. Government of Pakistan (PLD 1974 SC 291), (iii) Income Tax ??????????? Officer, Alleppey v. M.C. Ponnoose and Income Tax Officer, Alleppey v. Excel ???????? Productions (1970) 75 ITR 174 SC, (iv) Rehmatullah v. Province of Punjab (PLD ?????? 1978 Lah. 207), (v) Sanghal Sugar Mills Ltd. v. Federation of Pakistan (1991 ?????? CLC 456) and (iv) Pakistan WAPDA v. Shamim Kamal (1998 SCMR 2571 = ?? 1998 PLC (C.S.) 1306).

??????????? Mr. Abdul Ghaffar Khan further canvassed that the section 165 of the Income Tax ?????? Ordinance, 1979 provides the rule making powers which does not allow, ? expressly or impliedly, the retrospectivity to the rules framed thereunder. He also ???? pointed out that subsection, (4) of section 295 of Indian Income Tax Act, 1961, ?????????? however, is in contract with section 165 of the Ordinance, 1979 which gives the ????? power to frame rules with retrospective effect, thus he contended that power to ?? frame rule with retrospective application is expressly conferred by the Indian ???? Income Tax Act, whereas, Ordinance, 1979 confers no such power and therefore, ??????????? the rules including the Income Tax Rules, 1982 cannot be given retrospective ?????? effect and referred the following cases:--

??????????? (i) Anis Ahmed v. Government of Pakistan (PLD 1979 Kar. 796), (ii) Muhammad ?????? Bashir Butt v. Taheri (PLD 1980 Kar. 458), (iii) Collector of Customs and Central ??????????? Excise v. Rais Khan Ltd. (1996 SCMR 83) and (iv) Commissioner of Sales Tax v. ? Kruddsons Ltd. (PLD 1974 SC 180).

The learned counsel for the applicant further contended that the Rules cannot be made applicable to adversely affect the vested rights acquired by the assesses and any legitimate expectations that applicants might have and referred the case of (i) Collection of Central Excise and Land Customs v. Azizuddin Industries Ltd. (PLD 1970 SC 439) and (ii) Ittefaq Foundaries v. Deputy Collector of Customs, Dry Port, Lahore (1988 MLD 2272). This plea need not detain us long because of the limited scope of the jurisdiction of the Bench under section 136(2) of the Ordinance, 1979.

On the other hand, Mr. Nasarullah Awan, learned counsel for the respondent has submitted that the charging provision in section 9 of the Ordinance, 1979 and under Clause (c) of section 24 any expenditure under Head Office expenditure, claimed by an assessee being non-resident in excess of such limit as may be prescribed is not allowable. He contended that the limit has been prescribed under Rule 20, effective on 1st July, 1982 i.e. on the first day of the assessment year, therefore, the learned Appellate Tribunal was justified in vacating the order of CIT(A) and contended that plea of retrospective of the Rule 20 has no substance. He also maintained that the "Assessment Year" and "Income Year" has been defined in subsections (8) and (26) of section 2 of the Ordinance, 1979. The law in force on 1st July, 1982 governs the assessment for the preceding year.

We have carefully considered the contentions raised by the learned counsel for the parties.

The question is very short whether Income Tax Rules, 1982 in force on 1-7-1982 has been applied retrospectively in the instant case. Under the charging section 9 of the Ordinance, 1979 the law in vogue in the assessment year will govern the assessment notwithstanding the ending of the income year. The income of previous year is assessable in the subsequent assessment year. It is well-settled that the assessment is to be made in accordance with law in force at the beginning of the assessment year in respect of the income years preceding to the said assessment year. In the instant case, the petitioner's income year ends on 31-12-1981 and assessment year would be 1982-83 i.e. from 1-7-1982 to 30-6-1983, therefore, the Rule has not been applied retrospectively.

Learned counsel for the applicant lastly laid stress on the contention that Income Tax Rules, 1982 was enforced on 1st July, 1982 applicable to the assessment year 1982-83 and referred S.R.O. 966(I)/82, dated 27-9-1982, whereby following rules have been made effective from 1-7-1982 instead of 1-7-1983:--

???????????

??????????? (a) rules 3 to 18 relating to valuation of perquisites and allowances;

??????????? (b) rules 34 and 35 regarding issuance of cash memos and retention their copies;

??????????? (c) rule 48 which prescribes the procedure for approval for claiming tax credit for ???????? balancing, modernization, replacement and extension of machinery under section ? 107 of the Income Tax Ordinance, 1979;

??????????? (d) rule 56 which prescribes the form in which certificates of deductions from ??? salaries are to be issued by the employers; and

??????????? (e) rule 197 which prescribes the form in which annual statements of salaries are ?????????? to be submitted by the employers under the provisions of section 139 of the ??? Income Tax Ordinance, 1979.

??????????? (2) The aforesaid rules would, thus be applicable to assessment year 1983-84 and ??????? the assessment years following that year.

No doubt Rules 3 to 18, 34, 35, 48, 56 and Rule 9 were made effective from 1-7-1983 and made applicable to assessment year 1983-84. The plea taken has no legs, the Rule 20 which governs the mode of assessment of "Head Office expenses" was made effective on 1-7-1982.

In the above circumstances, it is held that the learned Income Tax Appellate Tribunal rightly rejected the reference application under section 136(1) of the Ordinance, 1979 to which no exception can be taken. Resultantly, the material question (a) is therefore answered in affirmative. The other questions are not material and need not be answered.

H.B.T./C-20/K??????????????????????????????????????????????????????????????????????????????????? Order accordingly.