Law: Income Tax Ordinance, 2001

Section: 32, 100A,122(5A)

Summary The Supreme Court dismissed the Revenue’s appeal and upheld MCB Bank’s position: an actuarial pension-fund surplus shown under IAS-19 is not taxable income until it is actually repaid to the employer. The Court held that Rule 4, Part-II of the Sixth Schedule governs this issue even for a banking company. Core points MCB Bank maintained an approved defined-benefit pension fund through a trust deed for employees. Under IAS-19, an annual actuarial valuation may produce a surplus or deficit; MCB recorded the Tax Year 2011 surplus as income in its financial statements. MCB did not offer that surplus to tax, relying on Rule 4, Part-II of the Sixth Schedule, which treats employer contributions as income only when repaid to the employer. The tax authorities amended the return under Section 122(5A), arguing that banking companies must compute income under Section 100A and the Seventh Schedule on an accrual basis. The Supreme Court held that the insurance “one unit/basket” principle cannot automatically be applied to banks. The Seventh Schedule contains no specific rule taxing an actuarial pension surplus; therefore, Rule 9 imports the applicable Ordinance provisions, including Rule 4 of the Sixth Schedule. “Repaid” means an actual cash repayment or transfer back to the employer, not a notional IAS-19 accounting surplus. A bank may use a consistently followed hybrid accounting method for tax purposes, and the department cannot depart from an accepted past practice without a valid legal basis. The appeal was dismissed, confirming the Lahore High Court’s decision in favour of MCB Bank. Legal framework   Law / provision Subject Court’s holding Section 32, Income Tax Ordinance, 2001 Method of accounting; companies generally account for business income on accrual basis Accrual accounting governs commercial/financial-statement treatment, but it does not by itself determine taxability; a consistently employed method may be recognized for tax.  Section 100A, Income Tax Ordinance, 2001 Special computation regime for banking companies It requires banking-company income and tax to be computed under the Seventh…