Key Takeaways
- • The Supreme Court of Pakistan ruled that a pension fund surplus recorded under IAS 19 is not taxable income for a bank unless the surplus is actually refunded to the employer.
- • Under Rule 4 of Part II of the Sixth Schedule, employer pension contributions or income earned on them become taxable only in the tax year the amount is actually received back by the employer.
- • The three-member bench dismissed the Commissioner Inland Revenue's appeal against MCB Bank, upholding the Lahore High Court's judgment.
- • The court held that accounting principles cannot independently determine tax liability, and tax authorities cannot reject a consistently followed bank accounting practice without sound legal grounds.
Summary
The Supreme Court of Pakistan has ruled that a 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, according to a report by APP and UrduPoint dated October 30, 2026. The judgment, authored by Justice Aqeel Ahmed Abbasi, dismissed a civil appeal filed by the Commissioner Inland Revenue against MCB Bank and upheld the Lahore High Court's earlier decision. The three-member bench also included Justice Irfan Saadat Khan and Justice Shakeel Ahmed.
The court reasoned that under Rule 4 of Part II of the Sixth Schedule, employer contributions to a pension fund, or income earned on them, become taxable only in the tax year in which the amount is actually received back by the employer. Although banks are subject to a special regime under the Seventh Schedule, the court observed that this schedule contains no specific provision governing pension fund surpluses. The relevant provisions of the Sixth Schedule therefore apply through Rule 9 of the Seventh Schedule.
The judgment also addressed the role of accounting standards. Annual actuarial valuations under International Accounting Standard (IAS) 19 may show a surplus or deficit in pension fund assets and liabilities, but the court held that merely recording a surplus in financial statements does not make it taxable income. The court further held that accounting principles cannot determine tax liability independently of the applicable tax law, and that tax authorities cannot reject a bank's consistently followed accounting practice without sound legal grounds.
The court reasoned that under Rule 4 of Part II of the Sixth Schedule, employer contributions to a pension fund, or income earned on them, become taxable only in the tax year in which the amount is actually received back by the employer. Although banks are subject to a special regime under the Seventh Schedule, the court observed that this schedule contains no specific provision governing pension fund surpluses. The relevant provisions of the Sixth Schedule therefore apply through Rule 9 of the Seventh Schedule.
The judgment also addressed the role of accounting standards. Annual actuarial valuations under International Accounting Standard (IAS) 19 may show a surplus or deficit in pension fund assets and liabilities, but the court held that merely recording a surplus in financial statements does not make it taxable income. The court further held that accounting principles cannot determine tax liability independently of the applicable tax law, and that tax authorities cannot reject a bank's consistently followed accounting practice without sound legal grounds.
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