Sui Northern Gas Pipelines Limited through Raja Muhammad Yasir Vs Commissioner Inland Revenue

Stereo. H C J D A 38.

Judgment Sheet

IN THE LAHORE HIGH COURT AT LAHORE.

JUDICIAL DEPARTMENT

ITR No. 38744 of 2025

Sui Northern Gas Pipelines Limited Versus

Commissioner Inland Revenue, Zone III, Large Taxpayers Office, Lahore

JUDGEMENT

Dates of Hearing 18.09.2025, 22.09.2025, 30.09.2025, 06.10.2025, Applicant by: M/s. Feisal Hussain Naqvi and Ameer Hamza Dogar, Advocates Respondent by: Mirza Nasar Ahmad, Additional Attorney General for Pakistan assisted by Mr. Asad Ali Bajwa, Deputy Attorney General for Pakistan & Shakeel Ahmad Pasha, Assistant Attorney General for Pakistan Mr. Shazib Masood, Advocate

KHALID ISHAQ, J. This judgment shall decide the captioned Income Tax Reference as well as the following Income Tax References since common questions of law and facts are involved in all these cases:

i. ITR No. 38420 of 2025 ii. ITR No. 38743 of 2025 iii. ITR No. 38746 of 2025 iv. ITR No. 38747 of 2025 For the purpose of this judgment, the facts of the present case shall suffice.

2.This is a reference under Section 133(1) read with Section 134A(II) of the Income Tax Ordinance, 2001 (“Ordinance, 2001”), made at the instance of the applicant-Sui Northern Gas Pipelines Limited (“SNGPL”). The assessment year is 2010 and the question referred for opinion, as said to has

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arisen from order dated 18.03.2025 (“Impugned Order”) passed by Appellate Tribunal Inland Revenue, Lahore (“Tribunal”), is as under:

“Whether, under the facts and circumstances of the case, Cost Equalization Adjustment (“CEA”) is admissible under Section 20 of the Income Tax Ordinance, 2001 or not?”

3.Briefly, the facts which are necessary for the decision of this reference are that applicant SNGPL filed its return of income for the tax year 2010, which return was taken as deemed assessment under Section 120(1) of the Ordinance, 2001. The deemed assessment was subsequently alleged as erroneous being prejudicial to the interest of the Revenue and accordingly show cause notice dated 13.02.2012 (“SCN”), issued under Sections 122(9), read with 122(5A) of the Ordinance was served upon the applicant SNGPL. It is pertinent to mention here that there were multiple issues of alleged evasion of taxes, however, the only issue which requires determination by us pertains to the permissibility of the deduction of an amount of Rs.11,217,001,000/- as Cost Equalization Adjustment (CEA), which amount was deducted by the applicant SNGPL while computing its income chargeable to tax under the head as ‘income from business’ for the tax year 2010, in terms of Section 20 of the Ordinance, 2001. The SCN was duly replied, supported by all relevant documents, however, considering the said reply as insufficient, the Assessing Officer proceeded to pass the Amended Assessment order dated 10.04.2012 under Section 122(1) read with Section 122(5A) of the Ordinance, 2001 (“ONO”).1

4.Being aggrieved, the applicant SNGPL filed an appeal under Section 127 of the Ordinance, 2001 before the Commissioner Inland Revenue (Appeals) “CIR (A)”, which appeal was heard on 07.11.2012, to the extent of issue in hand i.e. adjustment/deduction of CEA and was decided in favour of the applicant SNGPL vide order dated 28.12.2012.

Initially, it was alleged vide SCN that the amount of CEA, which was claimed to have been paid to SSGC and deducted as such under Section 20 of the Ordinance, was not shown to have been declared by SSGC as income. But subsequently it was settled that the amount transferred by SNGPL to SSGC as CEA was duly reflected as such in the SSGC’s returns, however, the ONO is premised on the Revenue’s assertion that CEA is not a permissible cost deduction under Section 20 of the Ordinance.

5.Feeling dissatisfied from order dated 28.12.2012 passed by CIR(A), the respondent Revenue filed appeal under Section 131 of the Ordinance, 2001 before the Tribunal, which appeal was dismissed vide order dated 03.08.2015. The respondent Revenue filed reference bearing ITR No.39651 of 2019 under Section 133 of the Ordinance, 2001 before this Court, which reference was allowed vide order dated 10.03.2025 in the terms that the order dated 03.08.2015 passed by the Tribunal was set aside and the matter was remanded to the Tribunal for decision afresh.

6.In post remand proceedings, the Tribunal heard the parties and proceeded to pass the Impugned Order, whereby, the order dated 07.11.2012 passed by the CIR(A) was set aside and the findings rendered by virtue of ONO were upheld. Since the applicant SNGPL is a State-Owned Enterprise (“SOE”), therefore, the matter was referred to the Alternative Dispute Resolution Committee (“ADRC”) in terms of the provisions contained in Section 134A of the Ordinance, 2001. ADRC passed the order dated 17.06.2025, settling all issues except the issue relating to CEA; ADRC held that “the committee remains inconclusive on the issue of admissibility of the claim and the parties are free to approach the relevant judicial forum on this legal issue.”. Hence this reference Application, seeking opinion of this Court on the question framed above vide order dated 30.06.2025.

7.Considering that the issue of deduction of CEA and the applicability of Section 20 of the Ordinance, 2001 also have its trappings with an agreement dated 22.09.2003 (“Agreement”), executed between the applicant SNGPL and Sui Southern Gas Company Ltd. (“SSGC”), therefore, learned counsel for the applicant SNGPL commenced his submissions by explaining the background, which necessitated the execution of the Agreement and submits that both gas Companies i.e. SNGPL & SSGC, are ‘licensees’ in terms of the provisions contained in the Oil and Gas Regulatory Authority Ordinance, 2002 (“OGRA Ordinance”); adds that in terms of Sub-section (2) of Section 8 of the OGRA Ordinance, both Companies submit their respective revenue requirements to Oil and Gas Regulatory Authority (“OGRA”) for determination of tariffs of each

ITR No. 38744 of 2025 Page 4

Company and it is on the basis of OGRA’s determination that per unit price for different category of consumers is notified while taking into account the Estimated Revenue Requirement (“ERR”) submitted by the Company(s), divided by its total predicted gas sales, which price per unit is termed as ‘Price per Unit’ = ‘Prescribed Price’; contends that in terms of Section 8(1) of the OGRA Ordinance, OGRA advises Federal Government for notification of the Prescribed Price and after considering OGRA’s determination under the applicable law and rules, the Federal Government advises OGRA viz the minimum charges and the sale price for each category of retail consumers of natural gas to notify the Prescribed Price in the official gazette in terms of Section 8(3) of OGRA Ordinance. Learned counsel has further elaborated that each licensee/gas company has different costs and profits owing to its peculiar facts and areas of operations, therefore, it is literally impossible to have one uniform Prescribed Price for different categories of consumers of both/all licensees, thus, considering the predominant factors e.g. Federalism and Socio-economic concerns, it was felt mandated by the Federal Government to work out a Policy for determination of uniform Prescribed Price for the same category of consumers of both Companies; adds that prior to the introduction of CEA mechanism, this purpose of uniform Prescribed Price was sought to be achieved by various other Policy(s)/Mechanism(s), e.g. introduction and implementation of Gas Development Surcharge (“GDS”), Tariff Adjustment Payment (“TAP”) etc.2 Per learned counsel for the applicant SNGPL, it was felt and concluded by OGRA and Federal Government that neither the system of GDS nor TAP served the purposes owing to financial management and complications relating to TAP/GDS contributions, particularly the aspect of contribution of GDS in the NFC pool and consequent overall Provincial shares entitlements @ 58% from whatever is contributed in NFC; the GDS mechanism had rather added to the issue of excessive increase of federal deficit, therefore, the CEA was introduced, which is a starkly simple and elegant solution. Learned counsel for the applicant SNGPL has The details of GDS and TAP are not required to be supplied for the purpose of this Judgment.

explained the working and effects of the CEA in detail, which may be adumbrated by the following illustration:

➢ SNGPL Prescribed Price = Rs.100/- • Rs.85/- Cost + Rs.15/- Profit ➢ SSGC Prescribed Price = Rs.116/- • Rs. 101/- Cost + Rs.15/- Profit ➢ After cost equalization payment of Rs.8/- by SNGPL to SSGC • SNGPL Prescribed Price = 108/- ▪ Rs.93/- Cost + Rs.15/- Profit • SSGC Prescribed Cost ▪ Rs.93/- Cost + Rs. 15/- Profit ➢ Result of cost equalization • Prescribed Price = Consumer Price • Full payment of gas goes directly to Gas Companies (no Provincial Share) • Simple, less complicated regulatory structure • No effect on “profits” of Gas Companies

8.As regards the implementation of CEA regime, learned counsel for the applicant SNGPL has referred to the various steps and actions being taken, which actions culminated into execution of the Agreement; submits that SNGPL filed its tariff petition for determination of tariff for the financial year 2003-04 and considering the preliminary determination by OGRA, the Ministry of Petroleum and Natural Gas realized that the purpose of achieving a uniform Prescribed Price for consumers of distinct categories across the Country cannot not be achieved on the basis of existing GDS & TAP mechanisms, therefore, a summary was initiated by the said Ministry for the Economic Coordination Council (“ECC”), the proposal qua CEA was contained in para 8 (a & b) of the said summary, which summary was accorded approval by the Finance Division vide its Office Memorandum No.F.1(25)CF-III/2003-554 dated 26.05.2003; learned counsel has placed reliance on ECC’s decision dated 16.06.2003, whereby, para 8(a &b) of the summary initiated by Ministry of Petroleum and Natural Gas was accorded ECC’s approval; adds that ECC’s decision was placed before the Cabinet and after its approval, the same was communicated to OGRA for the purpose

of determination of the tariff petition(s) filed by SNGPL. Reliance has further been placed upon OGRA’s decision dated 07.07.2003, whereby, OGRA proceeded to determine the ERR of the Gas Companies for the financial year 2003-04 and apart from other necessary determinations and directions, OGRA directed the applicant SNGPL to conclude the Agreement by or before 31.07.2003, ensuring the implementation of CEA, thus, the Agreement was executed, the terms whereof are self-explanatory. Learned counsel for the applicant SNGPL contends that it was on the basis of the Agreement that the CEA amount of Rs.11,217,001,000/- was transmitted to SSGC, which amount was deducted as expenditure incurred for the purposes of SNGPL’s business.

9.While concluding his submissions, learned counsel for the applicant SNGPL submits that CEA expenditure/cost is deductible as it is a mandatory and unavoidable expenditure since execution of Agreement and compliance thereof is not a voluntary decision, as erroneously determined by the Tribunal, instead, being licensee, OGRA’s directions carry statutory obligations for SNGPL, therefore, the compliance of such directions is sine qua non for the very existence and continuation of the SNGPL’s business; adds that Section 20(1) of the Ordinance, 2001 contemplates deduction/adjustment of such expenditures by employing the term ‘any expenditure incurred. . . wholly and exclusively....... for the purposes of business’ and since the amount of CEA is a statutory charge, wholly and exclusively incurred for nothing else but for the purposes of SNGPL’s business, therefore, Revenue’s objection viz CEA’s deductibility is unsubstantiated and untenable; further submits that if it may be assumed for the sake of arguments that the Agreement was voluntary in character, even then the CEA will remain deductible owing to connotation ‘wholly and exclusively for purposes of business’, as couched in Section 20 of the Ordinance, 2001. Placed reliance on Smith v. Lion Brewery Company [1911] A.C. 150, Moffat v. Webb (1913) 16 CLR 120, Usher'’s Wiltshire Brewery Ltd. v. Bruce (1915) AC 433, Income Tax Commissioner v. Malayalam Plantation (AIR 1964 Supreme Court 1722), CIT (Central) Calcutta v.

Standard Vacuum Oil Co. Ltd. (AIR 1967 Cal. 68), Indian Aluminum Co. Ltd. v. Commissioner of Income-Tax, West Bengal. I.C.I. (India) Private Ltd. (1972) 84 ITR 735 (SCI-5MB), A.V. Thomas Co. v. CIT (1986) 159 ITR 431 (Full Bench Kerala High Court, Commissioner Income Tax special Zone v. Dewan Khalid Textile Mills Ltd. (2016 PTD 1136) (DB Sindh), Sui Southern Gas Co. Ltd. v. Commissioner Income Tax (PLD 2001 SC 201), Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SCI), CIT v. Bombay State Road Transport Corporations (1977) 106 ITR 303, CIT v. J.K. Cotton and Weaving Mills (1980) 123 ITR 911, Keshkal Cooperative Marketing Society Ltd. v. CIT (1987) 165 ITR 437, CIT v. Pandavapura Sahakara (1988) 174 ITR 475, CIT v. Pandavapura Sahakara [1992] 201 ITR 56, Somaiya Orgeno Chemical v. CIT (1995) 216 ITR 291, Shahid Gul and Partner v. Deputy Commissioner of Income Tax (2021 SCMR 27), Commissioner Income Tax v. Alpha Insurance (PLD 1981 SC 293), David & Co. v. CIT (1979) 3 SCC 524, CIT v. Rajaram Bandekar [1994] 208 ITR 503, S.A. Builders v. CIT (2007) 1 SCC 781, Government of Sindh v. Khalil Ahmad (1994 SCMR 782).

10.On the other hand, learned counsel for the respondent department as well as the learned Additional Attorney General for Pakistan have argued that the necessity of making the payment is not one of the ingredient of the relevant provision i.e. Section 20 of the Ordinance, 2001 and instead, only those costs and expenditures, which are incurred ‘wholly and exclusively for the purpose of business’ is covered within the parameters of deductible cost, whereas, per learned counsel, CEA payments have been made by one company to offset the losses of another, therefore, the same cannot be construed as ‘wholly and exclusively for the purposes of SNGPL’s business; adds that an expenditure can only be construed as deductible cost when such an expenditure is essential for growth of business; it is vociferously contended that no executive instructions or directions can be relied to overwrite the statutory underpinnings of the tax statute, therefore, the CEA payments may have been enforced and thrusted upon SNGPL but that cannot be led to construe that such expenditure may be considered deductible within

the parameters of ‘wholly and exclusively for the purposes of business’. While attempting to explain the question of inadmissibility of CEA’s deductions, learned Additional Attorney General for Pakistan submits that these amounts may be ‘necessary or obligatory’ but the same cannot be construed as ‘wholly and exclusively for the purposes of business’; contends that every mandatory or statutory payment by a taxpayer is not essentially deductible by default for the purpose of computing income from business for the purposes of tax; further submits that the payment in issue i.e. CEA is merely a contractual payment and since it is well settled that contractual payments, in isolation of exclusivity of the business purposes, cannot be made basis for defeating the statutory obligations of the applicant SNGPL viz payment of its taxes; adds that the entire edifice of the taxpayer’s case is premised on the notion of equity and since it is well settled that there is no equity in taxation, therefore, the case of the applicant SNGPL has no substance for treatment of CEA expenditures as deductible cost; lastly, while referring to various provisions of the Rules of Business, 1973, learned counsel for the respondent department has argued that the Rules of Business exclusively delineate the jurisdictional boundaries of regulatory bodies and tax matters, including the determination of deductible expenses, thus, fall within the FBR’s domain under the Ordinance, 2001 and while OGRA’s policy on CEA may serve as a regulatory guideline, it cannot override or circumvent the statutory provision of the Income Tax Ordinance, 2001, thus, it is argued that necessity of a payment is not part of the formula in the taxing provisions, therefore, no deduction or adjustment on account of any such expenditure can be made except as provided by the Ordinance, 2001. Placed reliance on Atta Hussain Khan Ltd. v. Commissioner Income Tax (PLD 1969 SC 517), Tuticorin Alkali Chemicals v. Commissioner of Income Tax (Tax Reference Case 1-2 of 1992 (SCI), Mallalieu v. Drummont (H.M. Inspector of Taxes) [1983] 57 TC 330 (House of Lords), Smiths Potato Crisps (1929) v. Commissioner of Inland Revenue [1948] 30 TC 267 (House of Lords), Strong & Co. v. Woodifield 1906 A.C. 448 (House of Lords), Income Tax Commissioner v. Malayalam Plantation (AIR 1964 Supreme

Court 1722), Hashwani Hotels Ltd. v. Government of Pakistan (2007 PTD 1473), Government of Pakistan v. Hashwani Hotels Ltd. (PLD 1990 SC 68), Government of West Pakistan and others v. M/s. Jabees Ltd. (PLD 1991 SC 870), PTV v. Commissioner Inland Revenue (2019 SCMR 282), Justice Qazi Faez Isa v. President of Pakistan (PLD 2022 SC 119), Abdul Sattar Chughtai v. Pakistan Bar Council (PLD 2007 Lahore 170), Mirza Muhammad Nazakat Baig v. Federation of Pakistan (2020 SCMR 631), Commissioner of Income Tax Peshawar v. DG NWFP Employees Social Security Institution (2019 SCMR 439).

11.We have heard the learned counsels for the parties at considerable length and have also gone through the available record as well as case laws cited by both sides with, their able assistance.

12.As evident, the applicability and interpretation of Section 20 of the Ordinance, 2001, particularly the expression - “wholly and exclusively for the purposes of business” - is at the heart of the dispute between the parties and since both sides have also extensively relied upon the English, Indian and Pakistani case law in this respect, therefore, with the able assistance of the learned counsels for the parties, we have traced down the gradual legislative development of the identical expressions, as used in tax legislation, in all three jurisdictions.

UNITED KINGDOM

INCOME TAX ACT, 1842

Under the Income Tax Act, 1842, the matters pertaining to deductions were covered under the Rules, as supplied in Para 1 of the Schedule 4 of the said Act and the relevant Rules are reproduced herein below:

“Deductions not to be allowed on First and Second Cases First — In estimating the Balance of the Profits or Gains to be charged according to either of the First or Second Cases, no Sum shall be set against or deducted from, or allowed to be set against or deducted from such Profits or Gains, for any Disbursements or Expenses whatever, not being wholly and exclusively laid out or expended for the Purposes of such Trade, Manufacture, Adventure, or Concern, or of such Profession, Employment or Vocation; nor for any Disbursements or Expenses of

Maintenance of any Dwelling House or domestic Offices, or any Part of such Dwelling House or domestic Offices, except such Part thereof as may be used for the Purposes of such Trade or Concern, not exceeding the Proportion of the said Rent or Value herein-after mentioned; nor for any Sum expended in any other domestic or private Purposes, distinct from the Purposes of such Trade, Manufacture, Adventure, or Concern, or such Profession, Employment, or Vocation.”

INCOME TAX ACT, 1918

Similarly, under the Income Tax Act, 1918, the subject was covered under Schedule D of the said Act and the relevant extract therefrom were as follows:

Schedule D. Cases I. and II.

3.In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of—

(a)any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment, or vocation:

(b)..............

INCOME TAX ACT, 1952

Chapter II, Section 137 of the Income Tax Act, 1952 of the United Kingdom was as under:

137.Subject to the Provisions of this Act, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of-

(a)any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation;

(b).............

INCOME AND CORPORATION TAXES ACT 1988

74.Subject to the provisions of the Tax Acts, in computing the amount of the profits or gains to be charged under Case I or Case II of Schedule D, no sum shall be deducted in respect of—

(a)any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation;

CORPORATION TAX ACT 2009

Chapter 4 – Trade Profits: Rules Restricting Deductions 54. Expenses not wholly or exclusively for trade and unconnected losses

(1)In calculating the profits of a trade, no deduction is allowed for—

(a)expenses not incurred wholly and exclusively for the purposes of the trade, or

(b)losses not connected with or arising out of the trade

INDIAN PROVISIONS

INCOME TAX ACT, 1922

10.Business. - (1) The tax shall be payable by an assessee under the head Profits and gains of business, profession or vocation in any respect of profits or gains of any business, profession or vocation carried on by him.

(2)Such profits or gains shall be computed after making the following allowances, namely:- (i)

(xv)any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and expenses of the assessee laid or expended wholly and exclusively for the purpose of such business, profession or vocation:

INCOME TAX ACT, 1961

37.General. — (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

PAKISTAN

INCOME TAX ACT, 1922

(xvi)any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out of expended wholly and exclusively for the purpose of such business, profession or vocation:

INCOME TAX ORDINANCE, 1979

23.Deductions. –(1) In computing the income under the head “Income from business or profession”, the following allowances and deductions shall be made, namely:-

(i)any rent paid for the premises in which such business or profession is carried out;

ITR No. 38744 of 2025 Page 12

(xviii)any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business or profession:

INCOME TAX ORDINANCE, 2001

20.Deductions in computing income chargeable under the head “Income from Business”.— (1) Subject to this Ordinance, in computing the income of a person chargeable to tax under the head “Income from Business” for a tax year, a deduction shall be allowed for any expenditure incurred by the person in the year [wholly and exclusively for the purposes of business]3.

13.Although it is extensively argued by the learned counsels for the respondents that only that expenditure which is wholly and exclusively for the business, which expenditure is for enhancing taxable income, will be deductible, however, by and large, the parties are not at dispute that only those expenditures or costs are deductible which are incurred by the assessee ‘wholly and exclusively’ for ‘the purposes of business’, therefore, the pivotal question which requires determination is to determine that whether the CEA amount being paid by the applicant SNGPL to SSGC is a cost or expenditure being incurred as such. In our view, the ancillary question which arises for determination is that” Whether SNGPL’s business may have survived to gain taxable income by avoiding to make CEA payments to SSGC. For answering this question, we have considered SNGPL’s status in OGRA’s regime. The relevant provisions of OGRA Ordinance, as well as, various provisions of the Agreement, in context of the applicable provisions of the Ordinance, 2001 are, thus, germane to the issue in hand. Admittedly, SNGPL is a licensee in terms of the provisions contained in the OGRA Ordinance. The term “licensee” means the grantee or holder of a license4. Nobody disputes that the business activities being undertaken by SNGPL are confined to transmission, distribution or sale of gas; likewise, it is undisputed that without grant and subsistence of a valid license by OGRA, SNGPL cannot commence, undertake and continue its business of transmission, distribution or sale of natural gas5. Section 6 of the OGRA Ordinance spells out the Substituted for the words “to the extent to which the expenditure is incurred in deriving income from business chargeable to tax” by Finance Act, 2004.

See clause (xii) of Section 2 of the OGRA Ordinance.

See Section 23, OGRA Ordinance, which provides that: 23(1)(d): “No person shall undertake transmission, distribution or sale of natural gas, unless a general or specific license to undertake such activity has been issued and is in full force and effect and the person is the licensee”.

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contours of powers and authority of OGRA, which powers include OGRA’s authority to suspend, cancel, revoke or terminate any license for the undertaking of any regulated activity6 and the prescribe requirements to be satisfied by applicants for the grant of license.7 Similarly, OGRA is armed with the authority and powers to administer, enforce and certify standards and other conditions for undertaking any regulated activity, as supplied in clauses (b) & (e) of Sub-section (2) of Section 6 of the OGRA Ordinance8. The determination of Tariff is a pre-condition for the core, rather exclusive, business activity of the SNGPL i.e. distribution or sale of natural gas, thus, as a natural corollary, SNGPL’s business activity is dependent upon the determination of Tariff by OGRA and compliance of OGRA’s statutory directions. The relevant provisions of the OGRA Ordinance are Sections 7 & 8, which are reproduced herein below:

7.Tariff: -- (1) Subject to policy guidelines, the Authority shall determine or approve tariff for regulated activities whose licences provide for such determination or such approval or where authorized by this Ordinance.

(2)The criteria for determination, approval, modification and revision of tariffs shall be prescribed in the rules and in the terms and conditions of each licence and shall, inter alia, include ---

(a)provision for the protection of users of regulated activities and consumers against monopolistic or oligopolistic pricing;

(b)cost of research, development and capital investment programme;

(c)provision of reasonable returns to attract investment of the quantitative and qualitative improvements of regulated activities;

(d)encouragement and reward of efficiency;

(e)sending of appropriate price signals regarding the relative abundance or scarcity of supply of such regulated activity;

(f)minimizing economic distortions; and

(g)keeping in view the costs of alternate or substitute sources of energy.

[Emphasis Supplied]

8.Pricing for retail consumers for natural gas: -- (1) The Authority shall determine an estimate of the total revenue requirement of each licensee for natural gas engaged in transmission, distribution and the sale of natural gas to a retail consumer for natural gas, in accordance with the rules, and on that basis It is an admitted position that transmission, distribution or sale of natural gas is a regulated activity and both the companies i.e. SNGPL & SSGC are carrying out such activities.

See clause (a) of Sub-section (2) of Section 6 of OGRA Ordinance.

See clause (d) of Sub-section (2) of Section 6 of OGRA Ordinance.

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advise the Federal Government the prescribed price of natural gas for each category of retail consumer for natural gas.

(2)A licensee for natural gas referred to in sub-section (1), shall submit for review by the Authority its total revenue requirement after incorporating the actual changes in the well-head prices, as notified by the Authority and other relevant factors and the Authority shall advise the Federal Government promptly of the revised prescribed prices for the licensee for natural gas.

(3)The Federal Government shall, within forty days of the advice referred to in sub-sections (1) and (2), advise the Authority of minimum charges and the sale price for each category of retail consumer for natural gas for notification in the official Gazette by the Authority of the prescribed price as determined in sub- sections (1) and (2), the minimum charges and the sale prices for each category of retail consumers for natural gas.

(4)If the Federal Government fails to advise the Authority within the time specified in sub-section (3) and the prescribed price for any category of retail consumer for natural gas determined under sub-sections (1) and (2) is higher than the most recently notified sale price for that category of retail consumers for natural gas, the Authority shall notify in the official Gazette the prescribed price as determined by the Authority under subsections (1) and (2) to be the sale price for the said category of retail consumers for natural gas.

(5)Each licensee for natural gas shall pay to the Federal Government the development surcharge in respect of each unit of natural gas sold during the calendar month within two months of the close of that month and any amount paid by a licensee under this sub-section shall be an expenditure for which allowance shall be made in computing profits or gains under section 23 of the Income Tax Ordinance, 1979 (XXXI of 1979):

Provided that when the Income Tax Ordinance, 2001 (XLIX of 2001), comes into force the provisions of the said Ordinance shall apply for the purposes of this sub-section.

(6)In this section:

(a)......

(c)“licence for natural gas” means a licence for transmission, distribution or sale of natural gas to a retail consumer for natural gas granted pursuant to sub-section (1) of section 23;

[Emphasis Supplied]

14.The perusal of the provisions contained in Section 7 ibid, which deals with the authority and power of OGRA for determining the SNGPL’s Tariff reflects that the provision starts with a caveat that any such determination is subject to ‘policy guidelines. The term policy guidelines, for the purpose of OGRA Ordinance is defined as9: “policy guidelines” means policies of the Federal Government covering or related to any or all of the regulated activities which are issued in writing pursuant of a decision of the cabinet of the Federal Government or any committee thereof. Furthermore, Section 21 See Clause (xxvi) of Section 2 of the OGRA Ordinance.

of the OGRA Ordinance is also of irrefutable significance, which deals with the power and authority of the Federal Government to issue ‘policy guidelines’ to OGRA. Perusal of the said provision would reflect that the policy guidelines, as and when issued by the Federal Government, will have to be followed by OGRA, of-course, so long as the same are consistent with the provisions contained in the OGRA Ordinance. This leads us to two conclusions; firstly, OGRA, while determining and notifying the Tariff of SNGPL/SSGC or any other licensee who carries on regulated activity, is bound by ‘policy guidelines’ of the Federal Government. The ‘policy guidelines’ for the purpose of the case in hand are exhaustively and unequivocally explicated in the Memorandum of Ministry of Petroleum & Natural Gas, on the basis of ECC’s and Cabinet’s approvals. The relevant part thereof is reproduced herein below:

“The Federal Government has observed that determination of the revenue requirement of SNGPL and SSGC has been determined by OGRA on the basis of cost of gas for each licensee separately. Since the sale price of gas for each category of retail consumer is kept uniform all over the country and the cost of gas constitutes about 80% of the sale prices the Federal Government, has decided that the input cost of gas purchased in respect of both the gas companies should also be kept uniform. Consequently the Federal Government in pursuance of the decision of the ECC dated 16th June, 2003, and in exercise of the powers conferred under Section 21 of the OGRA Ordinance hereby issues the following policy guidelines:

In order to ensure the uniform consumer gas prices all over the country, the cost of gas purchased should be worked out for both the gas companies on an over all average basis in such a manner that the input cost of gas for both the companies becomes uniform. The OGRA should work out the revenue requirement of both the gas companies on this basis with effect from financial year 2003–04. The OGRA should also develop the mechanics for inter-company adjustment of input cost of gas through a formal agreement between the two gas companies.”

15.The above decision of the Federal Government was then conveyed to OGRA by the Cabinet Division, therefore, OGRA was bound to factor in the CEA element in its decision of SNGPL’s Tariff petition, thus, it acted accordingly while directing SNGPL to execute the Agreement by or before July 31, 2003. Foregoing in view, it is incomprehensible to infer or hold that SNGPL had a choice to ignore OGRA’s mandatory directions, which directions undoubtedly have the statutory force for compliance, so long as SNGPL wishes to continue its business as ‘licensee’. The compliance of the

mandatory directions is further evident from the terms of the Agreement, the relevant extracts whereof are reproduced herein below:

“WHEREAS the GOP has decided as a matter of policy and in the national interest that there should be a uniform price of gas for consumers throughout the country and pursuant to such decision the GOP has issued the following policy guideline under Section 21 of the Oil and Gas Regulatory Authority Ordinance, 2002 (the “Ordinance”) to the Oil and Gas Regulator Authority (“OGRA”): “In order to ensure the uniform consumer gas prices all over the country, the cost of gas purchased should be worked out for both the gas companies on an overall average basis in such a manner that the input cost of gas for both the companies becomes uniform. The OGRA should work out the revenue requirement of both the gas companies on this basis with effect from financial year 2003-04. The OGRA should also develop the mechanics for inter-company adjustment of input cost of gas through a formal agreement between the two gas companies.”

Whereas OGRA in compliance with the aforesaid policy guideline has, by means of its separate orders both dated 27th June, 2003, issued pursuant to Section 6 and all other powers enabling it under the Ordinance, directed the Parties to give full effect to the policy guidelines noted above and, inter alia, directed the Parties to enter into this Agreement to give effect thereto.

WHEREAS the Parties are bound as a condition of their license to ensure full and prompt compliance with the orders and directives of OGRA which have been issued to implement policy guidelines of the GOP.

AND WHEREAS in order to ensure that they do not violate the conditions of their respective licenses and in order to enable them to lawfully continue undertaking their business, the Parties are therefore obligated to give effect to the orders of OGRA noted herein above embodying the directive of the GOP and enter into the obligations hereby incurred and intended to be incurred.”

16.Secondly, as evident from Sub-section (5) of Section 8 of the OGRA Ordinance, when considered while taking into account the undeniable substitution of GDS with that of CEA, the only purposive interpretation which emerges is that like GDS, which was in vogue at the time of promulgation of OGRA Ordinance, the deduction of CEA’ amount(s) cannot be denied since such expenditure being incurred by SNGPL was wholly and exclusively necessary for the purposes of its business.

17.Before embarking upon to analyze the case law referred by both sides, we deem it appropriate to discuss the pith and substance of the Revenue’s next argument, which lies in the submission that only that expenditure will be deductible for the purpose of computing taxable income, which expenditure is incurred in deriving or enhancing income from business chargeable to tax. We are of the opinion that this submission may have had some substance prior to the amendment brought about in Section 20 of the

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Ordinance, 2001 by virtue of Finance Act, 2004 as the words: ‘to the extent to which the expenditure is incurred in deriving income from business chargeable to tax’ were replaced by ‘wholly and exclusively for the purposes of business’, therefore, as evident, the condition of deriving income from the business, having been substituted with the expenditure being made ‘wholly and exclusively for the purposes of business’, has potentially changed the scope of Section 20 of the Ordinance, 2001 and accordingly dispels the very essence of the submissions by the learned counsels for the respondents as it is well settled that: ‘Indeed, the mere fact that the legislature enacts an amendment is of itself an indication of an intention, as a general rule, to alter the pre existing law. . . . Moreover, in construing the amended statute, the Court should consider the change sought to be effected by the legislature’10 In this respect, we are guided by the enunciation of law, as handed down by the Supreme Court of Pakistan in the case of Sui Sothern Gas Company Limited,11 whereby the question of adjustment/deduction of GDS related amounts and payments was poised for determination before the Supreme Court of Pakistan. Needless to observe that the relevant law for the purpose of the said case was Income Tax Ordinance, 1979 and the relevant provision was Section 23 of the said Ordinance. It was held that:

7.. . . . . Admittedly, above two sums were paid by the petitioner to the Federal Government and to the gas companies in connection with its routine business expenses and if such expenditure had not been made, it might have resulted in suspension of the gas supply and cancellation of the agreement between the petitioner and gas companies. Considering that said sums were paid in the interest of business and to avoid further losses, it may not be out of place to observe here that the petitioner is stated to have saved a large amount by making delayed payment of the development surcharge on the gas supply and gas price and the huge amount so saved was used for carrying out the business. Aforesaid amount was shown towards total income which was taxed by the respondent. Section 3(3) of said Ordinance also stipulates that interest at the rate of 12 % shall be payable on any amount due if the amount is not paid within the time specified for such payment. The above provision of law does not say that "penalty" shall be imposed but states that "interest" shall be payable on any amount due if the amount is not paid within the specified time for such payment. It may be pertinent to observe that penalty is to be levied or a fine is to be imposed on account of any criminal infraction/violation of the provision of law but in the instant case there was no criminal violation of any legal provision. In the instant case interest/compensation for delayed payment has been provided in the statute Federation of Pakistan and others v. M/s. Noori Trading Corporation (Pvt.) Ltd. (1992 SCMR 710), Earl T. Crawford's `The Construction of Statutes' at pages 618 and 619 “Sui Southern Gas Co. v. Commissioner Income Tax” (PLD 2001 SC 201)

as well as in the agreements, therefore, it may be non-compliance with contractual obligations on the part of the petitioner to make additional payment as interest or compensation for late payment, but it could not be said to be violation or infraction of criminal law, therefore, such payment cannot be termed as a penalty or penal interest, having regard to the fact that payments were made for the purpose of carrying on business to enable the petitioner to carry on and earn profit in business, and if the payment had not been made, the petitioner could have suffered colossal losses. These payments and disbursements made by the petitioner were on account of commercial expediency to facilitate carrying on its business. These were essentially expenses for the purpose of business of the petitioner, as such these could not be termed to be penalty or penal interest or fine, hence petitioner would be entitled to deductions under section 23 as expenditures as laid out or expended wholly or exclusively for the purpose of business. We are fortified in our view by the precedent cases cited in paragraph 5 of the judgment.

[Emphasis Supplied]

18.The reliance may also be placed upon an authoritative pronouncement of the Supreme Court of Pakistan in the case of Shahid Gul12, whereby, while interpreting Section 20 of the Ordinance, 2001, it was observed:

“15. On careful reading of the above provision, it is interesting to note that the legislature, in its wisdom, has employed the word "any" before the word "expenditure", and thereby rendered the expenditure to be without any qualification. This has surely expanded the scope of deductible expenditure. At the same time, this right has, however, been made conditional on three essential factors. Firstly, that the said expenditure is not excluded under Section 21 of the Ordinance, which provides for all those expenditures which cannot be claimed deductible while computing the income of a taxpayer for the chargeability of tax for the said tax year. Secondly, the said expenditure has to be incurred by the taxpayer, wholly and exclusively, for the purpose of his business. And finally, that the said deductible expenditure was incurred by the taxpayer within the said tax year. .............................

16.The intention of the legislature is clear. In the first place, a right has been vested in the taxpayer to claim deductible expenses for the purposes of computing his income. And the onus to dispute the said expense, so claimed by a taxpayer, has been cast upon the Revenue. Thus, it is for the Revenue to show that the expenditure so claimed by the taxpayer is not permissible, or is excluded from deduction under the Ordinance, and in particular, section 21 supra.

19.In this respect, a circular issued by Revenue Division, Central Board of Revenue i.e. Circular No.17 of 2004, dated 17.07.2004 is also relevant for the purposes of determination of the issue in hand, whereby, following explanation was issued relating to the provision in hand i.e. Sub-section (1) of Section 20 of the Ordinance, 2001. The relevant extract of the Circular is reproduced herein below:

12 Shahid Gul v. DC Income Tax (2021 SCMR 27)

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Circular No. 17 of 2004 (Income Tax)

3. ALLOWING EXPENDITURE INCURRED WHOLLY AND

EXCLUSIVELY FOR THE PURPOSES OF DERIVING INCOME

FROM BUSINESS.

Apprehension was expressed through various queries that language of law is ambiguous and its interpretation may restrict admissibility of business expenditure. In order to remove doubt regarding admissibility of expenditure against income under the head “Income from Business”, sub- section (1) of section 20 of the Income Tax Ordinance, 2001 has been amended to clarify that an expenditure wholly and exclusively incurred for the purpose of business would be allowed as business expense.

20.Without prejudice to and rather in addition to foregoing discussion for determining the permissibility or otherwise of the deduction of the CEA, the only thing which is required to be considered is that whether CEA is an expenditure/cost, which was incurred ‘wholly and exclusively for the purposes of business’ or not? Since the expression is being employed for almost two centuries now and remained subject matter of jurisprudential pursuits, therefore, we have considered all the available case law for deciding the issue in hand and may begin with a judgment of a Division Bench of the High Court of Sindh at Karachi in the case of Dewan Khalid Textile Mills Limited 13, whereby while considering case law from various jurisdictions, the learned Division Bench proceeded to interpret the expression ‘wholly and exclusively for the purposes of business’ and held:

“What is a capital expenditure and what is a revenue expenditure? It is clarified that no criteria could be laid down in this regard. An expenditure could be a capital expenditure in the hands of an assessee but the same could be a revenue expenditure in the case of other assessee and vice versa. Hence, the distinguishing factor between a capital expenditure and revenue expenditure has always been a moot point which has to be determined on the basis of each case separately. Rowlatt J, in IR v. Anglo Brewing Co. Ltd. (12 Tax Cases 803) while defining the term "wholly and exclusively" for the purpose of business has observed that the expenditure for the purpose of keeping the trade going. Suba Rao J, in the case of CIT v. Malayalam Plantations Limited [53 ITR 140 (SC)] observed that "it may include measures for the preservation of the business". He further observed that "it may also comprehend payment of statutory dues and taxes imposed as precondition to commence or for carrying on of a business". In the decision given in the case of Commissioner of Income Tax v. Rajaram Bandekar [(1994) 208 ITR 503] the Bombay High Court observed that "the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader". Hence, in our view, any expenditure incurred for the purposes of business which is neither capital or personal is an allowable expenditure under Section 13 Commissioner of Income Tax, Special Zone, Karachi v. Dewan Khalid Textile Mills Ltd. (2016 PTD

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23(1)(xviii) of the Ordinance, 1979. The only bar which could be imposed is that whether the said expenditure has been incurred in the ordinary course of business or not and on the ground of commercial expediency and has a direct nexus and relation with the business or not? Any expenditure which fulfills the above criteria in our view could be termed as expenditure incurred for the business purposes and is an allowable expenditure.”

21.The expression ‘for the purpose of such business’ has a very wide ambit, it must include anything which will further the cause of the business as also anything which is so linked with the business as to go hand in hand with it or be an unavoidable outgoing by its very nature. Thus, an expenditure incurred with the idea of increasing profits, a disbursement made with the object of meeting a threat to it, a payment which is unavoidable by anybody carrying on a particular business must all be included within the category of an expenditure for the purposes of the business.14 in the case of M/s. Malayalam Plantation Ltd.15, Supreme Court of India elaborately considered various Judgments from English & Indian jurisdictions to reach to the following conclusion:

The aforesaid discussion leads to the following result: The expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business

22.In the case of India Aluminum Co. Ltd.16, while reviewing an earlier Supreme Court judgment in the case of Travancore Titanium17 (which judgment was extensively relied upon before us by the learned counsels for the respondent Revenue) the Supreme Court of India, placed reliance on a landmark Judgment from UK’s jurisprudence i.e. the case of Smith v. Lion Brewery Company18 and held that:

Commissioner of Income Tax (Central) Calcutta v. Standard Vaccum Oil Co. Ltd. (AIR 1967 Calcutta Commissioner of Income Tax Kerala v. M/s. Malayalam Plantation Ltd. Quilon (AIR 1964 SC 1722) Indian Aluminum Co. Ltd. v. Commissioner of Income-Tax..., (1972) 84 ITR 735 (Supreme Court of India)

Travancore Titanium Products Ltd. v. Commissioner of Income-tax, Kerala [1966] 60 I.T.R. 277 =

[1966] 3 S.C.R 321 (S.C)

Smith v. Lion Brewery Co Ltd [1910] 5 T.C. 568, 592, 594 (H.L.)

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“Lord Chancellor’s observations in Woodifield’s case19 were not accepted by Lord Atkinson in Smith v. Lion Brewery Company. The brewery company were the owners or lessees of a number of licensed premises which they had acquired as part of their business as brewers and as a necessary incident of its profitable exploitation. The licensed premises were let to tenants, who were “tied” to purchase their beers from the company. Under the Licensing Act, 1904, Compensation Fund Charges were levied in respect of the excise “on” license held by the tenants who paid the charges and recouped themselves by deduction from the rents which they paid to the company. It was claimed by the company that in computing their profits for assessment to income-tax they should be allowed to deduct the sum of the amounts ultimately borne by them in respect of the Compensation Fund Charges. The Court of King’s Bench held that the deduction claimed was inadmissible. This decision was reversed in the Court of Appeal (Kennedy L. J. dissenting), and opinion s in the House of Lords being equally divided, the judgment of the Court of Appeal was sustained. Earl Halsbury, in holding in favour of the brewery, observed that “he (the trader) must if he carries on that business or that trade pay this tax; it is the act of the legislature which makes him pay it and it not a thing that is open to his own will or option”

23.While examining various English and Indian cases e.g. Keshav Mills Vo. Ltd. v. Commissioner of Income-tax, and the decisions in the cases of Travancore Titanium Products Ltd. v. Commissioner of Income-tax, Strong & Co of Romsey Ltd. v. Woodifield, the Supreme Court of India concluded, with which conclusion we also agree:

“Stated broadly, I think that that doctrine amounts to this, that where a trader bona fide creates in himself or acquires a particular estate or interest in premises wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend, the money devoted by him to discharge a liability imposed by Statute on that estate or interest, or upon him as the owner of it, should be taken to have been expended by him wholly and exclusively for the purposes of his trade.

It was further observed:

"It may be mentioned that there was no express statutory provision for deduction of rates and taxes in the English Income-tax Act and yet they were allowed as a necessary deduction for the purpose of carrying on trade. There is no doubt that in one sense when rates and taxes on property are paid by a trader he pays them as owner or occupier because taxes are either on possession of property or on its ownership. But, when the assessee has a dual capacity, i.e. he is owner-cum- trader, why should it be not deductible when according to ordinary commercial principles he would be treated as paying it as a trader. Take the case of taxation on a motor vehicle. The tax is levied under the Motor Vehicles Act on the possession or ownership of a motor car. When a owner-cum- trader pays the tax in respect of a vehicle used solely for the purpose of trade, nobody doubts, and the learned counsel for the revenue did not contest the position, that the tax would be deductible as an expense. Now why is it deductible? The only rational explanation seems to us to be that when a person has a dual capacity, of a trader-cum-owner, and he pays tax in respect of Strong & Co. of Romsey Ltd v. Woodifield [1906] 5 T.C. 215 (H.L)

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property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles." [Emphasis Supplied]

24.Applying the above reasoning to the case in hand, if it may be assumed for a while that the amount of CEA was made by the applicant SNGPL to SSGC in compliance of the directions of a regulator and the provisions contained in the OGRA Ordinance cannot defeat the operations and effect of mandatory charging provisions of the Ordinance, 2001, even then, the payment of CEA being necessarily incidental to carrying on its business and it is only owing to SNGPL’s position and character of having undertaken such business that it was directed to pay CEA, thus, the payment of CEA is a necessary and unavoidable requirement to keep the SNGPL’s business afloat, the payment of CEA is therefore a necessary incident of carrying on SNGPL’s business, which makes CEA as an expenditure, ‘wholly and exclusively incurred for the purposes of business’. On a different plane, liability to pay sales tax or excise duty or like taxes or amounts, such as the CEA, does not depend upon whether profits are made or not, these are the payments which the assessee is compelled to make if an assessee has to carry on its trade; the fundamental distinction is that such payment, unlike in the case of Income Tax or a similar charge on income, is not an application of the income, but a cost or expenditure incurred before earning the income. Such taxes, duties and charges are paid to ensure that the trade is allowed to continue; these are paid wholly and exclusively for the purposes of the business and are, therefore, allowable as deductions in computing the profits and gains20. The purpose for directing the payment of the CEA may not be considered immaterial in this case as it cannot be denied that it was a must for the applicant SNGPL, if it carries on the business and not a thing that was open to its own will or option, therefore, the only ineluctable conclusion which emerges is that the expenditure of CEA was incurred wholly and exclusively for the purposes of SNGPL’ business.

A.V. Thomas and Co. Ltd. v. Commissioner of Income Tax (1986) 159 ITR 431

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25.In this regard, the case Poona Electric Supply Co. Ltd.21 from Indian Jurisdiction, decided by Supreme Court of India, having somewhat identical facts if of relevance to quote. The facts of the said case are that an energy company (Poona Electric) was a licensee of the State Government under the Indian Electricity Act, 1910 and by virtue of being a licensee, Poona Electric was bound by the statutory underpinnings of another Act i.e. the Electricity Supply Act, 1948, the provisions whereof provided for rationalization of the production and supply of electricity and generally for taking measures conducive to electrical development. One of its main objects was to prevent such licensees from charging unreasonable rates to the detriment of the consumers. Under section 57(1) of the Act the provisions of the Sixth Schedule and the table appended to the Seventh Schedule thereto were deemed to be incorporated in the licence of every licensee. Paragraph I of the Sixth Schedule imposed a duty on every such licensee to adjust its rates for the sale of electricity by periodical revision that its clear profit in any year shall not, as far as possible, exceed the amount of "reasonable return". These statutory requirements were compiled by Poona Electric, and such as in the case in hand, Indian revenue objected to that on somewhat same premise, as agitated by the respondent department before us. The Supreme Court of India held:

“The appellant-company is a commercial undertaking. It does business of the supply of electricity subject to the provisions of the Act. As a business concern its real profit has to be ascertained on the principles of commercial accountancy. As a licensee governed by the statute its clear profit is ascertained in terms of the statute and the schedule annexed thereto. The two profits are for different purposes - one is for commercial and tax purposes and the other is for statutory purposes in order to maintain a reasonable level of rates. For the purposes of the Act, during the accounting years the assessee credited the said amounts to the "Consumers Benefit Reserve Account". They were a part of the excess amount paid to it and reserved to be returned to the consumers. They did not form part of the assessee''s real profits. So, to arrive at the taxable income of the assessee from the business under s. 10(1) of the Act, the said amounts have to be deducted from its total income.

26.It was not disputed before us that SNGPL’s obligation to make payments of CEA is linked to the continuation of its business as a Licensee as Section 21 of the OGRA Ordinance empowers the Federal Government to issue policy guidelines to OGRA and in turn OGRA is empowered to Poona Electric Supply Co. v. CIT (1965) 57 ITR 521

impose such obligations upon Licensees such as SNGPL and SSGC, which obligations have to be fulfilled, thus, a legal obligation has been cast upon the applicant SNGPL to incur the CEA expenditure, therefore, it does not behoove to reason that an expenditure incurred due to statutory obligation may be termed as an expenditure not having been incurred ‘wholly and exclusively’ for the purposes of SNGPL’s business. In our view, the assessing officer and the Tribunal have erred in law while disallowing the deductions claimed by the applicant SNGPL in respect of CEA payments.

27.Another submission advanced on behalf of the respondent Revenue, which needs to be attended to is that since the CEA payments were made in furtherance of a contractual arrangement between the SNGPL & SSGC, therefore, these contractual payments cannot be allowed to be deducted in terms of Section 20 of the Ordinance, 2001. As noted above, the execution of the Agreement was a condition imposed by OGRA, which had to be fulfilled by SNGPL & SSGC. It needs to be appreciated that these payments were neither made for infraction of law nor it was a commercial arrangement being brought about by two public instrumentalities; it was on account of a statutory obligation imposed by the Government on the touchstone of statutory authority. The breach was in the contemplation of the parties and amounted to certain potential risks in the ‘carrying on’ of the business; the CEA payments were made in the course of the SNGPL’s business. Further, as elaborated above, there was clear nexus between these payments and the operations of SNGPL’s business, which nexus inevitably demonstrates that without having made these payments, SNGPL could not have been allowed to carry on its regulated activities.

28.The conclusion that emerges from the English and Indian cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business, then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure, one has to take into consideration the questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the

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assessee it does not matter that the payment may inure to the benefit of a third party.22 Another test is whether the transaction is properly entered into as a part of the taxpayer’s legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby.23 But in every case, it is a question of fact that whether the expenditure was incurred wholly and exclusively for the purpose of trade / business of the assessee.24 In deciding whether a payment of money is deductible expenditure, one has to take into consideration the question of commercial expediency and the principles of ordinary commercial trading. If the payments are expenditures which are incurred for the purposes of trade of the assessee, it does not matter that the payment may inure to the benefit of a third party.25 The true test of an expenditure laid out ‘wholly and exclusively for the purposes of trade or business’ is that it is incurred by the assessee as incidental to trade for the purposes of keeping the trade going and of making it pay, not in any other capacity than that of a trader; The question should be decided on ordinary principles of commercial trading and commercial expediency.26 In order to claim a deduction, it is enough to show that the money is expended, not as of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business27. For interpreting the true import of the term ‘wholly and exclusively’ & ‘for the purposes of business’ and to consider the submission that the expenditure must be for earning the profits of the business, the resort may also be had to Kanga & Palkhivala’s exhaustive commentaries on Income Tax Statutes as this commentary extensively considered the cases from English and Indian Jurisdictions. The relevant extract whereof is quoted below: 28

“Usher's Wiltshire Brewery Ltd. v. Bruce” (1915) AC 433; “Moore v. Stewards and Lloyds” (1906) 6 Tax Cas. 501; “British Insulated and Helsby Cables Ltd. v. Atherton” (1926) A C 205 at pp. 221 and 235 “Eastern Investments Ltd. v. The Commissioner of income tax, West Bengal” (1951) S.C.R. 594.

“Sassoon J. David v. CIT” (1979) 3 SCC 524

CIT v. Chandulal Keshavlal (AIR 1960 SC 738)

CIT v. Rajaram Bandekar (1994) 208 ITR 503;

“S.A. Builders v. CIT” (2007) 1 SCC 781; “Atherton vs. British Insulated & Helsby Cables Ltd” (1925)10 TC 155 (HL); “Eastern Investments Ltd. vs. CIT” (1951) 20 ITR 1; “CIT vs. Chandulal Keshavlal & Co.” (1960) 38 ITR 601

Kanga & Palkhivala’s: The Law and Practice of Income Tax, (Eleventh Edition, 2020, Published by LexisNexis, Vol. 1, pp. 1110-11-12. Note: (The footnotes of the quoted para are per the sequence of this judgment and not as per the quoted extracts.)

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11.Wholly and Exclusively for the Purposes of the Business.

(a)Purpose of Business.

Before the corresponding section in the 1922 Act was amended, allowance was given in respect of any non-capital in 1939 expenditure ‘incurred solely for the purpose of earning such profits or gains’. Under the present law, the expenditure should be laid out ‘wholly and exclusively for the purposes of the business’. The two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earning the profits of the business.29 This is established by the decision of the Supreme Court in Meenakshi Mills Ltd v CIT.30 The expression “for the purposes of business” is wider than the expression “for the purpose of earning income”. The former would include within its scope expenditure on grounds of commercial expediency.31 In Strong & Co. Ltd. v. Woodfield, Lord Davey explained the words ‘for the purpose of the trade’ as meaning ‘for the purpose of enabling a person to carry on and earn profits in the trade’. But this gloss was in reference to the circumstances of the case then under consideration and is not necessarily either useful or conclusive in all cases.

(b)‘Wholly and Exclusively’ - This Section requires that the expenditure should be ‘wholly and exclusively’, laid out for the purpose of the business, but not that it should be ‘necessarily’ laid out for such purpose.32 An expenditure found to be not genuine and incurred only for the purpose of diverting profits or avoiding tax cannot be ‘wholly and exclusively for the purpose of business’.33 Expenses wholly and exclusively laid out for the purposes of trade should, subject to the fulfilment of the other conditions, be allowed under this section even though the outlay unnecessary or unnecessarily large,34 unless the case falls under some other provision......

12.General Principles. What is money wholly and exclusively laid out for the purpose of trade is a question which must be determined upon the principles of ordinary commercial trading. What is allowed in one business may not be allowed in another; what is wholly extraneous to one business may be germane to another.

Somewhat similar approach is adopted by the Courts and authors across various jurisdictions while interpreting the similarly coined “Binodiram v CIT” 48 ITR 548; “India Copper v CIT” 38 ITR 544, 555; “CIT v. Jagannath” 30 ITR 654, affirmed in 41 ITR 360 (SC); “ITT v. Chhaganmal” 14 ITR 206, 212-13; “Morgan v. Tate” 26 ITR 195, 202-03 (HL), 35 TC 367; “CIT v Mahendra” 203 ITR 178; “CIT v. Bishnauth” 205 ITR 578; “Voltas v CIT” 207 ITR 47; “CIT v. Southern Publications” 211 ITR 397 “Meenakshi Mills Ltd v CIT” 63 ITR 207, reaffirmed in “CIT v Birla” 82 ITR 166 (SC); “Madhav v.

CIT” 118 ITR 200, 208 (SC)

“S.A. Builders v. CIT (Appeals)” 288 ITR 1 (SC), AIR 2007 SC 482, 2007 1 SCC 781.

“Sassoon David v CIT” 118 ITR 261, 275 (SC); “Sri Venkata v CIT” 223 ITR 101 (SC); “CIT v. Kuber Singh” 118 ITR 379, 386-88 (FB)

“Industrial Cables Ltd v CIT” CIT 212 ITR 1.

“Craddock v Zevo” 27 TC 267, 287 (HL); “Newtone v. CIT” 28 ITR 378; “Raman v CIT” 47 ITR 680; “CIT v City Ahmedabad Spg & Wvg” 207 ITR 427

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terms in the income tax statutes. We seek to rely upon one more of such texts from “Tax Law, Design and Drafting.35 “There are two advantages to a general deduction provision designed with broad positive limbs followed by specific negative provisions that specify the types of nondeductible outgoings. First, this technique avoids the impossible task of enumerating the endless list of expenses that may be incurred by business. It is impossible for legislative drafters to anticipate every type of expense that will be incurred, and, as a result, a system that allowed decoctions only for enumerated expenses would inevitably prejudice some businesses. Second, and more important, the drafting approach that commences with a broad general deduction measure followed by specific deduction-denial measures provides a logical and sound framework for taxpayers, tax administrators, and tax adjudicators and makes the task of characterizing unusual expenses simpler for all parties”.

29.This takes us to consider the respondent department’s overwhelming reliance on the following extract from the case of Atta Hossain Khan supra36:

“. . . . It is open to the Department to ascertain whether the amount was spent on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business but nothing more. The onus of showing that the amount was spent for such a purpose is, no doubt, upon the assessee. . . .”

While relying upon the above, learned counsel for the respondent- Department failed to appreciate that it is nobody’s case that the Department is bereft of its authority to examine the expenditure claimed for the purpose of deduction in terms of Section 20 of the Ordinance, 2001, on the case-to-case basis. This principle is also enunciated in the same judgment, rather in the same paragraph, in the following terms: “. . . . .This, however, does not mean that the Department by applying some subjective standard of reasonableness can disallow such an expenditure. If, however, it is found on evidence that the expenditure was not incurred on grounds of commercial expediency but for a consideration other than that it is open to the Income-tax Officer to disallow such an expenditure.”

30.The above says it all.

31.There is another important aspect, as enunciated in Atta Hossain’s case supra, which pertains to the question as to who has to discharge the onus that the amount was spent ‘wholly and exclusively for the purposes of business’. This question seems to have been settled by the terms of Atta Hossain’s case supra, whereby, it was observed that: “The onus of Tax Law Design and Drafting, Editor Victor Thurony, Published by International Monetary Fund, Chapter 16 -Taxation of Income from Business and Investment; (Authored by Lee Burns and Richard Krever) V. 2, pp. 597, 607

Atta Hussain Khan Ltd. v. Commissioner Income Tax (PLD 1969 SC 517)

showing that the amount was spent for such a purpose is, no doubt, upon the assessee37”, however, in the case of Shahid Gul supra, the Supreme Court of Pakistan, while interpreting the exact same provision which is at play in the case in hand i.e. Section 20 of the Ordinance, 2001, it is observed: “And the onus to dispute the said expense, so claimed by a taxpayer, has been cast upon the Revenue” 38. On the face of it, the ratio decidendi of both these judgments seems to be conflicting and if any such conflict actually exists, the law laid down in Atta Hossain’s case, being a five Member Bench judgment will naturally prevail, however, a collective reading of both these judgments, when considered in the context as to the facts and circumstances of each case, would lead to a reconciled position that no doubt that the initial onus is on the assessee to prove that the expenditure is such, which has been incurred “wholly and exclusively for the purposes of business’ and once such initial burden is discharged, the Revenue may dispute such deductions but in that case, it is cast upon the Revenue to dispel the initial claim of deduction by the assessee. Be that as it may, this precise question is not an issue which may have a direct bearing for the decision of case in hand; and we are of such opinion for twofold reasons; firstly, the applicant SNGPL has discharged the onus as to what was the purpose of the incurred expenditure, which is sought to be adjusted; secondly, the parties are not at dispute that these expenses have been incurred, instead the issue, which is at the heart of the dispute is that whether this expenditure was incurred ‘wholly and exclusively for the purposes of business’. For the said determination, the answer also lies in this overwhelmingly relied precedent by Revenue i.e. Atta Hossain’s case39 supra. A thorough reading of the law report leads us to conclude that the cited precedent does not help the cause of the respondent- Revenue and instead supplements the case of the applicant SNGPL. A perusal of the law report would reflect that certain principles of law relating to the issue in hand, as settled in Indian jurisprudence, were See page 522 of the law report

See para 16 at page 37 of the law report

Ata Hossain Khan v. CIT (PLD 1969 SC 517)

ITR No. 38744 of 2025 Page 29

quoted with approval by the Supreme Court. The relevant extracts from the law report are reproduced herein below for ready reference 40:

“In the case of Eastern Investments Limited v. Commissioner of Income-tax, (20 ITR 1), the Supreme Court of India applied certain principles in construing section 12(2) of the Income-tax Act. The words that occur in that section are "any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains". It was said:

"(a) though the question must be decided on the facts of each case the final conclusion is one of law: Indian Radio and Cable Communication Ltd. v. The Commissioner of Income-tax, Bombay (1937) 5 I T R 270 (P C) and Tata Hydro Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay (1937)51 TR202(PC);

(b)it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned: Moore v. Stewards and Lloyds (1906) 6 Tax Cas. 501 and Usher's case (Usher''s Wiltshire Brewery Ltd. v. Bruce) (1915) AC 433;

(c)it is enough to show that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business": British Insulated and Helsby Cables Ltd. v. Atherton (1926) A C 205 at pp. 221 and 235;

(d)beyond that no hard and fast rule can be laid down to explain what is meant by the word "solely".

We respectfully agree with the view taken in this case. It will, thus, be seen that the most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director is "wholly and exclusively for the purposed of the business of the Company, is whether the expenditure is voluntary and is incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the Income-1 tax Department to say that the expenditure is not reasonable.

32.Thus, we are of the opinion that the reliance placed on Atta Hossain supra by respondents is misplaced.

33.Similarly, much reliance has been placed by the respondents on two judgments from English jurisdiction i.e. Mallalieu v. Drummond41 & Smith Potato Crisp (1929) v. Commissioner of Inland Revenue42. We have See pages 520 and 521 of the Law Report

Mallalieu v Drummond [1983] 57 TC 330

Smith Potato Crisp (1929) v. Commissioner of Inland Revenue (1948) 30 TC 267=[1948] ac 508 (HL)

considered both these judgments and respectfully disagree as to the applicability of the cited precedents for dispelling the permissibility of CEA expenditure incurred by the applicant SNGPL. In Mallalieu v. Drummond, the question was that whether a Barrister is entitled to deduct the cost of clothes, which she claimed to have purchased for maintaining her exposure and decency as a Barrister. The Court held that clothes were dual use clothes, hence, not exclusively for the work and the fact that the Barrister was a blonde and would be subject to social sanction for wearing ugly clothes, deemed irrelevant. The Court also noted that the cost of the clothes would be deductible if these were exclusively for work. Likewise, it was held in Smith Potato Crisp (1929) v. Commissioner of Inland Revenue that the legal and other expenses incurred to successfully challenge the quantum of tax, were not deductible themselves as such expenses were incurred in part to determine quantum of tax payable, and not for the purposes of trade, whereas, in the instant case, the capacity of taxpayer is not in dispute as the applicant SNGPL is paying CEA in its capacity as a business necessity and not in any other capacity whatsoever.

34.Adverting to the Revenue’s next submissions; One, in case of conflict of two laws viz the obligation of payments under each statute separately, the charging provisions of tax statutes cannot be subsided; two, which argument is actually intertwined in the foregoing submission by the Revenue i.e. the necessity of CEA payment is in the nature of equitable ground and since it is well settled principle that there is no equity about a tax, therefore, per learned counsel for respondent Revenue, the CEA payments are not deductible under Section 20(1) of the Ordinance, 2001. In this respect the reliance has been placed on the cases of Hashwani Hotel43, M/s. Jabees Ltd.44, PTV v. CIR45 and Justice Qazi Faez Isa case46 supra, therefore, we feel it imperative to deal with these two submissions for the purpose of the decision of the case in hand. Respectfully, the inference being drawn that SNGPL has pleaded a case of equity is utterly untenable. We are of the considered opinion that no case of equity has been pleaded by applicant Hashwani Hotels Ltd. v. Government of Pakistan [2007 PTD 1473 (SC)] Government of West Pakistan and others v. M/s. Jabees Ltd. (PLD 1991 SC 870) PTV v. Commissioner Inland Revenue (2019 SCMR 282)

Justice Qazi Faez Isa v. President of Pakistan (PLD 2022 SC 119)

ITR No. 38744 of 2025 Page 31

SNGPL, instead, the case has been argued on the premise of SNGPL’s statutory entitlement for claiming deduction of the expenditure incurred wholly and exclusively for the purpose of SNGPL’s business by way of payments of CEA and, thus, the adjustments have been made by it on the basis of statutory underpinnings of the provisions contained in the Ordinance, 2001 i.e. Section 20 and 21, therefore, the submission and the judgments relied upon by learned counsels for the respondent department are clearly distinguishable in the facts and circumstances of the case in hand, and would, therefore, have no precipitable relevance to the present lis. In the case of Sakina Bi etc.47, an Hon’ble Five Member Bench of the Supreme Court of Pakistan has recently reaffirmed the well settled principle of law that a judgment is precedent for what it decides and cannot be cited as precedent for a proposition that may be inferred from it.48 While speaking for the Bench, Shahid Waheed, J. expounded the principle in the following words:

“7. . . . . . Before delving into this analysis, we wish to reiterate two important principles regarding judicial interpretation. Firstly, it is crucial to recognise that every judicial opinion must be understood in relation to the specific facts established or assumed during the proceedings. The broader statements or legal principles articulated within a judgment are not intended to serve as comprehensive expositions of the law. Instead, they are intricately tied to the unique circumstances of the case at hand, and these particular facts thus qualify their applicability. Secondly, it is essential to remember that a judicial case serves as authority only for the specific issues it resolves. The precedential value of any ruling is intrinsically linked to the context and particulars of the case, meaning that judicial decisions should not be generalised beyond their immediate implications.”

35.Similarly, there is no question of any conflict or inconsistency of the two statutes nor the applicant SNGPL seeks to impede any statutory provision of the Ordinance, 2001, while seeking to rely on the contractual exigencies simplictor. The precise issue in this case is not whether the terms of the Agreement can be allowed to injure the mandatory provisions of the Ordinance, 2001, instead, it is a simple case where it has to be determined Mst. Sakina Bi etc. v. Barkat Hussain etc. (C.A.3347/2022 decided on 06.03.2026 [5MB]) Syed Hammad Nabi and others vs Inspector General of Police Punjab, Lahore and others (2023 SCMR 584), Naubahar Bottling Company (Pvt.) Limited and others v. Federation of Pakistan through Revenue Division Ministry of Finance and others (2022 SCMR 765), Quinn v Leathem (1901 AC 495); Trustees of the Port of Karachi v. Muhammad Saleem (1994 SCMR 2213); Sindh High Court Bar Association through its Secretary and another v. Federation of Pakistan through Secretary. Ministry of Law and Justice, Islamabad and others (PLD 2009 SC 879) per Ch. Ijaz Ahmed J,, Mst. Muhammadi and others v. Ghulam Nabi (2007 SCMR 761),

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that whether the expenditure incurred by the applicant SNGPL is deductible while applying the test: ‘wholly and exclusively for the purposes of business’? A statutory payment made by an assessee under one statute cannot be always held impermissible deduction per se. In the case of J.K. Cotton Spinning & Weaving Mills Co.49 a Division Bench of Allahabad High Court allowed the deduction of penalty amount incurred by taxpayer, which penalty was imposed by Government of India in case of taxpayer’s failure to meet minimum export requirements for use of trade mark; In the case of Bombay State Road Transport Corporation,50 a Division Bench of Bombay High Court held that the deduction viz a statutory obligation of payment into 3rd party’s liability fund is deductible. Similarly, while relying upon Poona Electric51 supra, Keshkal Cooperative Marketing Society52 was held entitled to deduct the money deposited by Society into a reserve fund created under statutory obligations of the Cooperative Societies Act. Likewise, while relying upon Poona Electric, in the case of Pandavapura Sahakara53, Karnataka High Court held that money deposited into an education reserve fund created under statutory obligation did not form part of the income. Same is the ratio of the judgments of Karnataka & Bombay High Courts Judgments in the cases of Pandavapura Sakkare54 & Somaiya Orgeno Chemicals55, respectively.

36.Considering the settled principles of law explicated above, it is unequivocally held that the CEA, is an expenditure, which was incurred by SNGPL ‘wholly and exclusively for the purposes of its business’ as the statutory obligation and inevitability of this expenditure is such that SNGPL’s business would not have even survived in alternate.

37.In view of the foregoing, the question framed above is accordingly answered in affirmative, Consequently this and connected Reference CIT v. J.K. Cotton Spinning and Weaving Mills Co. (1980) 123 ITR 911 CIT v. Bombay Road Transport Corporation (1977) 106ITR 302 Poona Electric Supply Co Ltd v Commissioner of Income Tax (1965) 57 ITR 521 SC Keshkal Co-operative Marketing Society Limited v. CIT (1987) 165 ITR 437 CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd (1988) 174 ITR 475 CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd” (1992) 195 ITR 136 (DB), Leave was refused by SCI and judgment was upheld.

“Somaiya Orgeno Chemicals v. CIT” (1995) 216 ITR 291, 300

Applications are hereby allowed and while setting aside the Impugned Order passed by the learned Tribunal, we hereby hold that the order dated 28.12.2012, passed by the learned Commissioner Inland Revenue (Appeals), to the extent of issue in hand, is upheld.

38.Office shall send a copy of this order under seal of the Court to the Appellate Tribunal as per section 133(8) of the Ordinance.

(Hassan Nawaz Makhdoom) (Khalid Ishaq) Judge Judge

APPROVED FOR REPORTING.

(Hassan Nawaz Makhdoom) (Khalid Ishaq) Judge Judge Awais!