P L D 1976 Lahore 337 (PLP)

In his opinion, therefore, the profits of Pakistan Branch could be easily ,worked out notwithstanding the system of accounting adopted by the assessee whereby only the world profits were determined. He observed that rule 40 was applicable only if the actual amount of the income of the non-resident assessee was not ascertainable. As such the Income-tax Officer held that rule 40 of the Rules was not attracted to the facts and circumstances of this case. He further observed that in law where income and profits are charge able under section 4 of the Act then section 42 would not be applicable. Con sequently, the question of application of the provisions contained in section 42 and rule 40 to this case did not arise. He, therefore, in repelling the contention of the assessee, discarded this method of computation of its taxable income in Pakistan. The assessee claimed deduction on account of Head Office or operating expenses in the ratio of 13.13 % of the total world expenses. But according to the Income-tax Officer the expenses claimed were not admissible under the Pakistan Income-tax Act. Against the expenses claimed by the assessee at $15,292 on the basis of the world ratio, the Income"-tax Officer estimated the Head Office expenses relevant to Pakistan projects at a reduced figure of $10,000 only. The Income-tax Officer also disallowed some of the items of reimbursable expenses amounting to Rs. 47,693 as inadmis sible.

6. The assessee went up in appeal (I. T. A. No. 10669 of 1971-72) against the order before the Income-tax Appellate Tribunal (Pakistan) Lahore. Actually the Tribunal disposed of not one, but three connected appeals of the assessee relating to the assessment years '1966-67, 1967-68 and 1968-69, by a consolidated order passed on the 28th of September 1972. The tribunal, in repelling the contention of the assessee, upheld the treatment accorded by the Income-tax Officer by holding that recourse to the provisions contained in rule 40 of the income-tax Rules was not necessary in completing these assessments. The Tribunal observed that the receipts of the assessee from. the projects is Pakistan were determinate, and that the dispute pertained to the related expenses debitable to them. In the opinion of the Tribunal these expenses including the operating or head office expenses, were ascertainable. The Tribunal further held that the assessment against the assessee was com pleted under section 4(1)(a) of the Act the provisions of section 42(3) was not applicable. Before the Tribunal it was also submitted on behalf of the assessee that the Income-tax Officer did not allow adequate opportunity to it and that an effort could be made to work out the head office expenses relative to the Pakistan projects. The Tribunal agreed with this submission and directed the Income-tax Officer to allow the assessee sufficient opportunity in this behalf and only on its failure to prove these expenses, he could adopt his own basis in ascertaining them. Last of all the Tribunal found that the Income-tax Officers was not justified in disallowing a part of the reimburseable expenses and in this connection observed that the assessee was acting merely as an intermediary or a treasurer like a bank, and was not supposed to see if they were admissible or not.

7. In these circumstances the assessee filed the above application referring the following questions of law said to arise out of the appellate; order dated 28-9-1972 passed by the Tribunal to the High Court for its opinion (1) Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in refusing to allow the assessee's income to be assessed under rule 40 of the Income-tat Rules? (2) Whether on the facts and in the circumstances of the case the assessee' income should have been assessed under section 42(3) of the Income tax Act? In the course of these proceedings the assessee made a miscellaneous applica tion under section 151 of the Code of Civil Procedure seeking permission to file an amended reference application raising the following questions instead of those reproduced above for opinion by the High Court:- "(1) Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was justified in holding that the I. T. O. had correctly made the assessment under section 4(1)(a) by holding that all income, profits and gains and business in question were received in Pakistan and thus ousted the applicability of rule 40? (2) Whether on the facts and in the circumstances of the case the Income tax Officer had rightly exercised his discretion by not assessing the income under rule 40? (3) Whether on the facts and in the circumstances of the case the assessee's income, profits and gains were legally assessable under rule 40?" In our opinion the amendment prayed for is formal and clarificatory in nature and it does not alter the substantial questions that arise out of the Tribunal's order. We have, therefore, no hesitation in allowing the amend ment in the main petition.

8. We have heard the learned counsel for the parties. At the hearing before us a half-hearted attempt was made on behalf of the assessee to contend that they have no regular branch office in Pakistan and that their team of specialist was merely working in the premises placed at their disposal by the Railways. But it was admitted by the assessee in this petition that it was operating its business from the Head Office in U. S. A. through its branch office in Pakistan. Even before the Tribunal the very first contention raised on behalf of the assessee was that being a branch of a non-resident ,company in Pakistan, maintaining accounts on world-wide basis, it could not be assessed except by recourse to the provisions contained in rule 40 of the income-tax Rules. Admittedly, therefore, the assessee as a non-resident company has its branch office in Pakistan. But nothing really turns on tin, admission and by and large it is immaterial for the purposes of this case whether or not the assessee was in fact maintaining a branch office here it Pakistan.

9. Before the Tribunal in its order under reference it was conceded that the receipts in the Pakistan projects were definitely ascertainable but it was argued that the related expenses incurred could not be determined without difficulty and unreasonable costs. These expenses are comprised of (a) the actual payroll costs; (b) reimburseable expenses; and (c) operating expenses In this connection on behalf of the assessee it was argued that although the actual payroll costs, according to the Income-tax Officer were determinate yet in arriving at this conclusion, he lost sight of the fact that these expense were inclusive of the salary of short term consultants and the time that the; spent on the consideration, finalization and the various reports. It was no possible to determine all these expenses with accuracy. Similarly as to the operating expenses, it was argued that the assessee has its branches all above the world and that it was difficult. if not impossible to spread these costs above specified projects. The ratio of these expenses may be abnormally high o abnormally low and are bound to differ from project to project. For a these reasons it was argued before the Tribunal that it was not possible to determine the income of each project separately and as such the Income-tax Officer was little justified in refusing to apply rule 40 to the facts and: in the circumstances of this case. In repelling the contention the Tribunal observed that the receipts being admittedly determinate, the only dispute centres around the ascertainment of the related expenses. From the three broad categories of expenses enumerated above, we are of the opinion that the actual payroll costs and reimburseable expenses are also distinctly determinate. We are thus left with the only uncertainty about the operating or head office expenses. In our view if the head office maintains proper records it should be possible to distinctly work out these operating expenses also pertaining to each project but even assuming that in certain cases like coordination and analysis work which may be combined for a number of projects a suitable formula can always be devised. This, therefore, leaves no manner of doubt regarding the expenses which can be ascribed to each project without much difficulty or high costs. This being the factual position, in our opinion no recourse to the provisions of rule 40 appears necessary. We shall, therefore, on the facts found by the Income-tax Officer, uphold his method of assessment. The appellant on this issue, therefore, must fail" The Tribunal also agreed with the Income-tax Officer in holding that section 42(3) was not applicable in the circumstances of this case. In this connection the Tribunal simply observed that the income being assessable under section 4(1)(a) of the Act as accruing or arising in Pakistan, the question of applying the fictional provisions of section 42 would not arise. In support of this view the Tribunal relied on (1964) 4 Taxation 1 and P L D 1969 S C 527.

10. Let us now minutely examine these findings in the context of the law applicable to this case. Section 3 of the Act is the main charging section. Under it the total income of an assessee for the previous year is brought to charge. Section 4(1) of the Act defines the extent and scope of the total income brought to tax. It lays down that the total income of any previous year of any person includes all income, profits and gains from whatever source derived which- "(a) are received or are deemed to be received in Pakistan in such year by or on behalf of such person; or (b) if such person is resident in Pakistan during such year- (i) accrue or arise or are deemed to accrue or arise to him in taxable territories during such year, or (ii) accrue or arise to him without taxable territories during such years or (c) if such person is not resident in Pakistan during such year, accrue or arise or are deemed to accrue or arise to him in Pakistan during such year." Income does not necessarily accrue or arise at the place where business is, carried on or where the source of income is situate. The Supreme Court of Pakistan in the reported case of Obvious Steel & Co. Ltd v. Commissioner of Income-tax, Dacca(1961) 4 Taxation 1 following in MacNeil & Barry Ltd. v. Commissioner of Income-tax, East Pakistan (P L D 1969 S C 527 observed that "the statute does not require, that income in order to be taxable should be receivable. It speaks of accruing and arising and it has long been settled that the aspect of accrue` and arising is to be understood in contradistinction to the act of receiving, which ordinarily follows and may often follow long after the accrual or arising of income". According to this section the incidence of tax depends upon and is determined by the fact of the residence of the assessee in Pakistan. On the face of it clause (a) of subsection (1) of section 4 is applicable to the residents and non-residents alike, while clause (b) above is confined in its application to the residents in Pakistan and clause (c) to the non-residents in Pakistan during the relevant previous years. Under clause (a) income "received or deemed to be received" by the assessee in Pakistan is chargeable to tax. In contrast to this under clause (c), in the case of a non-resident, income profits or gains which accrue, or arise or are deemed to accrue or arise to him in Pakistan are brought to tax. This subsection distinguishes between "income received or deemed to be received" and income which "accrue or arise or deemed to accrue or arise" to an assessee in Pakistan. On a plain reading of section 4(1)(a) the incidence of the tax is on the income. profits or gains received or deemed to be `received in Pakistan, irrespective of their place of accrual. The income, profits and gains may arise or deem to arise outside Pakistan but the liability to tax under this clause depends on their receipts in Pakistan. If the income is received or deemed to be received A in Pakistan, the amount is chargeable to tax in the hands of the residents and non-residents alike and there is no question of apportionment of the amount even though all the related business operations may not have been carried on in Pakistan. This is because the chargeability to tax is attracted on the a actual or notional receipts in Pakistan.

11. In the instant case before us the Tribunal simply assumed, without any discussion, and proceeded on the basis that the income in the hands of the petitioner was assessable under section 4(l)(a) of the Act. The mode of payments due to the assessee is regulated by para. 4 of their agreement with the Pakistan Railways. In order to ensure the payments due to the assessee the Pakistan Railways gave an irrevocable letter of credit for $1,97,000 drawn on the First National City Bank in New York. It was agreed that the assessee shall render monthly United States dollar invoices for professional time charges and reimburesable expenses to Pakistan Railways. Upon their approval by Pakistan Railways they shall be presented to the said Bank in New York by the assessee for payment under the letter of credit. In these circumstances the Tribunal was not justified in assuming that the income, profits and gains of the assessee were assessable under section 4(1)(a) of the Act. Indeed the observations made by the Tribunal that the income of the assessee was assessable under section 4(1)(a) as "accruing" or arising" in Pakistan are self contradictory. While clause (a) speaks of income "received or deemed to order received in Pakistan", clause (c) deals with income which accrue or arise or deemed to accrue or arise to the assessee in Pakistan. This fallacy in the approach in turn led to another erroneous finding to the effect that competently the question of the applicability of section 42(3) to this case did not arise.

12. In accordance with sections 4(1)(b) and (c) income, profits and special in which accrue or arise or are deemed to accrue or arise to a resident or & resident in Pakistan are chargeable to tax. In conjunction with this of t ion 42 lays down as to when can income be deemed to accrue or arise Res. Act within Pakistan. Subsection (1) of this section lays down that all income, or gains accruing or arising, whether directly or indirectly, through or from any business connection in Pakistan or through or from any property in Pakistan or through, or from any asset or source of income in Pakistan or through or from any money lent at interest and brought into Pakistan in cash or in kind, or through or from the sale, exchange or transfer of a capital asset in Pakistan shall be deemed to be income accruing or .arising within Pakistan and where the person entitled to the income, profits or gains is not resident in Pakistan shall be chargeable to income-tax either in his name or in the name of his agent. In particular subsection (3) of this section further lays down that in case of a business of which all the opera tions are not carried out in Pakistan the profits and gains of the business deemed under this section to accrue or arise in Pakistan, shall be only such -profits and gains as are reasonably attributable to that part of the operations carried out in Pakistan. On the face of it section 42(1) is not applicable to a case where income is received or deemed to be received by the assessee in Pakistan under section 4(1)(a) of the Act. It comes into play in cases where the income is deemed to accrue or arise within the taxable territories. In this ,connection the Tribunal observed that there was ample authority of the Supreme Court of Pakistan reported as (1961) 4 Taxation l and P L D 1969 ,S C 527 to the effect that section 42 of the Act is not applicable to the income assessable under section 4(1)(a) of the Act and for the same reason .subsection (3) of section 42 does not come into play in a case falling under section 4(1)(p) of the Act. There is no quarrel with this proposition as far as it goes. But as already stated above, the Tribunal has laboured under the erroneous belief that the income of the assessee was assessable under section 4(1)(a) and that consequently the Tribunal was not justified in holding that section 42(3) of the Act was not attracted to the facts and circumstances of the case.

13. In spite of this finding the Tribunal nevertheless acted on the princi ple underlying subsection (3) of section 42 of the Act in proceeding to dispose of the case on the basis that the expenses and hence the profits and gains of the assessee attributable to its Pakistan projects could be suitably apportioned and were ascertainable without difficulty and unreasonable costs. In that connection after recapitulating the arguments addressed on behalf of the parties, the Tribunal held that in the case of the petitioner-assessee the receipts being determinate, the only dispute centred round the ascertainment of the related expenses. After analysing the three broad categories of the expenses enumerated above, the Tribunal expressed the opinion that the actual payroll expense and the reimburseable expenses were distinctly determinate. In case the head office was maintaining proper records it should not be difficult to distinctly work out the operating expenses also pertaining to each project. The Tribunal was further of the opinion that even assuming that in certain cases like coordination and analysis work (which may have been combined for a number of projects), a suitable formula could always be devised for apportioning these expenses. Therefore, in the opinion of the Tribunal these expenses could be ascribed to each project without much difficulty or high costs. In conclusion the Tribunal held that on these facts it was not necessary to have recourse to the provisions contained in rule 40 of the Income-tax Rules and affirmed the method of assessment adopted by the Income-tax Officer.

14. Before us at the hearing the assessee did not deny its liability to income-tax on the income, profits and gains accruing or arising from Pakistan projects. But the only grievance of the assessee made out at the hearing before us was to the effect that on the facts and in the circumstances of this case the Income-tax Officer should have resorted to the provisions contained in rule 40 for the purposes of computation of the taxable income of the assessee in Pakistan and calculated by apportioning the world profits in the ratio of the world receipts to Pakistan receipts. Rule 40 can be invoked and comes into play only if the Income-tax Officer is of the opinion that the actual amount of the income, profits or gains accruing or arising to any person residing out of the taxable territory, whether directly or indirectly through or from any business connection in the taxable territory cannot be ascertained. But in the instant case, the Tribunal armed the finding by the income-tax Officer on appeal and held (as already discussed above) that the taxable income of the assessee could be ascertained without much difficult and high costs. Indeed in this connection it was eventually admitted on behalf of the assessee before the Tribunal that given more time and opportuni ty it was possible to apportion the expenses in dispute and work out the taxable income of the assessee in Pakistan. This finding by the Tribunal is -based on the material on the record. The finding of fact thus recorded by the Tribunal is binding in this reference before us. On this finding, therefore, there is hardly any room left for resorting to the provisions contained in rule 40 in computing the taxable income of the assessee. Moreover even under rule 40 the discretion rested with the Income-tax Officer to adopt any one of the three modes laid down therein for computing the taxable income. His discretion was not fettered and he could not be compelled to calculate the amount of the taxable income in proportion to the Pakistan receipts as compared to the world receipts, at the behest of the assessee. Under this rule also it was open to the Income-tax Officer to adopt such other manner in computing the taxable income as he may deem suitable.

15. To sum up the above discussion we find that the Tribunal was not Justified in assuming that the income of the assessee was assessable under section 4(1)(a). In this connection we have already held that on the facts and circumstances of this case the income was chargeable to tax of the income of the non-resident assessee accruing or arising or deemed to accrue or arise in C Pakistan during the previous year in question under section 4(1)(c) and not -section 4(1)(a) of the Act. A fortiori the Tribunal was not justified in observing that section 42 of the Act was not attracted to the facts and circumstances of the case. In spite of these fallacies in the order under reference the Tribunal in substance proceeded on the basis that the taxable income had accrued and arose to the non-resident assessee in Pakistan and that share of the expenses relateable to the Pakistan projects could be suitably apportioned and were ascertainable. It was for these reasons that the Tribunal did not rely on the provisions contained in rule 40 for the purposes of computation of the taxable income of the assessee. We are, therefore, of the opinion that in spite of those fallacies in the order under reference, in sub stance the Tribunal was justified on the facts and in the circumstances or this case in refusing to invoke the provisions contained in rule 40 of the Income tax Rules for the purposes of computation of the taxable income of the assessee in Pakistan. Our answers to the above questions referred to the High Court are returned accordingly. But there shall be no order as to costs in the circumstances of this case. S. Q. Reference answered accordingly