1989 PLP (Trib (PTD)

MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).- This appeal is directed against the older dated 24-10-1984 by the learned C.I.T. (A), Zone-2, Karachi in I.TA. No.CIT/Z-2/805/84. The only grievance agitated by the department is in respect of the direction of learned C.I.T. (A) that the head office expenses of the three years should be taken in U.S. Dollars and after computing the head office expenses in U.S. Dollars the same may be converted into rupees at the rate prevailing in the assessment year 1983-84.

2. Briefly stated the relevant facts are that the assessee (hereinafter referred to as the respondent) is Anon-resident Company who claimed head office expenses at Rs.43, 27,

840. The I.T.O worked out admissible head office expenses under Rule 20 of the Income-tax Rules, 1982, as under: allowed for asstt. year 1980-81 Rs.2904121 1981-82 Rs3298152 1982-83 Rs.2489280 Total Rs.8691553 Average. Rs.2897186 He, therefore, restricted the head office expenses to Rs.28,97,

186. The respondent did not object to the working of admissible head office expenditure but contended before the learned C.I.T. (A) that average head office expenditure should betaken in US Dollars and then converted into rupees at the prevailing rate in the year under dispute. It was further agitated that this average rate should be computed after giving effect to the earlier orders. The contention found favour with the learned C.I.T. (A) and the appeal was allowed in the terms as indicated above. The department felt dissatisfied with the impugned direction and preferred this second appeal before the Tribunal.

3. We have heard Mr. Abdul Razzaq Memon, learned D.R. and Mr. E.U. Khawaja, learned A.R. for the respondent. The learned D.R. has submitted that the head office expenditure is to be allowed in terms of Rule 20 of the Income-tax Rules, 1982 according to which average head office expenditure means 1/3rd of the aggregate amount of expenditure in the nature of head office 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 I.T.O. has worked out the admissible head office expenditure ire terms of the above rule and since in the three preceding years the head office expenditure was allowed into rupees, therefore, the average head office expenditure was correctly worked out by the I.T.O. The learned D.R. has further submitted that the direction of learned C.I.T. (A) is not in consonance with the definition of average head office expenditure given in Rule 2o (2) of the Income-tax Rules, 1982, On the other hand, Mr. E.U. Khawaja, learned counsel for the respondent has contended that since the head office of the respondent company is situated in United States and the expenses have been incurred in Dollars, therefore, the head office expenses should be worked out first in U.S. Dollars and thereafter it should be converted into rupees. Mr.Khawaja has fully supported the impugned order of learned C.I.T. (A).

4. We have given our anxious consideration to the contentions raised by the learned representatives for the parties. We find sufficient force in the contention, of learned D.R. that the average head office expenditure is to be worked out in accordance with Rule 20 of the Income-tax Rules, 1982 which reads as under: "Deduction of Head Office Expenditure in case of non-residents.

(1) In the case of an assessee, being a non-resident, no allowance stall 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 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 known.

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 year, 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: Provided that where any one of the years involved m 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 has been 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 authorize 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 (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 traveling by such employee for the purposes of business or profession; and (d) such other matters connected with executive and general administration as may be prescribed.

5. 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 a 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. If 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 by the learned representative for the respondent 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 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 in the assessment made under the Income-tax 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 Pakistan rupee and the tax is also to 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 reason stated above we are of the opinion that in the facts and circumstances of the case the Income Tax 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 an international 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 term 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 respondent 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 but 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. In fact Mr. E.U. Khawaja has conceded during the course of arguments that the respondent has incurred expenses in, currencies other than U.S. Dollars as respondent is importing oil in Pakistan mainly from Iran and other Gulf countries. However, he has maintained that since head office of respondent is situated in U.S.A., therefore, expenses are calculated in head office in terms of U.S. Dollars. This contention is of no help to the respondent because if the expenditure is to be worked out by converting the various expenditures in various currencies, in one currency then there is no reason for converting the same in terms of dollars instead of converting 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 working of average head office expenditure of non-resident international company in terms of the actual expenditure m various currencies is further fraught with practical difficulties. It may he demonstrated in the following example: Dollar Pound Mark 1980 50 20 10 1981 10 15 40 1982 2 5 50 62 40 100

6. In the above situation when expenditure is shown in different currencies the average head office expenditure cannot be worked out m accordance with the sub-rule (2) of Rule 20 until and unless the expenditures in various currencies are converted in one currency. Thus, to any case for the purposes of working out the average head office expenditure the actual expenditure is to be converted in one currency and if it is so then there. is no reason to convert it in the terms of dollar while making assessment under the Pakistan law instead of converting it into Pakistan rupee. The right to impose tax is one of the attributes of sovereignty and, therefore, the currency of a sovereign State is always to be considered for the purposes of working out the taxes to be charged. The last contention of Mr. E.U. Khawaja is that adherence to Rule 20 of Income-tax Rules, 1982 is causing great inconvenience and hardship to the respondent as its volume of business, turnover and income is increasing while the head office expenditure being allowed by-the department is proportionately decreasing from year to year. He has proceeded on to argue that since value of Pak rupee is decreasing, therefore, allowing of average head office expenditure on the basis of average head office expenditure allowed in immediately three preceding years in terms of Pak rupee instead of U.S. Dollars will be an addition to the hardship already being faced by the respondent.

7. We are not impressed with the contention because the considerations of hardship or inconvenience do not weigh with the Courts while interpreting statutes. Reliance in this behalf is placed on the ruling reported in P L D 1985 Quetta

29. While interpreting a statute the Courts are supposed to presume that legislature has considered all the implications arising out of a particular provision. The legislature cannot be imputed oblivion to the consideration of hardship m execution of law enacted by it. It is within the competence of Legislature to consider the question of hardship, if any. The duty of Courts is to interpret and implement the law as it is and not to enforce the same as it ought to be any such attempt would amount to transgressing the limits and entering into the legislative activity which is manifestly against the principles of interpretation of statutes and beyond the jurisdiction vested Courts. The contention of hardship rose by Mr. E.U. Khawaja is therefore, repelled. 7-A. On careful reading of section 24 (e) of the Income-tax Ordinance, 1979 and Rule 20 of the Income-tax Rules, 1982 we are of the opinion that since two terms 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 learned C.I.T. (A) while giving the impugned direction did not advert to the distinction between the "average of head office expenditure allowed" and "head office expenditure", incurred by the assessee and, therefore, fell in error. The question of considering 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 m the three assessment years immediately preceding the relevant assessment years. Since it is admitted position that to the three immediately preceding assessment years head office expenditure was allowed in rupees, therefore, we are of the opinion that the learned C.I.T. (A) was not justified in directing the I.T.O. to compute the head office expenses in U.S. Dollars and then to convert the same in rupees. The impugned direction of learned C.I.T. (A) is, therefore, not sustainable and is hereby vacated. The order of I.T.O. in respect of the average head office expenditure is restored.

8. The appeal is allowed.

9. ALVI ABDUL RAHIM (ACCOUNTANT MEMBER).--I have gone through the order written by my learned brother, the Judicial Member. I agree with the finding. However, I may add a few words in support of the decision. Some repetition of facts and arguments may please be tolerated to help me in my views lucidly. In brief, Mr. Khawaja's plea is that the ceiling provided by Income tax Rule 20 into Rupees at the rate prevailing in the assessment year under consideration. In this way the allowance will be more than what has been allowed by the I. T. O. This will be on account of constant increase in the value of provisions of law. Here we may note distinction between "expenditure incurred" and "expenditure allowed". Whatever amount is incurred is reflected in the accounts of an assessee; it may be in terms of rupees or any other currency allows an expenditure in Pak The assessee incurs and claims an expenditure the I.T.O. 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". -Now in any 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. It seems this plea has been taken to reap the benefit of weaker position of rupee vis-a-vis dollars. Had the position been otherwise this plea may not have been taken. A built-in weakness of this plea is apparent when we apply this very principle in the case of section 25 (c) of the Income Tax Ordinance, which also speaks about trading liabilities allowed by I.T.O. but later on not paid within a specific period of time. Section 25 (c) is reproduced below: "Section

25. Amounts subsequently recovered in respect of deductions, etc.-- Not withstanding anything contained in this Ordinance, where an allowance or deduction has been made under section 23 for any year in respect of any loss, stet debt, expenditure or trading liability incurred by the assessee, and subsequently, (a) .......................................... (b) ......................................... .. (c) such trading liability or a portion thereof is found not to have been paid within three years of the expiration of the income year in which it was allowed, such liability or portion thereof, as the case may be, shall be deemed to be income from business or profession of the year in which such finding is made or any other year (not being, a year commencing after the expiration of five years from the end of the said three years) as the Income Tax Officer may think fit." We may take an example to illustrate the point. An assessee incurs and claims trading. Liability of US $

100. It is allowed at Rs.1, 500 on the basis of the prevailing rate of a U.S. $ equal to Rs.15. Suppose, it is not paid within three years period mentioned in section 25 (c). In the fourth year the rate is U.S. $ Rs.20. Now, should the I.T.O. add a sum of Rs:2,000 (20 x 100) as income or Rs.1,

500. According to section 25 (c) only that much trading liability is to be added to income as was allowed. If we say that Rs.500 was allowed, a sum of Rs.1, 500 will be added. However, if we say that U.S. $ 100 was allowed then we will add Rs.2,

000. It will be unfair to give concession of Rs.1, 500 and at the time of recouping the concession a higher sum is recovered. This injustice can be removed if we hold that Rs.1, 500 was allowed and not U.S. $

100. This principle will also yield fair results in case rupee becomes stronger. If Rs.1, 500 is allowed as a trading liability, Rs.1, 500 will be added to income in the fourth year and not Rs.1, 200 on the basis of the then prevailing rate of Rs.12 = U.S. $. If we adopt the current rate, the entire relief given for the trading liability will not be recouped as is the intention of section 25 (c).

10. Before parting with the issue I may take up one of the arguments of Mr. Khawaja, which does not find place in the order authored by my learned brother, During the course of hearing Mr. Khawaja was asked incurred by appellant's head office in currencies other than example it was stated that head office connection with head office activities the expenditure in German currency. In order to calculate average, the German currency has to be converted into U.S.$ A question arises here: If a currency is to be converted why should it not be converted into Pak Rupees. (This issue has been discussed by my learned brother). To this Mr. Khawaja replied that the head office would make the expenditure in U.S. dollars and not in German currency. According to him the head office employees will be given advance in U.S. dollars; and the employees will convert dollars into German currency as and when necessary. This argument is not valid. The expenditure that is wholly and exclusively incurred for the purpose of head office business takes place when the head office employee spends the money in boarding and lodging facilities etc in Germany. When the head office gives advance before commencement of trip to Germany no such revenue expenditure is incurred which is allowable as per provisions of section 23 (1) (xviii). The normal book keeping entry will be: Advance to Mr. X Dr When the employee submits bills for boarding and lodging etc the book-keeping entry will be: Travelling Expenses Dr The first entry passed before the commencement of journey has no impact on Profit and Loss Account as both the affected accounts appear in the Balance Sheet. It is only the second entry, which will push up the revenue expenditure on traveling. It will be at this point that expenditure will .b: incurred. And it is at this stage, that provisions of section 23 (1) (xviii) will be attracted. Moreover, the amount of advance, which remains unspent for business purposes, will not be allowed. I am, therefore, convinced that mathematically moving average, as laid down by Rule 20, cannot be calculated until and unless head office expenditure incurred in various currencies is transacted into a common currency.

11. FARHAT ALI KHAN (CHAIRMAN).--I have the advantage of going through the proposed orders recorded by my learned brothers but, with due respect to both of them, I am unable to persuade myself to subscribe to their point of view and I think that the difference of opinion has arisen because of our different angles of approach to the problem m dispute. The learned J.M. has given in details the relevant facts as well as the law applicable in his proposed order, I, therefore, need not recapitulate it in my order and straightaway enter into the discussion on merits.

12. From perusal of clause (e) of section 24 of the Income-Tax Ordinance (hereinafter referred to as "the Ordinance"), it appears that if an assessee is a non -resident, he is entitled to head office expenditure and the Explanation appended to it has laid down the scope thereof. If we analyze the Explanation, it appears that the head office expenditure means and implies those expenses. (i) Which pertain to executive and general expenditure including expenditure regarding items which are enumerated m it clauses (a), (b), (c) and (d) and (ii) which is incurred by the assessee outside Pakistan, and (iii) which is incurred for the purposes of business or profession of the assessee.

13. It is thus clear that before head office expenditure is allowed it should not only fulfill conditions, mentioned above; but, in any case, should not be in excess of such limits as may be prescribed, and' as pointed out by the learned J.M, these limits have been prescribed by Rule 20 of the Income-Tax Rules, 1982 (hereinafter referred to as "the Rules") which became effective from first day of July of 1982 except certain Rules which are irrelevant for our purposes. Now, if we go through Rule 20, it appears that its clauses (a) and (b) of its sub-rule (1) lay down the method of computing the amount which should not be exceeded by head office expenditure referred to and claimed under clause (e) of section 24 of the Ordinance. Thus, it is clear that the head office expenditure should not be in excess of either an amount equal to the average head office expenditure or 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 amount is lower. Clause (a) of sub-rule (2) of Rule 20 is relevant for our purposes as it defines what the average head office expenditure means. In other words, if head office expenditure has been allowed in immediately three preceding years, the average "head office expenditure would be 1/3rd of the total expenditure allowed in such three years. Thus, controversy has arisen regarding the interpretation of the expression head office expenditure allowed." Both the learned Members have taken the figures of Rs.29,04,

125. Rs.32,98,152 and Rs.24,89,280 as head office expenses allowed in assessment years 1980-81, 1981-82 and 1982-83 respectively and then have conceded Rs.28,97,186 as head office expenditure to the respondent during the relevant assessment year being 1 /3rd of the total amount of the figure reproduced above, and this exactly has been the approach of the Income-Tax Officer. The learned C.I.T. (A), on the other hand, has directed the Income Tax Officer to find out 1/3rd of the total of head office expenditure as declared in U.S. Dollars in immediately three preceding years and then convert it into Pakistani Rupees at foreign exchange rate prevailing in the relevant assessment year and, with due respect to her, I think that she has reached the correct conclusion.

14. As discussed above, it is indisputably correct that as per Explanation appended to Section 24 (e) of the Ordinance, it is necessary that the head office expenditure should have been incurred outside Pakistan. As such, it could not have been incurred in Pakistani Rupees, Now, if it has been incurred in foreign currency, it ought to be allowed in the same currency for the simple reason that the I.T.O. has power to make disallowances out of such claim. Let me rather explain it.

15. If we read again Explanation appended to Section 24 (e) of the Ordinance, it appears that all expenditure incurred cannot be claimed by an assessee as Head Office expenditure. In other words, the I.T.O. would allow only that expenditure which is either for the purposes of business of profession or is regarding any of the items mentioned in clauses (a), (b), (c) and (d) of aforesaid Explanation. Thus, if any expenditure claimed by an assessee falls outside the scope of aforesaid Explanation, the Income Tax officer would be within his rights to disallow it. Since the expenditure is claimed in foreign currency, therefore, it has also to be disallowed m that currency. It is, therefore, obvious that if the I.T.O. finds any expenditure outside the scope of aforesaid expenditure, he would not disallow it in Pakistani currency in face of the claim having been made in foreign currency. From all this discussion it is, therefore, clear that what the I.T.O. allows as a deduction regarding Head Office expenditure of a non-resident assessee is in foreign currency and then for the purposes of Pakistan Tax it is converted in Pakistani currency. Mr. Ehtesham khawaja has cited several instances of this method of computation. According to him, in assessment years)1972-73, 1973-74 and 1974-75 the claim pertained to U.S. Dollar 97,000, $ 1,12,OOO-and $ 1,35,000 but the same was allowed at U.S. $ 94,029, $ 1,09,449 and 1,32,

069. Similarly, assessment year 1979-80 though the total amount of claim in US. Dollars was allowed yet m assessment year 1981-82 the claim stood at U.S. $ 3,11,100 but the total expenditure allowed stood at U.S. $ 2,93,

346. Similarly, in assessment years 1981-82 and 1982-83 the claim lodged in U.S. Dollars was allowed in its entirety but in assessment years 1983-84, 1984-85, 1985 -86 and 1986-87 the claim stood at US $ 3,36,180 $ 3,44,540, $ 3,48,353 and $ 3,43,091 but the expenditure allowed stood at US $ 2,25,090, 2,14,014,$ 1,79,373 and $ 1,78,082 in each year respectively. It is thus clear that not only in the past but also in future the Department has followed this mode of computation. However, before proceeding further let me explain another aspect of this controversy.

16. It is to be kept in mind that when a non-resident assessee files his return in Pakistan, he has to show his income in Pakistani Rupees for the purposes of Pakistan Tax, for the simple reason that this is the Pakistani currency. However, in case of a non-resident, he would also have to file details of his Head Office expenditure, which would obviously be in currency of the country where Head Office is situated. Thus, all the details would be expressed in such foreign currency and would be supported by audited, account books as well as vouchers etc. The I.T.O. however, would be empowered to disallow that amount which is shown in details but which is beyond the scope of the Explanation appended to section 24 (e). This disallowance would, therefore, naturally be foreign currency. I think I should better illustrate this point. Take a case of Non-resident Company having its business in Pakistan but Head Office in U.S.A. Needless to say that its account books are maintained in U.S. Dollars. Now, suppose this company has receipts of Rs.10, 000,000 in Pakistan and claims inter alia, Head Office expenses at Rs.1, 00,

000. The details which are filed along with the return disclose the Head Office expenses at U.S. $10,000 with the following break up:

(1) Salaries etc. US$ 8,000 (2) Travel to Japan. 500 (3) Travel to England. 500 (4) Travel to Switzerland. 500 (5) Donations. 500 Total U.S. $10,000 Since the Head Office expenses lave been claimed at Rs.1,00,000 in the return, the exchange rate offered is supposed to be US $ 1 equal to Rs.10. The I.T.O. when going through the vouchers and account books etc., discovers that Travel to Switzerland was a pleasure trip wholly unconnected with the business of assessee carried on in Pakistan. However, he finds both trips to Japan and England in connection with the business carried on in Pakistan. Moreover, he also finds from the vouchers presented in Yen and Sterling Pounds that U.S. $ 500 for Travel to Japan and U.S. $ 500 for Travel to England have rightly been claimed. Again, he finds that U.S.$ 500 shown as donations do not fall within the scope of Head Office expenditure as determined by Explanation appended to section 24 (e) of the Ordinance. The I.T.O. would, therefore, disallow the claim of US $ 500 regarding Travel to Switzerland and U.S. $ 500 shown as donations. Thus, out of the claim of Head Office expenditure amounting to US $10,000; he would allow $ 9,000 and then converting it into 9,000 Pakistani Rupees would deduct the same from Rs.10,00,000 and assess Tax on Rs.9,10,

000. It is thus clear that the I.T.O. made allowances and disallowances out of the claim of US $ 10,000 regarding Head Office expenditure. It also appears to be obvious that when we talk of allowance or disallowance out of the claim regarding Head Office expenditure, which is in foreign currency, it is made out of it and not out of declared expenditure in Pakistani Rupees. Let me further emphasize yet another point. In our illustration mentioned above, the "assessee has claimed Head Office expenditure at Rs.1,00,000 by converting US $=10,000 at the rate of US $ 1 Rs.10. But suppose the I.T.O. finds that the exchange rate at the relevant time was US $ 1=Pakistani Rs.9. In such case he would convert the Head Office expenditure in Pakistan Rupees to Rs.90,000 and thus the disallowance made regarding Travel to Switzerland and donations amounting to U.S. $ 1,000 would also be reduced to, Rs.9,000 and thus Rs.81,000 only would be allowed as Head Office expenditure. Thus, from both these illustrations it is well established that the Head Office expenditure is not only incurred in the foreign currency of the Head Office but is also claimed in the same and the I.T.O. disallows or allows also in the same currency. Another point which is established from aforesaid illustration is that the Head Office does not incur any expenditure in different other foreign currencies but in the currency of the Head Office though it is converted into foreign currency and spent there and it is not other way round as suggested by both the learned Members.

17. Thirdly, if the approach adopted by the I.T.O. is followed, we face insurmountable difficulty while computing the Head Office expenses under clause (b) of sub-rule (1) of Rule

20. Suppose, the I.T.O. is required to work out Head Office expenses which are attributable to the business or profession of a non resident assessee in Pakistan and which are lower than the average Head Office expenditure, the question arises how would he work it out when he computes them on the basis of foreign exchange rate which is prevalent during the relevant assessment year? To my mind, the only answer to this question would come in the affirmative and, if it is so, would it not be anomalous to adopt another procedure regarding another assessee whose Head Office expenditure is to be worked out on average basis. However, if we approach this problem with the definition of Head Office expenditure in our mind, as contained in clause (e) of Section 24 of the Ordinance, we would not face this problem at all for the simple reason that we would have to work out, in any case, the Head Office expenditure after disallowing the inadmissible items of expenditure as discussed above. To my mind, this interpretation of law is, therefore, to be preferred in order to avoid hardship and discrimination.

18. Fourthly, the contention of Mr. E.U. Khawaja that since they have declared the profit at the ruling exchange rate, they should also get the expenditure at the same rate also carries much weight. It appears to be inequitable to accept different foreign exchange rates for working out Head Office expenditure. However, if tire interpretation proposed by me is accepted, this anomaly would also disappear.

19. Fifthly, the conversion of one currency to another is altogether different from allow ability of an expenditure. The I.T.O. has adopted the figures of US. Dollars converted into Pakistan Rupees and my learned brothers have taken that amount to have been allowed. However, since the expenditure was not incurred in Pakistani currency, it could not have been allowed in it. As discussed above, it was firstly allowed after deducting disallowances, in U.S. Dollars in which it was incurred and then the amount so allowed was converted in Pakistani currency for the purposes of Pakistan Tax.

20. Sixthly, in assessment years 1980-81 and 1981-82 the Head Office expenditure was allowed in US Dollars on the basis of expenditure attributable to the business in Pakistan and then converted in Pakistani currency at the foreign exchange rate prevalent during those assessment years. However, sine 1st July, 1982, Rule 20 of the Rules became applicable and the average method was also introduced. Thus, the rate of foreign exchange applied during those assessment years cannot be applied for finding out average in assessment year 1983-84 in which the foreign exchange rate is different, for the simple reason that Head Office expenditure allowed was allowed in US Dollars and then converted into Pakistan Rules at the Tetravalent exchange rate for the purposes of assessment in those assessment years only.

21. Seventhly, we have to interpret the law as it stands without keeping into consideration as to whether it is resulting in some gain to assessee or loss to the Department or vice very. If the interpretation given by me is adopted, it would apply uniformly in all the assessment years irrespective of the gain or loss of the assessee or the Department and thus wood create- certainly in the mind of Tax payers.

22. Eighthly, it is wholly irrelevant to consider as to whether a non-resident assessee incurred expenditure in various foreign currencies. The only relevant point is the foreign currency in which the Head Office is maintaining the accounts. It is important to note that the Head Office expenditure is not worked out by converting various expenses in vary currencies but, on the other hand; the currency of the Head Office is converted into various currencies and in the books only the currency of the Head Office is entered. Whenever such non resident assessee claims Head Office Expenditure, it offers it on the basis of its books, which are maintained in the currency of the Head Office and the I.T.O. allows or disallow it in Pakistan. He converts the foreign currency in Pakistan currency only for the purposes of Pakistan Tax. Let me illustrate this point. Suppose a non-resident assessee having its office at New York is running also some business in Pakistan and for such business he sends one of his employees to West Germany. He would pay him in U.S. Dollars and the employee would convert N in Deutsche Mark. In the books at Head Office, however, the entry would be made in U.S, Dollars and the same would be claimed as Head Office expenditure for Pakistan Tax purposes. Similarly, the US Dollars would be paid to an employee going to U.K. or Japan for the purposes of business in Pakistan. These employees would get US Dollars converted into sterling Pounds and Yen but in the Head Office the expenditure would be entered m U.S. Dollars and would be- claimed in. the same currency in Pakistan. Whether or not the expenditure has been incurred for business or profession and if so, how much, is a question which the I.T.O. would examine at the time of framing of the assessment. Since I have discussed this question in para 16 in some details, it should not detain me any more.

23. Ninthly, it is not correct to say that the Head Office expenditure is always to be allowed m terms of Rupees, for the simple reason that it is not incurred in Pakistani Rupee The Income Tax Law does not lay down anywhere that the expenditure should always be allowed in Pakistani Rupees, though it specifically lays down what expenditure is to be allowed. However, since the Pakistan Tax ' Law deals with Pakistan currency, the assessee or the I.T.O. as the case may be, therefore, has to convert all the expenditure incurred in foreign currency for the purposes of Pakistan Tax after allowing or partly disallowing such expenditure.

24. Now before concluding, let me deal with certain points raised by learned Accountant Member. Relying upon provisions of Section 25 (c) of the Ordinance my learned brother has observed:- "According to Section 25 (c) only that much trading liability is to be added to income as was allowed. If we say that Rs.1,500 was allowed, a sum of Rs.1,500 will be added. However, if we say that U.S. $ 100 was allowed then 'we will add 14.2,

000. It will be unfair to give scion of Rs.1,500 and at the time of recouping the concession a higher sum is recovered. This injustice can be removed if we hold that Rs.1,500 was allowed and not U.S. $100." However, with profound respect to my learned brother, I think that the add back of a trading liability depends wholly on what was actually allowed by the I.T.O. and not on what we say or think about it, In other words, the addition under section 25 (c) is restricted to what was allowed earlier as a deduction. Let us, a therefore, examine the question as to what an I.T.O. can legally allow as deduction of a trading liability which is payable in foreign currency. In other words the question is as to whether the I.T.O. can allow or disallow the amount of foreign or Pakistani currency.

25. Now to start with, let me mention specifically that whenever any remittances or repatriation in foreign currency is involved, the Foreign Exchange Regulations instantly come into play and, thus, the permission of the State Bank of Pakistan is involved. Thus, if a Pakistani resident assessee wants to claim a trading liability as a deduction, he would firstly claim it in `Pakistani currency after converting it at the current exchange rate and secondly would also produce before the I.T.O the permission of the State Bank of Pakistan to the effect that he would be entitled to remit certain amount of foreign currency to his foreign creditor. Suppose that a Pakistani resident assessee wants to claim a deduction regarding a trading liability of US $ 100 which is payable to his non-resident creditors. But before he claims such deduction and the I.T.O. allows it, he would have firstly to produce the permission of the State Bank of Pakistan regarding remittances of U.S. $ 100 to his non-resident creditor. Secondly he would claim it in Pakistani currency which, according to the illustration of my learned brother concerned, comes to Rs.1,

500. Since he would be having the permission of State Bank of Pakistan, the I.T.O. would allow the deduction of Rs.1,

500. Now, if he fails to remit U.S. $ 100 within 3 years, the I.T.O. would be empowered to add back only Rs.1,500 which he allowed as deduction as Section 25 (c) restricts his power to the amount already allowed. Let me point out that neither the I.T.O. could have allowed the trading liability in a sum of US. $ 100 as it is within the exclusive jurisdiction of State Bank of Pakistan nor the assessee could have claimed it in that currency as the Pakistan Tax Law requires return in local currency. As it could not have either been claimed or allowed in U.S. $ 100 therefore, the exchange rate prevalent on 4th assessment year would become wholly irrelevant. As far as the assessee is concerned, he would have to pay back US $ 100 to his creditors whatever be the exchange rate at the time of payment, but as far as the I.T.O. is concerned, he had no power to allow any trading liability in the amount of a foreign currency or he can legally add it back. Thus, in view of discussion made above, the answer to the question posed above becomes quite obvious.

26. Now the second point, which has been emphasised by my learned brother, the learned AM, is regarding the normal book keeping entry. Here again with profound respect to him, I have to point out that the question regarding incurring of an expenditure is to be answered with reference to the income year. An assessee claims and deduction on the basis of the account books which stand closed at the end of the income year. It is important to keep into consideration that at the time of framing of the assessment, the assessee has to produce his account books which were duly maintained throughout the year and which came to a close at the end of the income year. Thus the issue as to what amount was really incurred out of the funds advanced to an employee stands finally closed at the end of the income year for the tax purposes of that year. Let me also point out that as far as the Head Office expenditure of a non-resident is concerned, the I.T.O. is supposed to examine it in the light of Explanation appended to clause (e) of section 24 read with the provisions of Section 23 (1) (xvui) as the former lays down the definition of Head office expenditure.

27. Now as far as the issue regarding conversion of various foreign currencies to U.S. $ is concerned, both the learned Members have raised it .in their respective proposed orders. However, since I have dealt with it earlier in some details, I, therefore, refrain myself from dilating on it any more. But, even at the cost of repetition, let me point out that the expenditure is incurred in the foreign currency which the head office accounts are maintained and such foreign currency is converted in and reconverted from other foreign currency as and when occasion arises.

28. Thus, in view of discussion made above, I am of the opinion that the learned C.I.T. (A) reached the correct conclusion. I, therefore, propose that the departmental appeal be dismissed. However, since both learned Members have concurred, the departmental appeal is allowed as indicated by them. M.BA./638/T Appeal allowed.