Legal Principle & Question Decided

Ruling Summary: This decision was rendered by the Supreme Court of Pakistan, officially reported as 2026 PTD 967. In this matter between COMMISSIONER INLAND REVENUE, ZONE-V, CORPORATE REGIONAL TAX OFFICE, LAHORE and POWER LINE CONSTRUCTION COMPANY (PVT.) LTD., LAHOREHonorable Justice Munib AkhtarShaigan Ijaz,Qaiser Tasleem, 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.

Full Judgment Text & Judicial Ruling

305

2026 P T D 967 [Supreme Court of Pakistan] Before Munib Akhtar, Muhammad Shafi Siddiqui and Miangul Hassan Aurangzeb, JJ COMMISSIONER INLAND REVENUE, ZONE-V, CORPORATE REGIONAL TAX OFFICE, LAHORE Versus POWER LINE CONSTRUCTION COMPANY (PVT.) LTD., LAHORE C.P.L.A. No.2442-L of 2022, decided on 21st October, 2025. (a) Income Tax Ordinance (XLIX of 2001)--- ----Ss.4, 74, 120 & 122(2)---Dispute regarding applicability of the Income Tax Ordinance, 2001 to a given tax year---Whether the Ordinance, 2001 applies as it stood on 30 June (end of tax year) or on 1 July (beginning of next year)---Tax year being 2009 and notice under Section 122(9) issued in 2015 to amend a deemed assessment---Legality---Each tax year is a self-contained fiscal unit governed by the law as it stands in respect of that tax year alone---Principle enunciated---Ordinance, 2001 applied as it stood on the last day of the tax year---Department s notice held to be time-barred---Facts of the case in brevity were that the case arose under the Income Tax Ordinance, 2001, concerning the limitation for amendment of assessment under Section 122(2) for the tax year 2009---The respondent company s deemed assessment order under Section 120 was sought to be amended by a notice issued on 18.06.2015---The taxpayer argued that the notice was time-barred based on the version of Section 122(2) applicable on 30 June 2009, which allowed amendment only within five years from issuance of the assessment order---The department contended that the substituted version introduced by the Finance Act, 2009, effective 1st July 2009, extended the limitation period and therefore governed the case---The High Court upheld the taxpayer s view, holding that the earlier provision applied---Pivotal issue requiring determination before the Supreme Court was as to How is the Income Tax Ordinance, 2001 to apply in relation to a given tax year; as it stood at the end of the said year (i.e. on June 30th) or as amended on July 1st by the Finance Act of that year, which is the beginning of the next financial year ?---Held: The genesis of the rule in relation to the charging section of the Income Tax Act, 1922 was that the statute applied not as it stood on the last day of the previous year but rather as on the first day of the year when the statute was brought into effect by the Finance Act in relation thereto, and that was inclusive of all amendments (if any, which was more often than not the case) made to the Act up to and on the latter date---But any amendments made thereafter did not apply to the previous year in question---Or, put differently, the Income Tax Act, 1922 did not apply as it stood on March 31st (or June 30th) but rather as it stood on the succeeding April 1st (or July 1st)---For each tax year the 2001 Ordinance applied as it stood at the end of that year---Any other date, including in particular the first day next succeeding, was of no relevance for the simple reason that no such referent existed in the charging provision---The day next succeeding the last day of a tax year was simply the first day of the next tax year---It had no meaning or relevance for the tax year that just ended---Put differently, the end of the year which was to be brought to tax did not, as it did under the predecessor statutes, slide into a year that had also to be taken into account since the tax was to be charged with reference to the latter---Thus, each tax year was, in all aspects, in near complete accord and harmony with the fundamental principle of income tax law, i.e., that each such period is a self-contained unit ---Since everything was self-contained in the tax year, which was its own referent for all purposes of the charge, it followed that the 2001 Ordinance applied to that tax year as it stood on the last day of such period, i.e., June 30th---However, this was in relation to the normal tax period , which was the situation in the present case in respect of the TY 2009, whereas, Section 74 also dealt with what was described therein as a special tax year ---Same principles applied equally, mutatis mutandis, in relation to a special tax year---If the 2001 Ordinance was amended on or before its last day (i.e., on or before June 30th), that still would not have affected the financial or budgetary position of the Federal Government for the ensuing financial year---The reason was that the tax, though levied on and assessed for the (just ended) tax year, was nonetheless collected in the following (financial) year---Therefore, the (expected) revenue receipts on account of the tax would not be affected---The rates amended up to 30th June for the just ended tax year would both properly close that year and also result in receipts that would be collected in, and therefore for, the ensuing financial year---In the present case, the department took the position that the provision applied as it stood on the date of the notice by when it had of course been substituted to take the form---High Court held that the change in law could not affect the vested right that had accrued to the taxpayer to have the provision applied as it stood on the last day of the tax year---Therefore, the notice was time barred---On any view of the matter the department s stand was, without merit---Present leave petition was converted into an appeal and the question posed was answered against the department---Appeal failed and same was dismissed, in circumstances. Maharajah of Pithapuram v. Commissioner of Income Tax AIR 1945 PC 89, 13 ITR 221, 72 IA 241, [1945] UKPC 10; Scindia Steam Navigation Company Ltd. v. Commissioner of Income Tax AIR 1955 Bom 230, (1954) 26 ITR 686 and Commissioner of Income Tax v. Scindia Steam Navigation Company Ltd. (1961) 42 ITR 589, AIR 1961 SC 1633 ref. (b) Tax--- ---Income-tax---Each tax year is a self-contained fiscal unit governed by the law as it stands in respect of that tax year alone---Principle---What are chargeable to income tax in respect of a business are the profits and gains of a year---For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant. Fawad Ahmed Mukhtar v. Commissioner Inland Revenue 2022 SCMR 426 ref. Commissioner of Income Tax v. Chitnavis AIR 1932 PC 178, 6 ITC 453, [1932] UKPC 33 ref. Shaigan Ijaz, Advocate Supreme Court (via video-link, Lahore) and Dr. Ishtiaq, D.G., Law for Petitioner. Qaiser Tasleem, Advocate Supreme Court (via video-link, Lahore) for Respondent. Date of hearing: 27th May, 2025. JUDGMENT MUNIB AKHTAR, J.---This matter is being disposed of as an appeal; see below. It arises out of the Income Tax Ordinance, 2001 ("2001 Ordinance") and raises, in the facts and circumstances of the case, the following question of law of general application: how is the 2001 Ordinance to apply in relation to a given tax year: as it stood at the end of the said year (i.e., on June 30th) or as it stands on the first day thereafter (i.e., July 1st)? 2. The matter relates to the tax year ("TY") 2009. The respondent filed its tax return for the said year, which became a deemed assessment order under section 120. Thereafter, a notice was issued by the concerned officer of Inland Revenue on 18.06.2015 under subsection (9) of section 122 (read with subsections (1) and (5) thereof) seeking to amend the deemed assessment. The respondent took the plea that the notice was beyond time. This was on the basis that subsection (2) of section 122 applied to the respondent's case as it stood at the end of TY 2009 (i.e., on 30.06.2009). At that time, the provision was as follows: "(2) An assessment order shall only be amended under subsection (1) within five years after the Commissioner has issued or is treated as having issued the assessment order on the taxpayer." 3. The Commissioner (herein after referred to as the "Department") however took the position that the provision applied as it stood after being substituted by the Finance Act, 2009, which came into force on 01.07.2009 (see section 1(3) thereof). As so substituted, the subsection read (and continues to be) as follows: "(2) No order under subsection (1) shall be amended by the Commissioner after the expiry of five years from the end of the financial year in which the Commissioner has issued or treated to have issued the assessment order to the taxpayer." (For completeness, we may note in passing that the position under subsection (4), which relates to the further amendment of an amended assessment order, was along the same lines.) 4. It will be seen that subsection (2), as substituted, allows for a more extended period within which the notice can be issued. It is common ground that if the provision applied as contended by the respondent then the notice was indeed hit by limitation, but if the Department's position was correct then the notice was timely issued. This then is the point of contention between the parties. 5. The learned Appellate Tribunal, on an appeal filed by the respondent agreed with the latter. The Department took the matter to the High Court in tax reference where, by means of the impugned judgment, a learned Division Bench affirmed. Relying on the High Court's own earlier decision reported as Commissioner Inland Revenue v. Major General Retd. Dr. C. M. Anwar and others 2015 PTD 424 and the order of this Court dismissing the Department's leave petition against the same (being C.P. 1306/2014 dismissed by order dated 03.09.2014), it was held that a vested right had accrued in favor of the respondent to have section 122(2) applied to the facts and circumstances of the case as it stood on the last day of the tax year (30.06.2009). The amendment thereafter could not displace the vested right. The tax reference was accordingly dismissed and the Department is now before this Court. 6. Before us learned counsel for the Department submitted that the learned High Court had erred materially in its appreciation of the legal position. Subsection (2) of section 122 applied as it stood on the day on which the notice was issued (18.06.2015), which meant that it applied as substituted by the Finance Act, 2009. The notice was timely issued and could not be avoided on the basis of limitation. Learned counsel for the respondent submitted that the impugned judgment had rightly applied the law to the facts and circumstances of the case. The vested right accruing in favor of the respondent could not be nullified by the subsequent substitution. 7. We have heard learned counsel and considered the statutory provisions and the case law. The question now before the Court has been agitated on many occasions before the courts in different forms, arising out of varied fact-situations. However, the essence of the dispute remains the same: for a given tax year, does the 2001 Ordinance apply as it stood on the last day of the year (June 30th) or the first day thereafter (July 1st). Now the "normal tax year", as defined in section 74 (and which applies to TY 2009) in fact coincides with the financial year, which runs from July 1st in one calendar year to June 30th in the next. (The financial year is defined in such terms by section 3(19) of the General Clauses Act, 1897.) The annual Finance Act, whereby invariably each year many amendments are made in fiscal laws including the 2001 Ordinance, typically (though not always) comes into force from the beginning of the financial year, i.e., July 1st. Thus, the question now before the Court can be restated as follows: for any given tax year does the 2001 Ordinance apply as it stood at the end of that year or as amended on July 1st by the Finance Act of that year, which is the beginning of the next financial year? 8. The context in which this question is agitated is invariably the taxpayers' claim that the provision(s) in play apply in the unamended form since, so it is contended, they have a vested right in this regard or that such application constitutes a past and closed transaction. The claim is that to apply the provisions as amended by the Finance Act would be to give the changes "retrospective" effect. The Department, on the other hand, inevitably counters that such is not the case and that the statute applies as amended. It should be remembered that the amendments in question are rarely expressly given retrospective effect. They are just what they state to be: changes in the statute coming into force on the given date which is invariably (though by no means always) the first of July of the relevant financial year. The Department's claim is always that it is simply the statute as so amended that applies to the just ended tax year. The taxpayers, on the other hand, resist the impugned amendments on the ground that if so then the amendments are in effect being applied retrospectively, thereby trenching upon rights claimed to be vested or transactions that are past and closed, as the case may be. Indeed, as noted above, the question was framed and decided in the matter at hand in precisely such terms. The Finance Act, 2009 did not itself give retrospective effect to the substitution of section 122(2), which simply came into force on 01.07.2009. Yet, its application was resisted on the ground that to apply it to the respondent's case would be to give it retrospective effect. As noted, the forums below accepted that the respondent had an undefeatable vested right for section 122(2) to apply as it stood on the last day of TY 2009. 9. It should be noted for completeness that sometimes the question, though in essence remaining the same, is cast in inverse form. That is, the taxpayers (if it suits their purpose) contend that the 2001 Ordinance applies as amended so that the change(s) being relied upon ought to be given what would be retrospective effect. The context here is that it is usually claimed in such a situation that the change is "beneficial" in nature and hence so applies. The Department in such cases of course contends that the amendment cannot or does not have such application. However, the essential question remains as postulated. 10. When the question is cast in this frame it requires the courts, in litigation that can cumulatively last several years before the High Courts and this Court, to consider and decide complex and vexed questions as to what are (or are not) vested rights or past and closed transactions in the facts and circumstances of the case (or what is, or is not, beneficial legislation). Delicate distinctions are inevitably drawn and the provisions involved end up, more often than not, being parsed into ever more refined and elaborate interpretations. While no one who has any familiarity with fiscal statutes will deny that this branch of the law requires intense legal scrutiny, and often approaches to legal reasoning that may well be somewhat difficult and even alien for those (including lawyers) who are not well versed or experienced in the field, a point can, respectfully, be reached when it can legitimately be asked whether the "gains" (in terms of determining the "correct" conclusion of what is, or is not, in law a vested right or past or closed transaction or beneficial legislation) outweigh the "costs" (in terms of time spent and effort expended in seemingly endless litigation). It may well therefore be fruitful to take a step back and take another look at the whole issue from a different perspective. It is in this spirit that we approach the question at hand. 11. In our view, respectfully, the time is perhaps ripe to look at something that lies at the root of the issue: from whence came the conclusion that income tax law is to apply as it stands on the first day after the day on which ends the year the income of which is to be taxed? For, pared to its most essential form, that is the question before the Court. This question can only be properly answered by, and addressed in the context of, a historical and comparative analysis of the 2001 Ordinance and the predecessor income tax statutes. 12. The levy of income tax in the sub-continent, after the assumption of direct rule by the British Crown pursuant to the Proclamation of 1858, has a long and fascinating history. By way of background that history may be briefly alluded to by highlighting some of the principal legislation, there being a great number of statutes-usually of short duration-that were enacted from time to time relating to income tax. The first enactment came as early as 1860. That statute and a mass of legislation that followed were replaced by an Act of 1886 which, interestingly, as its long title attested, was "[a]n Act for imposing a tax on income derived from sources other than agriculture". This statute was perhaps the genesis for the division that eventually crystallized in a constitutional rule when federalism was introduced by means of the Government of India Act, 1935, of excluding the legislative competence of tax on agricultural income from the Centre's (or Federation's or Union's) domain-a division that has been maintained both in Pakistan and India after Independence. The Act of 1886 (along with much intervening legislation) was ultimately repealed and replaced by the short-lived Income Tax Act, 1918, which in turn gave way to the Income Tax Act, 1922 ("1922 Act"). It is with this statute that the analysis must begin. This law remained on the statute book up to Partition and in India till 1961 when it was replaced by the Income Tax Act of that year ("1961 Indian Act"). (This law is still in the field though apparently scheduled to be replaced (from 01.04.2026) by fresh legislation, the Income Tax Act, 2025.) In Pakistan the 1922 Act lasted a couple of decades more, till the Income Tax Ordinance, 1979. Thus, the 1922 Act has had a long life and, as will be seen, has left an enduring mark on tax jurisprudence, particularly in the context of the question at hand. 13. One point may be made here. The General Clauses Act, 1897 had, when enacted, provided that "financial year" meant the "year commencing on the first day of April" (a definition, in fact, to be found also in a preceding Act, of 1887, relating to general clauses). Both at the time of the enactment of the 1922 Act and at all times prior to Partition this was the definition: a financial year began on April 1st in a calendar year and ended on 31st March in the next. This continues to be the position in India. It was also initially the position in Pakistan and it was only in 1959 that the definition was altered to become that which has applied ever since, i.e., that a financial year commences on July 1st in a calendar year and ends on June 30th in the next. 14. Before proceeding to consider the 1922 Act itself it is necessary to set out a basic principle of income tax law, which is deeply rooted in the jurisprudence of this area and which has been uniformly applied across the decades to all the statutes, including the present one. The importance of this for present purposes will emerge later in the judgment. 15. As is well known income tax is a levy that is annual in nature, i.e., the tax is imposed on the income of a specified twelve month period. Income tax statutes are therefore, in a fundamental sense, annual in their structure, form and application and this has been the position throughout even though there have been certain departures from this basic principle. As a result, it is fundamental to income tax law that each specified (annual) period for which the tax is levied is a separate "unit". This principle was recognized early on in the life of the 1922 Act by the Privy Council in the leading case of Commissioner of Income Tax v. Chitnavis AIR 1932 PC 178, 6 ITC 453, [1932] UKPC 33, where it was held as follows (emphasis supplied): "What are chargeable to income tax in respect of a business are the profits and gains of a year... For the purpose of computing yearly profits and gains, each year is a separate self-contained period of time, in regard to which profits earned or losses sustained before its commencement are irrelevant." (pp. 180-81) This deeply embedded principle has been stated and applied innumerable times, of which a recent example is the judgment of this Court reported as Fawad Ahmed Mukhtar v. Commissioner Inland Revenue 2022 SCMR 426 (at para 12). With this in mind we now turn to look at the 1922 Act. 16. The yearly period the income of which was liable to tax was referred to in this statute as the "previous year". This term was defined in section 2(11) of the Act. Shorn to its essence (and as relevant for present purposes), it provided (when the statute was enacted and up to Partition) that "previous year" meant "the twelve months ending on the 31st day of March next preceding the year for which the assessment is to be made". It was the income of this period that was to be brought to tax, annually in (as noted above) separate, successive, self contained periods. In effect the period so liable to tax coincided with the financial year immediately prior to the year for which the assessment was to be made. (This was the basic position. Certain departures from it, provided for in the statute, are not relevant for purposes of addressing the question at hand.) In India, this remained the position up to 1961 when the present statute was enacted. As will be seen shortly, since the financial year in India continues to be from April 1st to March 31st this position is retained in the 1961 Indian Act. In Pakistan this was also the position up to 1959 when the definition of financial year was altered so that the definition of "previous year" then became "the twelve months ending on the thirtieth day of June next preceding the year for which the assessment is to be made". The essential point however remained the same: the year the income of which was to be brought to tax was the "previous year" which, in essence, coincided with the financial year, howsoever defined. 17. The manner in which the income of a previous year was brought to tax was given in section 3, the charging section, and the manner in which it was set out in the 1922 Act is absolutely crucial for properly addressing the question at hand. Again, to set it out as it stood up to Partition (to the extent presently relevant): "3. Charge of income-tax.-Where any Act of the Indian Legislature enacts that income-tax shall be charged for any year at any rate or rates tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year..." A striking feature (at least from a present day perspective) was that the 1922 Act itself did not contain the rate or rates at which the income of the previous year was to be charged. Those rates were to be "supplied" by (i.e., set out in) some other Act which was, inevitably and invariably, the annual Finance Act (and, for convenience, is herein after so referred). Secondly, while it was the income of a previous year that was to be taxed, the charge itself was for the year for which the rates were to be set by the Finance Act. Thus, the income liable to tax was subject to two aspects which were "external" to the period the income of which (i.e., the previous year) was being taxed. One aspect was "external" to the 1922 Act itself, being that other Act of the legislature which set out the rates of income tax. The second "external" aspect was the "year" for which that income was to be assessed and charged. That year too was a period outside of the previous year being, as will be seen in a moment, in essence the financial year immediately next following. 18. Quite how these aspects came and worked together was explained by the Privy Council in the leading and fundamentally important case of Maharajah of Pithapuram v. Commissioner of Income Tax AIR 1945 PC 89, 13 ITR 221, 72 IA 241, [1945] UKPC 10 (herein after "the Privy Council decision"). The facts were as follows. The previous year for which the dispute arose was 1938- 39, i.e., the year from 01.04.1938 to 31.03.1939. During this period certain amounts that the Maharajah had settled on his daughters did not amount to income in terms of the 1922 Act as it stood during these two dates. Now, the said Act was amended by Indian Income-tax (Amendment) Act, 1939, which came into force on 01.04.1939, i.e., on the day immediately after the end of the previous year 1938-39. As so amended, the amounts settled by the Maharaja became income. April 1st 1939 was the first day of the "year" next succeeding the previous year (i.e., 1938-39) the income of which was to be assessed and brought to tax. This was so because the Indian Finance Act, 1939 set out the rates of income tax applicable to that previous year in its section 6 which provided, as presently relevant, that "income-tax for the year beginning on the 1st day of April 1939, shall be charged at the rates…

Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.

Related Legal Research & Directories

• Browse all judgments from Supreme Court of Pakistan
• Search Pakistani statutes: Constitution of Pakistan 1973, PPC, CrPC, CPC & Family Laws
• Analyze this case with Al Wakeelo AI Legal Assistant