ISLAMABAD: A full bench of Supreme Court of Pakistan dismissed appeals filed by Lahore based Husnain Cotex Limited, Ghulam Rasool and Co. Pvt Ltd and Sarwar & Company (Pvt) Ltd against Commissioner Inland Revenue and Appellate Tribunal Inland Revenue for denying grant of tax relief specifically allowed by the federal government in 2010 to tax payers of certain areas of  province of Khyber Pakhtunkhwa, FATA and PATA, whose business suffered on account of internal strife .

The  government in June, 2010 invoked the provisions of Section 53 of the Income Tax Ordinance, 2001 (hereinafter referred as the Ordinance) under which exemptions or concessions are granted on such incomes or to such persons that are listed in the Second Schedule to the Ordinance. Consequently, Clause 126F was inserted in Part I of the Second Schedule which reads “Profits and gains derived by a taxpayer located in the most affected and moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA for a period of three years starting from the tax year 2010” and by virtue of Clause 126F, all profits and gains derived by the taxpayers located in the affected areas stood exempt from income tax for a period of three years .A

According to the petitioners/appellant one of them is a private limited company whereas the remaining two are public limited companies, not listed on the Stock Exchange. They have their business establishments either in Lahore or Multan. As they derive income from executing construction contracts, their business activity, by virtue of Section 153(1) (c) and 153(3) read with Section 169(b) of the Ordinance falls within the domain of ‘final tax regime’. Hence the amount deducted at the rate specified in the First Schedule of the Ordinance from the payments made to them towards fulfillment of their contractual obligations are to be treated as their final tax liability.

Accordingly, the petitioners submitted their income tax statements under Section 115 of the Ordinance for each of the tax years 2010, 2011 & 2012 disclosing the deductions made from the payments received against their respective contracts performed in the affected areas. Later it occurred to the petitioners that they were entitled to claim exemption on such payments in terms of Clause 126F, so they applied to the Commissioner for refund of the amounts deducted towards their income tax liability. They initially succeeded in obtaining refund, however, the Additional Commissioner, Inland Revenue issued show cause notices to the petitioners under Section 122(5A) of the Ordinance, proposing to disallow the exemption that was allowed earlier by the Commissioner. After hearing the matter, the Additional Commissioner held that as the petitioners fall within the domain of ‘final tax regime’ and not under ‘normal tax regime’, the exemption granted under Clause 126F was not intended for them. This decision was challenged in appeal before the Commissioner Inland Revenue (Appeals-II), Lahore. After his decision in appeal, the aggrieved party assailed the appellate orders before the Appellate Tribunal, Inland Revenue, which held that the petitioners were entitled for exemption. The tax department then filed References before the Lahore High Court which vide impugned judgments reversed the findings of the Tribunal after holding that the petitioners fall within the domain of ‘final tax regime’ whereas the term ‘profits and gains’ occurring in Clause 126F was relatable to such taxpayers only who fall within the domain of ‘normal tax regime’, hence not entitled to claim exemption. Feeling aggrieved

by such decision the petitioners have preferred these petitions for leave to appeal.

The supreme court bench after a detailed hearing dismissed the petitions/appeals  concluding that the tax exemption granted in the year 2010 under Clause 126F from its tenor could only have been intended for the taxpayers falling under the domain of ‘normal tax regime’ whose profitability while doing business in the affected areas had diminished in the past on account of an external factor i.e. political strife that affected the profitability of doing business there. The exemption was never meant for the taxpayers like the petitioners whose businesses fall within the domain of ‘final tax regime’ for whom the question of experiencing loss of business opportunity on account of internal strife does not arise. They made their presence in the affected area only when they had in their hands a business opportunity to make profits and gains in the form of contracts to be executed there. The income tax department shall accordingly proceed to recover the income tax that has been wrongly refunded to any of the petitioners.