Law: Income Tax Ordinance, 2001

Section: 99D, 7(9), 74

Summary of Judgment The petitioner, Bank of Khyber, challenged the constitutional validity of Section 99D of the Income Tax Ordinance, 2001 and SRO 1588(I)/2023, which impose an additional 40% tax on banks’ windfall gains arising from foreign currency fluctuations, with retrospective application for the last three tax years. The petitioner argued that its accounts for tax years 2022 and 2023 had already been finalized under the law existing at that time; therefore, imposing a new tax retrospectively would disturb vested rights and past closed transactions. It also claimed the levy amounted to double taxation because the income had already been taxed at regular corporate tax rates. The respondents contended that the tax was justified to capture extraordinary profits earned by banks due to sudden currency fluctuations, and that the legislature has the authority to enact retrospective fiscal laws. The Court held that Parliament has constitutional competence to impose retrospective taxes, and Section 99D is a valid charging provision, even if it taxes income already taxed under the normal regime. However, the Court distinguished between vested rights and “past and closed transactions.” It ruled that while retrospective taxation is permissible, transactions that have already been finalized—such as profits distributed to shareholders as dividends or bonus shares before the SRO—cannot be reopened. Consequently, Section 99D can apply retrospectively only to profits that remain with the company (e.g., retained earnings or reinvested profits) but cannot apply to amounts already distributed to shareholders, as those constitute past and closed transactions. The Court directed the tax authorities to recalculate the petitioner bank’s tax liability in accordance with this principle. One-Line Brief Retrospective windfall tax under Section 99D is constitutionally valid, but it cannot apply to profits already distributed to shareholders as such payments constitute past and closed transactions. J U D G M E N T *** SYED ARSHAD ALI, J.- The Bank of Khyber (“Petitioner-Bank”), established under the Bank of Khyber Act, 1991, has…