Supreme Court: Pension fund surplus taxable only when refunded to bank

The Supreme Court has ruled that surplus generated in a pension fund cannot be treated as a bank's taxable income under the Income Tax Ordinance, 2001, unless the amount is actually refunded to the employer. Associated Press of Pakistan and Daily Times reported the decision.

The judgment was written by Justice Aqeel Ahmed Abbasi. The case was heard by a three-member bench of Justice Irfan Saadat Khan, Justice Aqeel Ahmed Abbasi and Justice Shakeel Ahmed.

The bench dismissed a civil appeal filed by the Commissioner Inland Revenue against MCB Bank. In doing so, it upheld the judgment of the Lahore High Court.

The court relied on Rule 4 of Part II of the Sixth Schedule. Under that rule, employer contributions to a pension fund, or income earned on them, become taxable in the tax year in which the employer actually receives the amount back.

Banks are subject to a special tax regime under the Seventh Schedule, which has no specific provision on surplus from pension funds. According to Daily Times, the relevant provisions of the Sixth Schedule apply to a bank's pension fund surplus through Rule 9 of the Seventh Schedule.

The court also addressed accounting treatment. Annual actuarial valuations under IAS 19 may show a surplus or deficit in pension fund assets and liabilities, but recording a surplus in financial statements does not make it taxable income.

The court held that accounting principles cannot decide tax liability independently of the applicable tax law. It added that tax authorities cannot reject a bank's consistently followed accounting practice without sound legal grounds.