Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Official Citation: 2026 LHC 2241
Court / Jurisdiction: Lahore High Court (Honorable Mr. Justice Khalid Ishaq)
Ruling Summary: This decision was rendered by the Lahore High Court (Honorable Mr. Justice Khalid Ishaq), officially reported as 2026 LHC 2241. In this matter between the Petitioner and the Respondent, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.
Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.
COURT: Lahore High Court (Honorable Mr. Justice Khalid Ishaq) DECISION DATE: 16-03-2026 TAGLINE: (1) Interpretation of Section 20 of the Income Tax Ordinance 2001 (2) True import of connotations "wholly and exclusively for the purposes of business" viz the expenditure incurred by a Taxpayer (3) Onus, qua the claim that expenditure incurred is wholly and exclusively for the purposes of business. CASE DETAILS: ITR (Income Tax Reference) 38744/25 ============================================================ Stereo. H C J D A 38. Judgment Sheet IN THE LAHORE HIGH COURT AT LAHORE. JUDICIAL DEPARTMENT
ITR No. 38744 of 2025
Sui Northern Gas Pipelines Limited Versus Commissioner Inland Revenue, Zone III, Large Taxpayers Office, Lahore
JUDGEMENT
Dates of Hearing 18.09.2025, 22.09.2025, 30.09.2025, 06.10.2025, 20.10.2025, 21.10.2025, 27.10.2025, 06.11.2025, 13.11.2025, 04.12.2025 & 16.03.2026 Applicant by: M/s. F eisal Hussain Naqvi and Ameer Hamza Dogar, Advocates Respondent by: Mirza Nasar Ahmad, Additional Attorney General for Pakistan assisted by Mr. Asad Ali Bajwa, Deputy Attorney General for Pakistan & Shakeel Ahmad Pasha, Assistant Attorney General for Pakistan Mr. Shazib Masood, Advocate
KHALID ISHAQ, J. This judgment shall decide the captioned Income Tax Reference as well as the following Income Tax References since common questions of law and facts are involved in all these cases: i. ITR No. 38420 of 2025 ii. ITR No. 38743 of 2025 iii. ITR No. 38746 of 2025 iv. ITR No. 38747 of 2025 For the purpose of this judgment, the facts of the present case shall suffice. 2. This is a reference under Section 133(1) read with Section 134A(II) of the Income Tax Ordinance, 2001 (“Ordinance, 2001”), made at the instance of the applicant-Sui Northern Gas Pipelin es Limited (“ SNGPL”). The assessment year is 2010 and the question referred for opinion , as said to has ITR No. 38744 of 2025 Page 2
arisen from order dated 18.03.2025 (“Impugned Order ”) passed by Appellate Tribunal Inland Revenue, Lahore (“Tribunal”), is as under: “Whether, under the facts and circumstances of the case, Cost Equalization Adjustment (“ CEA”) is admissible under Section 20 of the Income Tax Ordinance, 2001 or not?” 3. Briefly, the facts which are necessary for the decision of this reference are that applicant SNGPL filed its return of income for the tax year 2010, which return was taken as deemed assessment under Section 120 (1) of the Ordinance, 2001 . The deemed assessment was s ubsequently alleged as erroneous being prejudicial to the interest of the Revenue and accordingly show cause notice dated 13.02.2012 (“SCN”), issued under Sections 122(9), read with 122(5A) of the Ordinance was served upon the applicant SNGPL. It is pertinent to mention here that there were multiple issues of alleged evasion of taxes, however, the only issue which requires determination by us pertains to the permissibility of the deduction of an amount of Rs.11,217,001,000/- as Cost Equalization Adjustment (CEA), which amount was deducted by the applicant SNGPL while computing its income chargeable to tax under the head as ‘income from business’ for the tax year 2010, in terms of Section 20 of the Ordinance , 2001 . The SCN was duly replied, supported by all relevant documents, however, cons idering the said reply as insufficient, the Assessing Officer proceeded to pass the Amended Assessment order dated 10.04.2012 under Section 122(1) read with Section 122(5A) of the Ordinance, 2001 (“ONO”).1 4. Being aggrieved, the applicant SNGPL filed an appeal under Section 127 of the Ordinance , 2001 before the Commissioner Inland Revenue (Appeals) “CIR (A)”, which appeal was heard on 07.11.2012 , to the extent of issue in hand i.e. adjustment/deduction of CEA and was decided in favour of the applicant SNGPL vide order dated 28.12.2012.
1 Initially, it was alleged vide SCN that the amount of CEA, which was claimed to have been paid to SSGC and deducted as such under Section 20 of the Ordinance, was not shown to have been declared by SSGC as income. But subsequently it was settled that the a mount transferred by SNGPL to SSGC as CEA was duly reflected as such in the SSGC’s returns, however, the ONO is premised on the Revenue’s assertion that CEA is not a permissible cost deduction under Section 20 of the Ordinance. ITR No. 38744 of 2025 Page 3
5. Feeling dissatisfied from order dated 28.12.2012 passed by CIR(A), the respondent Revenue filed appeal under Section 131 of the Ordinance , 2001 before the Tribunal , which appeal was dis missed vide order dated 03.08.2015. The respondent Revenue filed reference bearing ITR No.39651 of 2019 under Section 133 of the Ordinance , 2001 before this Court, which reference was allowed vide order dated 10.03.2025 in the terms that the order dated 03 .08.2015 passed by the Tribunal was set aside and the matter was remanded to the Tribunal for decision afresh. 6. In post remand proceedings, t he Tribunal heard the parties and proceeded to pass the Impugned Order, whereby, the order dated 07.11.2012 passed by the CIR(A) was set aside and the findings rendered by virtue of ONO were upheld. Since the applicant SNGPL is a State-Owned Enterprise (“SOE”), therefore, t he matter was referred to the Alternative Dispute Resolution Committee (“ ADRC”) in terms of the provisions contained in Section 134A of the Ordinance , 2001 . ADRC passed the order dated 17.06.2025, settling all issues except the issue relating to CEA; ADRC held that “the committee remains inconclusive on the issue of admissibili ty of the claim and the parties are free to approach the relevant judicial forum on this legal issue.”. Hence this reference Application, seeking opinion of this Court on the question framed above vide order dated 30.06.2025. 7. Considering that the issue of deduction of CEA and the applicability of Section 20 of the Ordinance, 2001 also have its trappings with an agreement dated 22.09.2003 (“Agreement”), executed between the applicant SNGPL and Sui Southern Gas Company Ltd. (“SSGC”), therefore, learned counsel for the applicant SNGPL commenced his submissions by explaining the background, which necessitated the execution of the Agreement and submits that both gas Companies i.e. SNGPL & SSGC, are ‘licensees’ in terms of the provisions contained in the Oil and Gas Regulatory Authority Ordinance, 2002 (“OGRA Ordinance”); adds that in terms of Sub-section (2) of Section 8 of the OGRA Ordinance, both Companies submit their respective revenue requirements to Oil a nd Gas Regulatory Authority (“ OGRA”) for determination of tariffs of each ITR No. 38744 of 2025 Page 4
Company and it is on the basis of OGRA’s determination that per unit price for different category of consumers is notified while taking into account the Estimated Revenue Requirement (“ ERR”) submitted by the Company(s), divided by its total predicted gas sales , which price per unit is termed as ‘Price per Unit’ = ‘Prescribed Price’; contends that in terms of Section 8(1) of the OGRA Ordinance , OGRA advises Federal Governmen t for notification of the Prescribed Price and after considering OGRA’s determination under the applicable law and rules, the Federal Government advises OGRA viz the minimum charges and the sale price for each category of retail consumer s of natural gas to notify the Prescribed Price in the official gazette in terms of Section 8 (3) of OGRA Ordinance. Learned counsel has further elaborated that each licensee/gas company has different costs and profits owing to its peculiar facts and area s of operation s, therefore, it is literally impossible to have one uniform Prescribed Price for different categories of consumers of both/all licensees, thus, considering the predominant factors e.g. Federalism and Socio-economic concerns , it was felt mandat ed by the Federal Government to work out a Policy for determination of uniform Prescribed Price for the same category of consumers of both Companies; adds that prior to the introduction of CEA mechanism, this purpose of uniform Prescribed Price was sought to be achieved by various other Policy(s)/Mechanism(s), e.g. introduction and implementation of Gas Development Surcharge (“GDS”), Tariff Adjustment Payment (“TAP”) etc.2 Per learned counsel for the applicant SNGPL, it was felt and concluded by OGRA and Federal Government that neither the system of GDS nor TAP served the purposes owing to financial management and complications relating to TAP/GDS contributions , particularly the aspect of contribution of GDS in the NFC pool and consequent overall Provincial shares entitlements @ 58% from whatever is contributed in NFC; the GDS mechanism had rather added to the issue of excessive increase of federal deficit, therefore, the CEA was introduced, which is a starkly simple and elegant solution . Learned counsel for the applicant SNGPL has
2 The details of GDS and TAP are not required to be supplied for the purpose of this Judgment. ITR No. 38744 of 2025 Page 5
explained the working and effects of the CEA in detail , which may be adumbrated by the following illustration: ➢ SNGPL Prescribed Price = Rs.100/- • Rs.85/- Cost + Rs.15/- Profit ➢ SSGC Prescribed Price = Rs.116/- • Rs. 101/- Cost + Rs.15/- Profit ➢ After cost equalization payment of Rs.8/- by SNGPL to SSGC • SNGPL Prescribed Price = 108/- ▪ Rs.93/- Cost + Rs.15/- Profit • SSGC Prescribed Cost ▪ Rs.93/- Cost + Rs. 15/- Profit ➢ Result of cost equalization • Prescribed Price = Consumer Price • Full payment of gas goes directly to Gas Companies (no Provincial Share) • Simple, less complicated regulatory structure • No effect on “profits” of Gas Companies
8. As regards the implementation of CEA regime, learned counsel for the applicant SNGPL has referred to the various steps and actions being taken, which actions culminated into execution of the Agreement; submits that SNGPL filed its tariff petition for deter mination of tariff for the financial year 2003 -04 and considering the preliminary determination by OGRA, the Ministry of Petroleum and Natural Gas realized that the purpose of achieving a uniform Prescribed Price for consumers of distinct categories across the Country cannot not be achieved on the basis of existing GDS & TAP mechanisms, therefore, a summary was initiated by the said Ministry for the Economic Coordination Council (“ ECC”), the proposal qua CEA was contained in para 8 (a & b) of the said summary, which summary was accorded approval by the Finance Division vide its Office Memorandum No.F.1(25)CF-III/2003-554 dated 26.05.2003 ; learned counsel has placed reliance on ECC’s decision dated 16.06.2003, whereby, para 8(a &b) of the summary initiated by Ministry of Petroleum and Nat ural Gas was accorded ECC’s approval; adds that ECC’s decision was placed before the Cabinet and after its approval, the same was communicated to OGRA for the purpose ITR No. 38744 of 2025 Page 6
of determination of the tariff petition (s) filed by SNGPL . Reliance has further been placed upon OGRA’s decision dated 07.07.2003, whereby, OGRA proceeded to determine the ERR of the Gas Companies for the financial year 2003 -04 and apart from other necessary determinations and directions, OGRA directed the applicant SNGPL to conclude the Agreement by or before 31.07.2003, ensuring the implementation of CEA , thus, the Agreement was executed, the terms whereof are self -explanatory. Learned counsel for the applicant SNGPL contends that it was on the b asis of th e Agreement that the CEA amount of Rs.11,217,001,000/- was transmitted to SSGC, which amount was deducted as expenditure incurred for the purposes of SNGPL’s business. 9. While concluding his submissions, learned counsel for the applicant SNGPL submits that CEA expenditure/cost is deductible as it is a mandatory and unavoidable expenditure since execution of Agreement and compliance thereof is not a voluntary decision, as erroneously determined by the Tribunal, instead, being licensee, OGRA’s directions carry statutory obligations for SNGPL, therefore, the compliance of such directions is sine qua non for the very existence and continuation of the SNGPL’s business; adds that Section 20(1) of the Ordinance , 2001 contemplates deduction/adjustment of such expenditures by employing the term ‘any expenditure incurred. . . wholly and exclusively ……. for the purposes of business’ and since the amount of CEA is a statutory charge , wholly and exclusively incurred for nothing else but for the purpose s of SNGPL’s business, therefore, Revenue’s objection viz CEA’s deductibility is unsubstantiated and untenable; further submits that if it may be assumed for the sake of arguments that the Agreement was voluntary in character, even then the CEA will remain deductible owing to connotation ‘ wholly and exclusively for purpose s of business ’, as couched in Section 20 of the Ordinance, 2001. Placed reliance on Smith v. Lion Brewery Company [1911] A.C. 150, Moffat v. Webb (1913) 16 CLR 120, Usher'’s Wiltshire Brewery Ltd. v. Bruce (1915) AC 433, Income Tax Commissioner v. Malayalam Plantation (AIR 1964 Supreme Court 1722 ), CIT (Central) Calcutta v. ITR No. 38744 of 2025 Page 7
Standard Vacuum Oil Co. Ltd. (AIR 1967 Cal. 68 ), Indian Aluminum Co. Ltd. v. Commissioner of Income-Tax, West Bengal. I.C.I. (India) Private Ltd. (1972) 84 ITR 735 (SC I-5MB), A.V. Thomas Co. v. CIT (1986) 159 ITR 431 (Full Bench Kerala High Court , Commissioner Income Tax special Zone v. Dewan Khalid Textile Mills Ltd. (2016 PTD 1136) (DB Sindh), Sui Southern Gas Co. Ltd. v. Commissioner Income Tax (PLD 2001 SC 201 ), Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SCI) , CIT v. Bombay State Road Transport Corporations (1977) 106 ITR 303, CIT v. J.K. Cotton and Weaving Mills (1980) 123 ITR 911, Keshkal Cooperative Marketing Soc iety Ltd. v. CIT (1987) 165 ITR 437 , CIT v. Pandavapura Sahakara (1988) 174 ITR 475 , CIT v. Pandavapura Sahakara [1992] 201 ITR 56, Somaiya Orgeno Chemical v. CIT (1995) 216 ITR 291, Shahid Gul and Partner v. Deputy Commissioner of Income Tax (2021 SCMR 27 ), Commissioner Income Tax v. Alpha Insurance (PLD 1981 SC 293 ), David & Co. v. CIT (1979) 3 SCC 524, CIT v. Rajaram Bandekar [1994] 208 ITR 503, S.A. Builders v. CIT (2007) 1 SCC 781, Government of Sindh v. Khalil Ahmad (1994 SCMR 782). 10. On the other hand, learned counsel for the respondent department as well as the learned Additional Attorney General for Pakistan ha ve argued that the necessity of making the payment is not one of the ingredient of the relevant provision i.e. Section 20 of the Ordinance , 2001 and instead, only those costs and expenditures, which are incurred ‘wholly and exclusively for the purpose of business’ is covered within the parameters of deductible cost, whereas, per learned counsel, CEA payments have been made by one company to offset the losses of another, therefore , the same cannot be construed as ‘wholly and exclusively for the purposes of SNGPL’s business; adds that an expenditure can only be construed as deductible cost when such an expenditure is essential for growth of business; it is vociferously contended that no executive instructions or directions can be relied to overwrite the statutory underpinnings of the tax statute, therefore, the CEA payments may have been enforced and thrusted upon SNGPL but that cannot be led to construe that such expenditure may be considered deductible within ITR No. 38744 of 2025 Page 8
the paramet ers of ‘ wholly and exclusively for the purposes of business’. While attempting to explain the question of inadmissibility of CEA’s deductions, learned Additional Attorney General for Pakistan submits that these amounts may be ‘ necessary or obligatory ’ but the same cannot be construed as ‘wholly and exclusively for the purposes of business’; contends that every mandatory or statutory payment by a taxpayer is not essentially deductible by default for the purpose of computing income from business for the purpose s of tax ; further submits that the payment in issue i.e. CEA is merely a contractual payment and since it is well settled that contractual payments, in isolation of exclusivity of the business purposes, cannot be made basis for defeating the statutory obligations of the applicant SNGPL viz payment of its taxes; adds that the entire edifice of the taxpayer ’s case is premised on the notion of equity and since it is well settled that there is no equity in taxation, therefore, the case of the applicant SNGPL has no substance for treatment of CEA expenditures as deductible cost; lastly, while referring to various provisions of the Rules of Business, 1973 , learned counsel for the respondent department has argued that the Rules of Business exclusively delineate the jurisdictional boundaries of regulatory bodies and tax matters, including the determination of deductible expenses , thus, fall within the FBR ’s domain under the Ordinance, 2001 and while OGRA’s policy on CEA may serve as a regulatory guideline, it cannot override or circumvent the statutory provision of the Income Tax Ordinance, 2001, thus, it is argued that necessity of a p ayment is not part of the formula in the taxing provisions, therefore, no deduction or adjustment on account of any such expenditure can be made except as provided by the Ordinance, 2001 . Placed reliance on Atta Hussain Khan Ltd. v. Commissioner Income Tax (PLD 1969 SC 517), Tuticorin Alkali Chemicals v. Commissioner of Income Tax (Tax Reference Case 1-2 of 1992 (SCI), Mallalieu v. Drummont (H.M. Inspector of Taxes) [1983] 57 TC 330 (House of Lords) , Smiths Potato Crisps (1929) v. Commissioner of Inland Revenue [1948] 30 TC 267 (House of Lords), Strong & Co. v. Woodifield 1906 A.C. 448 (House of Lords) , Income Tax Commissioner v. Malayalam Plantation (AIR 1964 Supreme ITR No. 38744 of 2025 Page 9
Court 1722), Hashwani Hotels Ltd. v. Government of Pakistan (2007 PTD 1473), Government of Pakistan v. Hashwani Hotels Ltd. (PLD 1990 SC 68), Government of West Pakistan and others v. M/s. Jabees Ltd. (PLD 1991 SC 870), PTV v. Commissioner Inland Revenue (2019 SCMR 282), Justice Qazi Faez Isa v. President of Pakistan (PLD 2022 SC 119 ), Abdul Sattar Chughtai v. Pakistan Bar Council (PLD 2007 Lahore 170 ), Mirza Muhammad Nazakat Baig v. Federation of Pakistan (2020 SCMR 631 ), Commissioner of Income Tax Peshawar v. DG NWFP Employees Social Security Institution (2019 SCMR 439). 11. We have heard the learned counsels for the parties at considerable length and have also gone through the available record as well as case laws cited by both sides with, their able assistance. 12. As evident, the applicability and interpretation of Section 20 of the Ordinance, 2001, particularly the expression - “wholly and exclusively for the purposes of business ” - is at the heart of the dispute between the parties and since both sides have also extensively relied upon the English, Indian and Pakistani case law in this respect , therefore, with the able assistance of the learned counsels for the parties, we have traced down the gradual legislative development of the identical expressions, as used in tax legislation, in all three jurisdictions. UNITED KINGDOM INCOME TAX ACT, 1842 Under the Income Tax Act, 1842, the matters pertaining to deductions were covered under the Rules, as supplied in Para 1 of the Schedule 4 of the said Act and the relevant Rules are reproduced herein below: :::::::::::::: “Deductions not to be allowed on First and Second Cases First — In estimating the Balance of the Profits or Gains to be charged according to either of the First or Second Cases, no Sum shall be set against or deducted from, or allowed to be set against or deducted from such Profits or Gains, for any Disbursements or Expenses whatever , not being wholly and exclusively laid out or expended for the Purposes of such Trade, Manufacture, Adventure, or Concern, or of such Profession, Employment or Vocation; nor for any Disbursements or Expenses of ITR No. 38744 of 2025 Page 10
Maintenance of any Dwelling House or domestic Offices, or any Part of such Dwelling House or domestic Offices, except such Part thereof as may be used for the Purposes of such Trade or Concern, not exceeding the Proportion of the said Rent or Value herein -after mentioned; nor for any Sum expended in any other domestic or private Purposes, distinct from the Purposes of such Trade, Manufacture, Adventure, or Concern, or such Profession, Employment, or Vocation.”
INCOME TAX ACT, 1918 Similarly, under the Income Tax Act, 1918, the subject was covered under Schedule D of the said Ac t and the relevant extract therefrom were as follows: Schedule D. Cases I. and II. 3. In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of— (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment, or vocation: (b)………….. INCOME TAX ACT, 1952 Chapter II, Section 137 of the Income Tax Act, 1952 of the United Kingdom was as under: 137. Subject to the Provisions of this Act, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of- (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation; (b) …………. INCOME AND CORPORATION TAXES ACT 1988 74. Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of— (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation; CORPORATION TAX ACT 2009 Chapter 4 – Trade Profits: Rules Restricting Deductions 54. Expenses not wholly or exclusively for trade and unconnected losses ITR No. 38744 of 2025 Page 11
(1) In calculating the profits of a trade, no deduction is allowed for— (a) expenses not incurred wholly and exclusively for the purposes of the trade, or (b) losses not connected with or arising out of the trade INDIAN PROVISIONS INCOME TAX ACT, 1922 10. Business. - (1) The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in any respect of profits or gains of any bus iness, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely:- (i) . . . . . (xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and expenses of the assessee laid or expended wholly and exclusively for the purpose of such business, profession or vocation: INCOME TAX ACT, 1961 37. General. — (1) Any ex penditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or professi on shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. PAKISTAN INCOME TAX ACT, 1922 10. (1) . . . . . (2) . . . . . . . . . . (xvi) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out of expended wholly and exclusively for the purpose of such business, profession or vocation: INCOME TAX ORDINANCE, 1979 23. Deductions. –(1) In computing the income under the head “Income from busi ness or profession”, the following allowances and deductions shall be made, namely:- (i) any rent paid for the premises in which such business or profession is carried out; . . . . . ITR No. 38744 of 2025 Page 12
(xviii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assesse e) laid out or expended wholly and exclusively for the purpose of such business or profession: INCOME TAX ORDINANCE, 2001 20. Deductions in computing income chargeable under the head “Income from Business”.— (1) Subject t o this Ordinance, in computing the income of a person chargeable to tax under the head “Income from Business” for a tax year, a deduction shall be allowed for any expenditure incurred by the person in the year [wholly and exclusively for the purposes of business]3. 13. Although it is extensively argued by the learned counsels for the respondents that only that expenditure which is wholly and exclusively for the business, which expenditure is for enhancing taxable income, will be deductible, however, by and large, t he parties are not at dispute that only those expenditures or costs are deductible which are incurred by the assessee ‘wholly and exclusively’ for ‘the purposes of business’, therefore, the pivotal question which requires determination is to determine that whether the CEA amount being paid by the…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.