IN THE HIGH COURT OF SINDH AT KARACHI

I.T.R.A. No.42 of 2016

[The Commissioner Inland Revenue v. Pak Arab Pipeline company Limited, Karachi]

PRESENT:

Mr. Justice Arshad Hussain Khan

Mr. Justice Amjad Ali Sahito

*****

Applicant : Through Mr. Faheem Ali Memon, Advocate

Respondent : Through Mr. Arshad Siraj, Advocate.

Date of hearing : 01.09.2026

Date of order : 01.09.2026

O R D E R

ARSHAD HUSSAIN KHAN J; Through this Reference Application filed under Section 133 of the Income Tax Ordinance, 2001, (“the Ordinance”) the applicant has challenged the Appellate Order dated 20.10.2015 passed by the Appellate Tribunal Inland Revenue (ATIR), Karachi Bench in ITA No.590/KB/2012 for the Tax Year 2005. By order dated 25.10.2016, this Court issued pre-admission notices to the respondent on the following proposed question of law:

"Whether in the facts and circumstances of the case, the learned Appellate Tribunal Inland Revenue is justified in holding that the interest income earned by the respondent be taxed on Accrual Basis instead of on Receipt Basis?"

2. The brief facts leading to the present reference are that the respondent, M/s. Pak Arab Pipeline Company Limited, is an unlisted public limited company incorporated in Pakistan and a subsidiary of Pak Arab Refinery Limited (PARCO). Its principal business activity is the transportation of petroleum products through its pipeline system from Port Qasim to Mahmood Kot, District Muzaffargarh, and from Korangi to Port Qasim. The respondent commenced its commercial operations on 01.03.2005 and, therefore, Tax Year 2005 was its first year of commercial operations. For the said tax year, the respondent filed its return of income declaring a net loss of Rs.10,416,073,556/-. The respondent's case was selected for audit under Section 177 of the Ordinance. During the course of audit proceedings, the Taxation Officer observed that the respondent had not offered interest income accrued to company for taxation on a receipt basis. Consequently, the Taxation Officer, through an amended assessment order passed under Section 122(1) of the Ordinance, made an addition in respect of the accrued interest income to the respondent's total income. Aggrieved by the said addition, the respondent preferred an appeal before the Commissioner Inland Revenue (Appeals), who maintained the amended assessment order. However, with regard to the respondent's contention that interest income to the extent of Rs.53.017 million had already been offered to tax in its return of income, the Officer Inland Revenue was directed to examine the said claim and modify the assessment order, if warranted. The respondent thereafter approached the learned Appellate Tribunal Inland Revenue. The learned Tribunal, vide impugned order dated 20.10.2015, allowed the respondent's appeal and held that the interest income was liable to be taxed on an accrual basis rather than on a receipt basis.

3. Learned counsel for the applicant-Commissioner Inland Revenue argued that the Taxation Officer had rightly assessed the interest income on a receipt basis in accordance with the relevant charging provisions of the Ordinance. He submitted that income arising from interest or profit on debt is liable to be taxed in the tax year in which it is actually realized or received by the taxpayer. Learned counsel further contended that the learned Appellate Tribunal Inland Revenue erred in law as well as on facts in reversing the concurrent findings of the Taxation Officer and the Commissioner Inland Revenue (Appeals) and in holding that the interest income was taxable on an accrual/mercantile basis rather than on actual receipt. According to him, the impugned order is contrary to the applicable provisions of the Ordinance and has resulted in loss of revenue to the public exchequer.

4. Conversely, learned counsel for the respondent-taxpayer supported the impugned order passed by the learned ATIR and submitted that the respondent, being a company, regularly maintains its accounts on the mercantile/accrual basis in accordance with Section 32 of the Ordinance, read with the applicable International Accounting Standards (IAS). He contended that, under Section 32(2) of the Ordinance, a company is required to account for its income chargeable to tax on an accrual basis and that the respondent has consistently followed the said method of accounting without any deviation. According to learned counsel, the accrual method appropriately recognizes income and the corresponding expenditure in the tax year to which they relate, irrespective of the actual receipt or payment thereof. He, therefore, maintained that the learned ATIR had correctly applied the statutory method of accounting and committed no error of law in holding that the interest income in question was liable to be taxed on an accrual basis rather than on a receipt basis.

5. We have heard the learned counsel for both parties, carefully examined the record, and perused the impugned order of the learned Appellate Tribunal Inland Revenue.

6. Section 32(1) of the Ordinance provides that, subject to the provisions of the Ordinance, a person’s income chargeable to tax shall be computed in accordance with the method of accounting regularly employed by such person. Sub-section (2), however, specifically provides that a company shall account for income chargeable to tax under the head “Income from Business” on an accrual basis. Section 34(1) complements this requirement by providing that a person accounting for income chargeable under the head “Income from Business” on an accrual basis shall derive income when it becomes due to such person. Sub-section (2) of Section 34 further explains that an amount becomes due when the person becomes entitled to receive it, even though the time for discharge of that entitlement may be postponed.

7. In the present case, the record reflects that the respondent-company regularly maintained its accounts on the mercantile/accrual basis and that the disputed interest income was treated as income falling under the head “Income from Business.” Once the income in question falls under that head, the consequence prescribed by Section 32(2) follows: being a company, the respondent is required to account for such income on an accrual basis. Read with Section 34, the income is thus recognized for tax purposes when the respondent becomes entitled to receive it and not merely when the amount is actually received. In the absence of any specific provision of the Ordinance requiring the disputed interest income to be taxed exclusively upon actual receipt, the Department could not depart from the statutory accrual method and seek to bring the same income to tax on a receipt basis. The learned Tribunal was, therefore, justified in holding that the disputed interest income was liable to be accounted for and taxed on an accrual basis.

8. In view of the above discussion and observations, the proposed question of law is answered in the affirmative, in favor of the respondent Taxpayer and against the applicant. Consequently, the Appellate Order dated 20.10.2015 passed by the Appellate Tribunal Inland Revenue in ITA No. 590/KB/2012 is hereby upheld, and this Reference Application stands dismissed with no order as to costs.

Let a copy of this order be sent to the Appellate Tribunal Inland Revenue, Karachi Bench, under the seal of this Court as required under Section 133(5) of the Income Tax Ordinance, 2001.

Instant ITRA stand disposed of alongwith pending application(s).

JUDGE

Naveed PA