COMMISSIONER INLAND REVENUE VS QUALITY TEXTILE MILLS LTD., 2013 PTD-KARACHI-HIGH-COURT-SINDH 2095 (2013)

Income Tax Ordinance (XLIX of 2001)---

----Ss.4(4)(b), 67, 154 & 169---Income Tax Rules, 2001, Rr.13 & 231---Income derived from export of cotton yarn---Expenses (i.e. ocean freight, export development surcharge, surcharge, clearing/forwarding expenses and those in relation to bills of exchange), incurred by taxpayer in deriving such income---Taking into account such export related expenses in computing taxable income on local sales of yarn by taxpayer---Scope---Application of R. 231 of Income Tax Rules, 2001 in preference to R. 13 thereof would not be possible as both such Rules had entirely different and separate subjects matters---Rule 13(6)(e) Income Tax of Rules, 2001 pertaining specifically to Pakistan-source of income chargeable under head "income from business" would cover local sales of yarn, thus, expenses attributable thereto would be deductable in full against local sales to determine income in terms of normal tax regime---Export related expenses could not be taken into consideration in computing taxable income on local sales---Principles.

1999 PTD (Trib.) 3880; 2003 PTD (Trib.) 1053; Golden Graphics (Pvt.) Ltd. v. Director of Vigilance and others 1993 SCMR 1635; Ch. Pervaiz Elahi v. Province of Punjab and others PLD 1993 Lah. 595 and Bama Charan v. Additional Commissioner of Taxes and others AIR 1964 Calcutta 332 ref.

Amjad Javed Hashmi for Applicant.

Mushtaq Hussain Kazi for Respondent.

Dates of hearing: 18th April and 14th May, 2013.

JUDGMENT

MUNIB AKHTAR, J.---This reference application has been filed by the Department impugning the order of the Tribunal dated 7-1-2011. The question of law said by the Department to arise out of the impugned order (with respect, slightly reformulated) is as follows:--

"Whether in the facts and circumstances of the case, the learned Tribunal has correctly concluded that Rule 231 of the Income Tax Rules, 2002 is applicable to the taxpayer's case?"

The question arises in relation to the tax year 2007 under the Income Tax Ordinance, 2001 ("2001 Ordinance").

2.The taxpayer is a public company that is engaged in the manufacture and sale of cotton yarn. It output is partly exported and in part sold locally. Insofar as the exports are concerned, a certain amount is deducted by way of tax under section 154 of the 2001 Ordinance, from the foreign exchange proceeds received from foreign buyers. Section 154 is to be found in Division III of Part V of Chapter X of the 2001 Ordinance. Subsection (4) of section 154 provides that the tax so deducted is a final tax "on the income arising from the transactions referred to in this section". Subsection (1) of section 169 (which is in Division IV of thesame Part) makes this section applicable, inter alia, to section 154, and its subsection (2) provides that such income shall not be chargeable to tax under any head of income in computing the taxable income of the exporter (clause (a)), nor shall any deduction be allowable for any expenditure incurred in deriving such income (clause (b)). This manner of taxation is usually referred to as the presumptive tax regime, or PTR. Thus, the export sales of the taxpayer are taxable under PTR. On the other hand, the income earned on its local sales is taxable under the ordinary provisions of the 2001 Ordinance. This is usually referred to as the normal tax regime or NTR.

3.The question that has given rise to this reference application is the manner in which certain expenses incurred by the taxpayer are to be dealt with. The adjudicating authority (the Deputy Commissioner/TO-9, Audit Division, LTU, Karachi) took the position that those expenses were incurred in relation to export sales and could not therefore be taken into account at all in computing the taxable income on the local sales. The Department's case was, and is, that section 67 read with Rule 13 of the Income Tax Rules, 2002 ("2002 Rules") was applicable. The taxpayer on the other hand contended that matter had to be dealt with in terms of Rule 231 of the 2002 Rules. It had filed its tax return for the tax year 2007 on such basis. The heart of the controversy is therefore whether Rule 231 is applicable to the facts and circumstances of the present case.

4.Since the adjudicating authority took a view different from that of the taxpayer, he issued notice for amendment of the (deemed) assessment order. He sought to disallow and exclude export related expenses such as ocean freight, export development surcharge, clearing and forwarding expenses and those in relation to bills of exchange. The taxpayer resisted any such amendment, but the adjudicating authority was not satisfied with its answer. He held as follows with regard to the taxpayer's contention that Rule 231 was applicable:--

"Contention of the taxpayer has not been accepted as the learned ITAT in its judgment reported as 1999 PTD (Trib.) 3880; has adjudicated upon the provisions of sections 50(5A) and 80-CC read with CBR's Circular No.20 of 1992, no further deduction is to be made from the deemed income under subsection (1) of section 80-CC. However later on the learned ITAT in another case reported as 2003 PTD (Trib.) 1053 has realized that in their earlier judgment reported as 1999 PTD (Trib.) 3880 the provisions of Rule-216 and CBR's Circular No.5 of 2000 were not considered hence, it recalled their earlier orders in I.T.A. No.332/KB of 1998-99 dated 21-11-1998 reported as 1999 PTD (Trib.) 3880 I.T.A. No.1693/KB of 1998-99 dated 27-11-1999 and I.T.A. No.547/KB of 1999-2000 dated 10-2-2000 and consequently decided the issue under consideration vide Para-11 of their order dated 17-5-2001 reported as 2003 PTD (Trib.) 1053 as under:

'Referring to the leading judgment in this very case, we find that issue with regard to FOB/C&F value of export was not addressed specifically because Circular No.5 of 2000 had by then been issued. So in view of this Circular our judgment needs to be modified to the extent that FOB value of export, as per Rule 216, has to be considered for allocation of G.P. and pro-ratio of expenses, we therefore, following principle endorsed in this very case, but also keeping in view our decisions in I.T.A. No.547/KB of 1999-2000 dated 10-2-2000 and I.T.A. No.1693/KB of 1998-1999 dated as 27-11-1999, direct that at the first instance FOB value of export and ex factory price of local sales has to be worked out then ratio of such exports and local sales has to be determined and then such expenses have to be pro-rated which are otherwise not identical or bi-furcatable. All expenses relatable to export sales should be allocated to exports, all expenses relatable to local sales have to be allocated to local sales, and only expenses which are common or not clearly bifurcated, should be pro-rated in the ratio of FOB-export/ex-factory local sales.'

In view of above cited judgment of the learned ITAT, the contention of taxpayer is not tenable and thus it is rejected."

5.Being aggrieved by the aforesaid treatment, the taxpayer filed an appeal, which was however not accepted by the CIT (Appeals). As presently relevant, the appellate authority held as follows in her order dated 17-2-2009:--

"I have minutely gone through the submissions made by the learned AR viz-a-viz the findings of the assessing officer on the issue of prorating the income/expenses between local sales and export sales in the manner and method provided under rule 231 of the Income Tax Rules, 2002, it is noted that the computation of export profit were made exactly in the manner laid down in Rule 231 of Income Tax Rules, 2002, and the identifiable export expenses were also disallowed in other identical cases and confirmed by my Predecessor. The same treatment has also been upheld by my predecessor in his Order No.1 dated 7-8-2007, and by me in Order No.369 dated 25-9-2008, therefore, I am of the view that addition of Rs.1262,124, Rs.516348 and Rs.649,640 in respect of commission export (bill of exchange), export development expenses, forwarding expenses respectively being export related expenses clearly relates to FTR income and the same can not be allowed against normal income which clearly warranted action under section 67 of Income Tax Ordinance, 2001 read with rule 13 of Income Tax Rules, 2002."

6.The taxpayer preferred a further appeal to the Appellate Tribunal, and finally met with success. After a hearing at which the Department was not represented, the Tribunal by means of the impugned order observed and held as follows:--

"6. The AR was specifically asked to explain the basic difference between the view point of the taxpayer and that of the department. It was explained that the basic difference is in the interpretation of Rule 231... [This Rule was reproduced and the Tribunal then continued:]

7. The AR pointed out that as per clause (b) of sub-rule (3) of Rule 231 it is evident that the "total profit" means the "sale proceeds" of exported goods or local sale of goods sold locally. Rule 231 does not speak about any profit, but about allocation/proration of profit between the export and local sales on the ratio of total sales whereas the department on the other had interpreting the same as the profit as computed after disallowance of inadmissible expenses including identifiable export related expenses. The AR to further elaborate his contention drew our attention to para 9 of Circular No.14 of 1992 dated 1-7-1992 relating to "explanation of important provision of Income Tax" while explaining the provision of section 50(5A) which was inserted vide FO 1992. It was explained as under:

"A new section '80CC'applicablefromassessmentyear1993-1994 has also been inserted providing for presumptive tax on income of exporters under which foreign exchange proceeds on account of export of goods by an exporter shall be deemed to be income of such exporter and tax deducted at source under the newly inserted section 50(5A) shall be deemed to be the final discharge of his tax liability on this income."

8. The AR contended that from the above para it is evident that the export proceeds received which had been subjected to WHT has been termed as income of the taxpayer. The AR further stated that in order to remove the ambiguity in Rule 231 which was deleted vide S.R.O. dated 19-5-2009 was again inserted vide S.R.O. 58(I)/2010 dated 2-2-2010. The expression "total profit" as mentioned in clause (b) of sub-rule (3) in the earlier Rule 231 has been replaced and inserted Rule 231 as per clause (b) of sub-Rule (2) by the expression "total sales".

9. After considering the argument of both side, related circular and annex-IIG of the return we are of the considered opinion that the method of computation of income being adopted/ followed by the department in the presence of Rule 231 of I.T.Rule, 2002 is against the law due to the fact when identifiable export expenses are being disallowed under section169(2)(b) for being related to export sales covered under section169 then identifiable expenses related to local sales such as local freight expenses, salaries paid to salesman, advertisement expenses related to goods sold in Pakistan should also be allowed directly against normal law income and should not be prorated between export and local sales as per the practice of the department.

10. In our view Rule 231 does not speak of profit because this practice of disallowing only identifiable export expenses and not allocating identifiable local sales related expenses against normal law, would be against natural justice. However, where income is computed after disallowing identifiable export related expenses and allowing identifiable direct expenses related to normal law sales, major expenses would become allowable against normal law income, which we are sure is not the intention of the legislature.

11. In view of the foregoing discussion and keeping in view of our earlier discussion given in I.T.As. Nos.1705 and 732/KB/10 of tax years 2005 and 2003 dated 4-1-2011 we are of the opinion that Rule 231 of the I.T. Rules, 2002 speak of proration of profit on the basis of export/local sales ratio to total sales without disallowance of any identifiable export related expense or allowance of identifiable locally sale related expenses against normal law income, accordingly the contention of the AR is found to be correct, therefore the Assessing Officer is directed to allow all the expenses on prorate basis. This method has also been adopted in return of income made in Rule 34 read with Second Schedule of the Rules in Annexure-II-G."

Being aggrieved by the aforesaid decision, the Department has filed the present reference application.

7.Learned counsel for the Department submitted that the Tribunal had seriously erred in law in concluding that Rule 231 was applicable. He submitted that the matter clearly fell within the scope of section 67, and Rule 13, which had been specifically framed to give effect to the provisions of that section. Indeed, subsection (2) thereof expressly empowered the Federal (formerly Central) Board of Revenue ("Board") in this regard. Learned counsel referred in particular to clause (ab) of subsection (1) of section 67, read with section 4(4)(b). Learned counsel submitted that the approach taken by the Tribunal in the impugned order was also contrary to the provisions of section 169(2)(b) since the Tribunal had, in effect, allowed expenditures incurred in relation to foreign sales to be taken into consideration contrary to the statutory provision. He submitted that the adjudicating authority and the CIT (Appeals) had come to the correct conclusions in law and their findings ought to have been sustained. He prayed that the question be answered in favour of the Department, and the impugned order be set aside.

8.Learned counsel for the respondent taxpayer strongly contested the Department's case. He submitted that the Tribunal had come to the correct conclusion in law on the facts of the case. Learned counsel took a preliminary objection that the question as proposed by the Department was not at all a question of law since no specific provision of the 2001 Ordinance had been identified therein, and the reference ought to be disposed off on this basis alone. Learned counsel submitted that Rule 231 was applicable and had been correctly applied. His case was that Rule 13 was a general provision, whereas Rule 231 was a special provision, which related specifically to export sales. Applying the principle of interpretation that the specific overrides the general, he submitted that Rule 13 could not be applied. Learned counsel took us to various provisions of the 2001 Ordinance, and to Rules 13 and 231. He submitted that it was an accepted position that the taxpayer did not keep separate books of account for export and local sales. Learned counsel further submitted that Rule 231 was in all material respects the same as Rule 216 that had been part of the repealed Income Tax Rules, 1982 ("1982 Rules"), which had been framed under the repealed Income Tax Ordinance, 1979 ("1979 Ordinance"). Reliance was placed on Circular 5/2000 that had been issued by the Board on 6-3-2000. This referred to the Board's earlier Circular 20/1992 dated 1-7-1992, and then stated in material part as follows:--

"Queries have, however, been raised as to what would be the method of proration of profits between export proceeds falling under section 80CC and local sales. It is clarified that prorating of profits between export sales and local sales in respect of assessee maintaining books of account has to be done in accordance with Rule 216 of the Income Tax Rules, 2002."

Learned counsel submitted that sections 50(5A) and 80CC of the 1979 Ordinance were in pari materia sections 154 and 169 of the 2001 Ordinance. Therefore, as made clear by the Board itself in relation to Rule 216 of the 1982 Rules, Rule 231 of the 2002 Rules had to be applied in the instant case and all such-like cases. Learned counsel prayed that the reference application be dismissed.

9.Exercising his right of reply, learned counsel for the Department submitted that the approach urged on behalf of the taxpayer would give it what was described as a "double dip" advantage. Learned counsel submitted that the subject matter of Rule 13 on the one hand and Rule 231 on the other was different and therefore the latter could not be regarded as a specific rule as opposed to the general rule contained in the former. It was submitted that Rule 13 related to expenditures, whereas Rule 231 related to profits earned. There was no equivalence between the two.

10.At the conclusion of the hearing, we allowed learned counsel to file written synopses along with the case-law they wished to rely upon. Learned counsel for the respondent filed a synopsis, referring therein also to certain case-law.

11.We have heard learned counsel as above, examined the record with their assistance and considered the case-law relied upon. We first take up the preliminary objection raised by learned counsel for the taxpayer. In our view, it cannot be accepted. The reference application does raise a question of law, and an important one at that. We have only slightly reformulated the proposed question in order to bring out the point in dispute with greater clarity. The issue of law involved was clearly understood and very ably articulated and argued by both learned counsel. We proceed therefore to a consideration of the case on its merits.

12.As noted, the heart of the controversy is whether Rule 231 is applicable or not. Learned counsel for the respondent has submitted that this rule is the same as Rule 216 of the 1982 Rules, and has relied on Circular 5/2000. It will be convenient to set out Rule 231 as applicable in the tax year 2007, and Rule 216, as it stood at the time of the repeal of the 1982 Rules. These rules were as follows:--

13.Clearly, the two rules were essentially identical. To understand Rule 231, one can therefore begin with Rule 216. Why was Rule 216 framed? What purpose did it serve? The answer to this lies in the First Schedule to the 1979 Ordinance. Part I of this Schedule gave the rates of income tax, while Parts II and III gave the rates of super tax and surcharge respectively. We are concerned with Part IV. This Part underwent significant changes by way of amendments and substitutions during the life of the 1979 Ordinance. For our purposes, it is relevant to consider this Part as it stood from the promulgation of the 1979 Ordinance up to (but before) the Finance Act, 1997. Although amendments were made to this Part from time to time even over this period, the basic structure remained as it was from the beginning, and it is this structure that needs to be examined, because it explains the genesis of Rule 216. (From the Finance Act, 2007 onwards, Part IV took on a significantly different form.) We have chosen to look at Part IV as it stood up to the Finance Act, 1994, but this does not at all affect the substance of the analysis.

14.Part IV comprised of two paragraphs, A and B, of which we are concerned with the former (the latter simply contained certain definitions). Paragraph A, which applied "notwithstanding anything contained in [the First] Schedule", had a number of sub-paragraphs. All of these, in one way or another, gave relief from the income tax or super tax, not by way of an exemption, but by a reduction in the tax payable. For our purposes, it is sub-paragraph (2) that is relevant. This provided in material part as follows:--

"(2) Where the total income of an assessee includes any profit and gains derived from export of goods manufactured in Pakistan,---

(a) income tax and super tax, if any, payable in respect of such profits and gains shall... be reduced by an amount equal to fifty per cent. of the amount of income tax and super tax, if any, attributable to the sale proceeds of such goods

...

The Central Board of Revenue may make rules providing for the computation of profits and the tax attributable to export sales for the purposes of sub-clause (a) and for such matters as may be necessary to give effect to the provisions of this clause".

(We have only reproduced that portion of sub-paragraph (2) as is necessary for explaining the reason why Rule 216 was framed.)

15.It will be seen that sub-paragraph (2) gave substantial relief in respect of any profits derived from the export of goods manufactured in Pakistan. The relief was that the income tax and super tax on profits as were attributable to the sale proceeds of exported goods stood reduced by fifty per cent. Obviously, for an assessee to obtain the benefit of this relief, the amount of profits and gains derived by him from the sale of exported goods had to be computed. For this purpose, the Board was expressly conferred a specific statutory power, in terms of the last portion of sub-paragraph (2), to frame the necessary rules. As it at once clear, Rule 216 was framed in exercise of the power thereby conferred, and specifically for the purposes of sub-paragraph (2) of paragraph A of Part IV of the First Schedule. This is also clear from sub-rule (1) of Rule 216. This provided that the profits to be attributed to the saleof exported goods were to bear the same proportion to the total profits as the export sales bore to the total sales. Once the profits had been computed, sub-rule (2) then provided that the tax attributable to such profits bore the same proportion to the total tax payable, as the said profits bore to the total income of the assessee. Thus (and finally), it was the tax so determined that stood reduced by fifty per cent, in terms as stated in sub-paragraph (2) of paragraph A of Part IV of the First Schedule. (It will be recalled that "total income" was a defined term in the 1979 Ordinance, which was the totality of the income on which tax was payable.)

16.It will be seen from the foregoing that Rule 216 served a specific purpose, and one that was entirely different from the matter at hand. Its inclusions in the 1982 Rules was the exercise of a statutory power expressly conferred on the Board for a specific purposes. In the context of that purposes, no question arose of any need for apportionment of expenditures between export sales and local sales, for the good reason that such an exercise was simply not required. The purpose was only to identify that portion of the overall profits as were attributable to export sales, in order to enable the assessee to enjoy the benefit of the relief provided.

17.Section 50 of the 1979 Ordinance, which had a number of subsections, dealt with the deduction of tax at source. In 1992, a new subsection (5A) was inserted in this section. This was in part materia section 154 of the 2001 Ordinance, in that it required the deduction of tax at the specified rate from the export sale proceeds received by an exporter from foreign buyers. In the same year, section 80CC was also addedtothe1979Ordinance(witheffectfromassessmentyears1993-94). This was in pari materia section 169 of the 2001 Ordinance. Section 80CC,initssubsection (1),deemedtheexportsaleproceedson which tax had been deducted under section 50(5A) to bethe income of the exporter, and in subsection (2) provided that no deduction or allowance was permissible against the deemed income. Finally, subsection (3)providedthatwheretheexporterhadnoincome other than that from export sale proceeds, the tax deducted under section 50(5A) would be deemed to be the final discharge of his tax liability.

18.Obviously,thequestionaroseastowhatwouldhappenincases where theexporterdidhaveother income,moreparticularlyfrom local sales. How would matters be prorated between that which came within the ambit of section 80CC (export sales) and that whichwasnotsocovered(local sales)?ItwastoaddressthisissuethattheBoardissueditsCircular 5/2000,relieduponbylearnedcounselfor the respondent. It is pertinent to note that the 1979 Ordinance had no provision equivalent to section 67 of the 2001 Ordinance. Therewasthereforenospecificprovisioninthe1982Rulesthatdealtwiththisissue.Itwasinthesecircumstancesthatthe Board directed that proration would be done in terms as provided in Rule 216. It is crucial to keep in mind that by so applying Rule 216, the Board was making use of a provision that had been designed and intended to serve an entirely different purpose. It is, in our view, unfortunate that the Board chose to do so. The reason isthatthistendedtoconflatetworelatedbutnonethelessdistinctmatters, namely sale proceeds from exports and profits attributable thereto. Section 80CC was concerned only with the former, whereassub-paragraph (2) of paragraph A of Part IVoftheFirst,Scheduledealtonlywiththelatter.Bymakinguseofaruleframedsolelyfor purposesofthelatterprovision,todealwithasituationcreatedbythe subsequent insertion of the former provision, the Board created a certain amount of confusion, with rather unfortunate results. This is clear from the two reported decisions of the Appellate noted in the adjudicating authority's order (see the extract reproduced at para 4 above).

19.The two decisions are reported at 1999 PTD (Trib.) 3880 and 2003 PTD (Trib.) 1053. Both were in relation to the 1979 Ordinance and involved different assessment years of the same assessee (1997-98 and 1998-99 respectively). Like the present respondent, that assessee was also engaged in the manufacture and sale of yarn, of which the major portion was exported and the rest sold locally. In the first mentioned decision, the issue was whether certain expenditures incurred in relation to export sales could be taken into account while determining the income (i.e., profits and gains) from local sales. The Tribunal held, quite correctly in our view, that this was not permissible: "The formula of proration is a law of prudence and has been evolved by taking a pragmatic view of the facts but the basic idea underlying it is that only such expenses are to be allowed which are worked out to be attributable to income covered under normal law" (pg. 75). By the time the second mentioned case came for hearing before the Tribunal, the Board had already issued Circular 5/2000. The issue was the same. While endorsing its earlierdecision,theTribunal"modified"itsapplicationintheappeal before it to the extent "that FOB value of export, as per Rule 216, has to be considered for allocation of GP and proration of expenses" (pg. 387).

20.This brings us to the 2001 Ordinance. The first point to note is that there is no provision in the present law similar to that contained in sub-paragraph (2) of paragraph A of Part IV of the First Schedule of the 1979 Ordinance (i.e., as that provision stood prior to the Finance Act, 1997). The inclusion of Rule 231 in the 2002 Rules, in exactly the same terms as its predecessor Rule 216 in the 1982 Rules, was therefore somewhat of an anomaly. There was no relief granted in respect of sale proceeds from the export of goods manufactured in Pakistan in the same terms as under the previous law. There was thus now no longer any need (as there had been previously) to work out the profits attributable to export sales (sub-rules (1)(b) of Rule 231) or the tax attributable thereto (sub-rule (2)). Rule 231 was, in our view, simply a somewhat unfortunate holdover from the previous Rules.

21.What the 2001 Ordinance did have was a new provision, section 67, which dealt specifically with the issue of proration. This section is as follows:--

"67. Apportionment of deductions.---(1) Subject to this Ordinance, where an expenditure relates to -

(a) the derivation of More than one head of income; or

(ab) derivation of income comprising of taxable income and any class of income to which subsections (4) and (5) of section 4 apply, or;

(b) the derivation of income chargeable to tax under a head of income and to some other purpose,

the expenditure shall be apportioned on any reasonable basis taking account of the relative nature and size of the activities to which the amount relates.

(2) The Board may, make rules under section 237 for the purposes of apportioning deductions."

Rule 13 of the 2002 Rules has been framed in exercise of the power conferred by subsection (2). It will be seen that subsection (1) postulates three situations that may require apportionment. We are concerned with that contained in clause (ab). This refers, inter alia, to section 4(4). The latter provision, in its clause (b), applies to deduction of tax under Division III of Part V of Chapter X in which of course section 154 is to be found, with which we are concerned. It is pertinent to note that while clause (a) of section 67(1) refers to different heads of income,whichare listed in section 11,afact-situationcoveredbyclause (ab) can relate to sources of income that lie within the same head. This is of course the situation at hand. Income from the sale of yarn, whether locally or abroad, comes with the head "income from business". Yet, because of the application and effect of section 154 read with section 169, an apportionment of expenses is necessitated even while remaining within this head of income.

22.When Rule 13 is examined, it is found to cater for precisely such a situation. Sub-rules (1) and (2) provide as follows:--

"13. Apportionment of expenditures.---(1) This rule applies for the purposes of section 67, which provides for apportionment of expenditure incurred for more than one purposes.

(2) Any expenditure that is incurred for a particular class or classes of income shall be allocated to that class or classes, as the case may be."

Sub-rule (1) expressly relates the Rule to section 67. Sub-rule (2) lays down the broad principle that expenditure incurred for a "particular class" of income "shall" be allocated to that class. Sub-rule (6) (which had previously been erroneously labeled as sub-rule (8)) contains a specific definition of "class of income" for purposes of the Rule. This comprises of a long list of various "classes" into which income is divided for purposes of the Rule. One of these (clause (e)) specifies Pakistan-source income chargeable under the head "income from business" as a particular class of income. This would of course, cover local sales of yarn. Clause (o) of the definition specifies "amounts to which section 169 applies" as another class of income, and this would cover proceeds from export of yarn. (We may note parenthetically that as originally framed, and up to 2009, Rule 13 contained a number of what were quite obviously typographical errors, some of the more egregious of which appeared in clause (o). These were "cleaned up" by a notification issued on 19-5-2009 by the Board. In our view, these typographical errors cannot stand in the way of the proper application of Rule 13, which is as stated here.)

23.When the foregoing provisions are kept in mind, in our view the position that emerges is that Rule 231 has no application to a situation where the apportionment of expenditures is being considered or the issue is how expenditures relatable solely to one "class of income" are to be dealt with. For these purposes, it is section 67 read with Rule 13 that is applicable. The genesis of Rule 231 in the predecessor legislation and rules framed thereunder makes it clear that the objective sought to be achieved through this rule was quite different. It has no bearing on the issues at hand. Its predecessor Rule 216 dealt with a matter peculiar to the 1979 Ordinance, and was framed in exercise of a specific statutory power conferred to achieve a specific objective. It is significant that Rule 216 was not invoked before the Tribunal when the appeal in (1999) 79 Tax 69 was heard. As already noted, we endorse the view that was taken by the Tribunal in that decision. Indeed, the essential principle identified in that decision appears (again, quite correctly) to beembodied in sub-rule (2) of Rule 13. It was only when the Board issued Circular 5/2000 that Rule 216 was made applicable. As to the wisdom (and more importantly, legal propriety) of doing so, and the decision of the Tribunal in (2003) 87 Tax 382 to accept such application, we reserve judgment. It is not necessary for us to dilate on this matter because it arose under the 1979 Ordinance, and we are concerned with the 2001 Ordinance. In our view, Rule 231 is, and ought to be regarded as, an unfortunate and unnecessary holdover from the 1982 Rules. It may be noted that learned counsel for the respondent submitted that Rule 231 was omitted in 2009 but reinserted (in somewhat different form) in 2010. Learned counsel submitted on this basis that the Rule ought to be regarded as an exercise of the power conferred on the Board by section 67. With respect, we are unable to agree. We accept the submission by learned counsel for the Department that the two Rules, 13 and 231, have entirely different and separate subject matters. This is so for the reasons given herein above. It also follows that we are unable to agree with learned counsel for the respondent that Rule 13 embodies a general rule, while Rule 231 is a specific provision and hence has to be applied in preference to the former. That is not so at all.

24.When the impugned decision of the Tribunal is considered in the foregoing perspective, it cannot, subject to what is stated below, be regarded as correct. The conclusion arrived at by the Tribunal may again be reproduced for convenience:--

"In view of the foregoing discussion ... we are of the opinion that Rule 231 of the I.T. Rules, 2002 speak of proration of profit on the basis of export/local sales ratio to total sales without disallowance of any identifiable export related expense or allowance of identifiable locally sale related expenses against normal law income, accordingly the contention of the AR is found to be correct, therefore, the Assessing Officer is directed to allow all the expenses on prorate basis."

This conclusion cannot stand for the reasons given above. Rule 231 has no application at all to the issue of proration of expenditures and its application, in whatever form, to a determination of this issue is incorrect. However, in an earlier part of the impugned decision, the Tribunal also noted as follows:--

"... when identifiable export expenses are being disallowed under section 169(2)(b) for being related to export sales covered under section169 then identifiable expenses related to local sales such as local freight expenses, salaries paid to salesman, advertisement expenses related to goods sold in Pakistan should also be allowed directly against normal law income and should not be prorated between export and local sales as per the practice of the department."

If the Tribunal has correctly identified the departmentalpractice, thensuchpracticeiserroneousandcontrarytolaw.Itwould, e.g., be directly contrary to sub-rule (2) of Rule 13, which the Departmentitselfwishestoinvoke.Expensesattributablesolelytolocal sales must be allowed in full against local sales to determine the income in terms of the normal tax regime. To this extent, the views expressed by the Tribunal must be endorsed. However, this endorsement does not affect the outcome of our decision, which in the end must answerthequestionraisedinthisreferenceapplicationasnotedabove.

25.In the written synopsis filed by him, learned counsel for the respondent has given the background to and genesis of Rule 216, and has in fact traced it back to the Income Tax Act, 1922. While we appreciate the assistance provided in this regard, we are, with respect, unable to agree with the conclusions that learned counsel has sought to derive from the same. In our view, the correct position is as stated herein above. The cases relied upon by learned counsel for the respondent may also be considered. Learned counsel relied on Golden Graphics (Pvt.) Ltd. v. Director of Vigilance and others 1993 SCMR 1635, Ch. Pervaiz Elahi v. Province of Punjab and others PLD 1993 Lah. 595 and Bama Charan v. Additional Commissioner of Taxes and others AIR 1964 Calcutta 332 in support of his submission that a specific provision or rule overrides a general one. Since we have concluded that is not the situation as between Rules 13 and 231, the cited decisions do not, with respect, provide any assistance to learned counsel. It is therefore not necessary to consider the cases in any detail.

26.In view of the foregoing, the question raised before us is answered in favour of the applicant Department and against the respondent taxpayer. The decision of the Tribunal stands modified accordingly. The Registrar is directed to send a copy of this decision to the Tribunal under the seal of the Court.

SAK/C-5/KReference accepted.