Pak-Saudi Fertilizer Company case: Allowances in excess of 50pc could not be allowed as deduction: SC
ISLAMABAD: The Supreme Court held that the status of Pak-Saudi Fertilizer Company was of a “private company,” any allowances given by it in excess of 50% could not be allowed as deduction, and Workers Welfare Fund (WWF) was payable.
A three-member bench, headed by Justice Muhammad Ali Mazhar, and comprising Justice Irfan Saadat Khan and Justice Aqeel Ahmed Abbasi, dismissed five connected appeals of Pak-Saudi Fertilizer Company regarding three different tax issues, falling in the jurisdiction of Large Taxpayers’ Office (LTO), Islamabad.
According to the facts, the assessing officer assessed that Pak-Saudi Fertilizer company was a ‘private company,’ It was confirmed by Commissioner Income Tax (Appeals). The company challenged the order before the Income Tax Appellate Tribunal, which held that the company had a history of being treated as a “private company” and tax rates should apply accordingly for the “private company”. The appellant then approached the Islamabad High Court (IHC), which by maintaining the findings of forums below, declared that it was an admitted position that the federal government does not hold any share in the company, and the shares held by National Fertilizer Corporation could not be treated as shares held by the federal government. Dissatisfied with the IHC ruling, the petitioner filed appeals before the apex court.
Before the Supreme Court, the counsel for the taxpayer, Naveed Andrabi, stated that the forums below have ignored the letters of the Ministry of Industries, which prove that the government has 100% ownership of the company.
Babar Bilal, representing the tax department, contended that the pattern of shareholding available on record reflected that the government of Pakistan did not hold any shares in the company, while the shares held by National Fertilizer Corporation cannot be treated as shareholding of the federal government. He submitted that the letters of Ministry have been considered and rejected by judicial forums below, adding the Ministry has no authority to interpret tax laws, and the status of a company has to be determined in accordance with the definition provided in the Income Tax Ordinance, 1979, being a special law regarding the tax matter. Babar told that there is no concept of “beneficial ownership” or indirect shareholding or control in the Income Tax ordinance.
About the second question relating to salary and perquisites, the bench was informed that the Tribunal discussed it in detail by holding that terms “salary” and “perquisites” have been specifically defined in the Income Tax Ordinance, 1979 but the term “allowance” has not been specifically defined in the Ordinance.
It was submitted that the Tribunal further held that as far as provisions of Section 24(i) are concerned, the meaning of “perquisites” as contained in Section 16(2) have to be taken into account for treatment of any sum to be considered as “perquisite”. However, a specific and independent definition of “salary” has been given in Explanation-(i) to Section 24 (i) which specifically excludes (a) employer’s contribution to recognized provident fund or an approved superannuation or gratuity fund; and (b) any other sum which does not enter into the computation of pensionary or retirement benefits.
The bench was further told that the Tribunal held that “salary” and “perquisite” have to be understood by the meanings as given in Section 24(i). The question whether an item of payment under the name of “allowance” is “salary” or “perquisite” has to be answered in the light of provisions specifically contained in Section 24(i). The Tribunal observed that the definition of “salary” as contained in Explanation-(i) to Section 24(i) is exclusively meant for the purpose of calculation and computation of “perquisites” for arriving at admissible limits of “perquisites” and making addition of the amount which exceeds the prescribed limit of 50% of salary. Babar informed that the findings of the Tribunal were upheld by the High Court.
The taxpayer lawyer contended that in Mirpur Methelo Allowance case it was held that allowance is in fact part of salary and be treated as such. However, Babar Bilal submitted that such allowances do not make part of “salary”. The company may make payment of any allowances to its employees but should not exceed the maximum limit of 50% to claim its deduction as an expense for tax purposes.
Regarding the third question about the payment of the Workers Welfare Fund (WWF). The tax department counsel informed that all the forums held that it could not be established by the taxpayer that the government of Pakistan held 50% shares in the company, therefore it could not claim exemption from its payment.
The Supreme Court after hearing dismissed all the appeals.
Copyright Business Recorder, 2026