M/S Bank of Khyber through its Chief Financial Officer Vs Deputy Commissioner (Audit), Corporate Zone, Regional Tax Office, Peshawar and others.

JUDGMENT SHEET

PESHAWAR HIGH COURT, PESHAWAR

JUDICIAL DEPARTMENT

Tax Ref. No.41-P/2023 with CM No.73-P/2023 with CM No.24-P/2026

M/S Bank of Khyber through its Chief Financial Officer Vs Deputy Commissioner (Audit), Corporate Zone, Regional Tax Office, Peshawar and others

Date of hearing: 11.06.2026

Petitioner (by): Mr. Muhammad Sangeen Khan, Advocate

Respondents (by): M/S Ghulam Shoaib Jally, Advocate, and Umair Jamal, Advocate/legal advisor

JUDGMENT

SYED ARSHAD ALI, J.- The petitioner has filed the instant tax reference under Section 133 of the Income Tax Ordinance, 2001 (“Ordinance”) against the order of worthy Appellate Tribunal Inland Revenue Peshawar Bench (“Tribunal”) dated 20.09.2023.

2.The present case relates to the tax affairs of the petitioner-bank for Tax Year 2015. Through an assessment order dated 13.12.2016, an amended assessment was framed whereby the tax liability of the petitioner-bank for the relevant tax year was reassessed. The said order was challenged before the Commissioner (Appeals) under Section 129 of the Ordinance. Subsequently, the matter was carried before the Tribunal, which disposed of the appeal with certain modifications.

3.The sole question requiring adjudication before this Court is whether, admittedly, the petitioner is a banking company; the Pakhtunkhwa Energy Development Organization ("PEDO") is an organization presently governed under the Khyber Pakhtunkhwa Energy Development Organization Act, 2020; PEDO made investments in the Bank of Khyber ("BOK") during Tax Year 2015; BOK paid profit on debt to PEDO without deducting tax under Sections 153/233 of the Ordinance, but nevertheless claimed the said payment as an admissible deduction under Section 21 of the Ordinance. The Revenue disallowed the said deduction on the ground that it was inadmissible under Section 21(c) of the Ordinance, which clearly envisages that failure to deduct withholding tax under Division III of Part V of Chapter X disentitles the payer from claiming such expenditure as an admissible deduction. Consequently, the entire amount of profit on debt was added back to the income of BOK. The petitioner-bank disputes this treatment. Thus, the controversy requires interpretation of Section 21 of the Ordinance.

4.The learned counsel for the petitioner-bank argued that Section 21 of the Ordinance begins with the words, “except as otherwise provided in this Ordinance,” and specifies certain deductions that shall not be allowed, including those mentioned in Section 21(c). According to the learned counsel, Sections 161 and 162 of the Ordinance provide that where a person fails to deduct tax as required, that person shall be liable to pay the amount of tax to the Commissioner, who may pass an order to that effect and proceed to recover the same. Therefore, by reading Section 161 together with Section 21(c), the

petitioner-bank could only be held liable for the non- deduction of withholding tax at the time of making payment of profit to PEDO, and the entire amount of profit could not be disallowed and added back to its income.

5.Since the contention of the petitioner-bank revolves around the interpretation of Section 21(c) vis-à- vis Section 161 of the Ordinance, therefore, the relevant provisions are reproduced below:

Clause (c) of Section 21 Before substitution by Finance Act, 2016

21.Deduction not allowed.– Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head “Income from Business” for–

(a)..........

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

(c)any salary, rent, brokerage or commission, profit on debt, payment to non-resident, payment for services or fee paid by the person from whih the person is required to deduct tax under Division III of Part V of Chapter X re section 233 of chapter XII, [unless] the person has [paid or] deducted and paid the tax as required by Division IV of Part V of Chapter X.”

Clause (c) of Section 21 after substitution by Finance Act, 2016

21.Deductions not allowed – Except as otherwise provided in this Ordinance, no deduction shall be allowed in computing the income of a person under the head “Income from Business” for–

(a)..........

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

(c)any expenditure from which the person is required to deduct or collect tax under Part V of Chapter X or Chapter XII, unless the person has paid or deducted and paid the tax as required by Division IV of Part V of Chapter X:

Provided that disallowance in respect of purchases of raw materials and finished goods

under this clause shall not exceed twenty per cent purchases of raw materials and finished goods: Provided further that recovery of any amount of tax under Sections 161 or 162 shall be considered as tax paid.

Section 161 of the Ordinance

161.Failure to pay tax collected or deducted.—

(1)Where a person–

(a)fails to collect tax as required under Division II of this Part [or Chapter XII] or deduct tax from a payment as required under Division III of this Part [or Chapter XII] [or as required under section 50 of the repealed Ordinance]; or

(b)having collected tax under Division II of this Part [or Chapter XII] or deducted tax under Division III of this Part [or Chapter XII] fails to pay the tax to the Commissioner as required under section 160, [or having collected tax under section 50 of the repealed Ordinance pay to the credit of the Federal Government as required under sub-section (8) of section 50 of the repealed Ordinance,] the person shall be personally liable to pay the amount of tax to the Commissioner [who may [pass an order to that effect and] proceed to recover the same.]

(1A) No recovery under sub-section (1) shall be made unless the person referred to in sub-section (1) has been provided with an opportunity of being heard.

(1B) Where at the time of recovery of tax under sub-section (1) it is established that the tax that was to be deducted from the payment made to a person or collected from a person has meanwhile been paid by that person, no recovery shall be made from the person who had failed to collect or deduct the tax but the said person shall be liable to pay [default surcharge]at the rate of [twelve]per cent per annum from the date he failed to collect or deduct the tax to the date the tax was paid.

(2)A person personally liable for an amount of tax under sub-section (1) as a result of failing to collect or deduct the tax shall be entitled to recover the tax from the person from whom the tax should have been collected or deducted.

(3)The Commissioner may, after making, or causing to be made, such enquiries as he deems necessary, amend or further amend an order of recovery under sub-section (1), if he considers that

the order is erroneous in so far it is prejudicial to the interest of revenue:

Provided that the order recovery shall not be amended, unless the person referred to in sub- section (1) has been provided an opportunity of being heard.

6.A plain reading of Sections 21(c) and 161 of the Ordinance shows that they embody two distinct concepts and operate independently within their respective spheres. Section 21 deals with the disallowance of certain expenditures and deductions, whereas Section 161 concerns the liability of a prescribed person or withholding agent who is required to deduct tax while making specified payments.

7.The language of Section 21(c) is clear and unambiguous. Any profit on debt that is subject to withholding tax under Division III of Part V of Chapter X or Section 233 of Chapter XII is not an admissible deduction unless the tax has either been deducted and paid by the payer or paid by the recipient in accordance with the relevant provisions of the Ordinance.

8.The restriction on admissible deductions under Section 21 and the liability arising from failure to deduct or pay withholding tax under Section 161 operate under separate statutory schemes. The former concerns the computation of taxable income and allowable deductions, whereas the latter imposes an independent liability upon the withholding agent for failure to comply with withholding obligations. Both provisions are distinct and independent in their operation.

9.We have also considered the law laid down by the august Supreme Court in Messrs Pakistan Television Corporation Limited v. Commissioner Inland Revenue (Legal), LTU, Islamabad and others (2017 SCMR 1136) and Commissioner Inland Revenue, Lahore v. Messrs Coca-Cola Pakistan Limited, Lahore (2026 SCMR 130), although neither judgment was relied upon by the learned counsel for the parties. While the ratio decidendi of the said judgments is not directly applicable to the controversy involved in the present case, they nevertheless provide valuable guidance regarding the interpretation of Sections 20, 21(c), 153(1)(b), 158(b), 161, 162 and 233(2) of the Ordinance.

10.In Pakistan Television Corporation's case, the issue before the august Supreme Court was that WAPDA/DISCOs had entered into an agreement with Pakistan Television Corporation Limited for the collection of television licence fee, under which WAPDA/DISCOs were entitled to retain a specified amount as collection charges. Pakistan Television Corporation Limited claimed the retained amount as an admissible deduction. The Revenue, however, took the view that since no tax had been deducted from the payment made to WAPDA/DISCOs, the deduction was not allowable under Section 21(c) of the Ordinance. The august Supreme Court rejected this contention, holding that since no amount was actually paid by Pakistan Television Corporation Limited to WAPDA/DISCOs, the restriction contained in Section 21(c) was not attracted. The Court based its conclusion on the settled principle that fiscal statutes, particularly provisions creating tax liability, must be construed strictly, and any ambiguity

must be resolved in favour of the taxpayer. The august Supreme Court also explained the concepts of deduction, collection and the subsequent payment of tax by the payee under the relevant provisions of the Ordinance, observing that where the payee had subsequently discharged the tax liability, the disallowance under Section 21(c) would not apply.

11.Similarly, in Messrs Coca-Cola Pakistan Limited, the august Supreme Court dealt with a somewhat analogous proposition where the company had allowed certain rebates. The Court held that a rebate is not synonymous with a payment and, therefore, a strict interpretation of Section 21(c) would not attract the disallowance contemplated therein. Nevertheless, the august Supreme Court reaffirmed that failure to comply with the statutory obligation to deduct or collect withholding tax entails several penal consequences, rendering the defaulting person a taxpayer in default. It further observed that other adverse consequences prescribed under Section 21(c) would also become applicable.

12.It is well settled that the literal approach is to be adopted while interpreting fiscal or taxing statutes, and the Court cannot read into or impute something to a provision when the language of a taxing statute is clear. While interpreting a taxing statute, the Court may look to the words of the statute and interpret them in light of what is clearly expressed therein; however, it cannot imply something that is not expressed or import provisions into the statute so as to remedy any assumed deficiency. Allied Bank Limited v. Commissioner of Income Tax (2023 SCMR 1166).

13.In the present case, the profit paid to PEDO was claimed by the petitioner-bank as an admissible deduction. It is an admitted position that the petitioner- bank did not deduct withholding tax from the said payment, under the impression that PEDO’s income was exempt under Section 49 of the Ordinance. However, it is equally admitted that the income of PEDO was not exempt under Section 49. There is no evidence on the record to establish that, for the relevant tax year, PEDO had discharged its tax liability in respect of the profit earned from the investment. Had PEDO discharged its tax liability for the relevant tax year, then, in view of the law laid down by the august Supreme Court in Pakistan Television Corporation Limited and Messrs Coca-Cola Pakistan Limited (supra), the deduction under Section 21(c) could have been allowed.

14.In view of the foregoing discussion, the opinion rendered by the learned Tribunal does not suffer from any legal infirmity and calls for no interference. Resultantly, this tax reference is answered in Negative. A copy of this judgment be sent to the worthy Tribunal in terms of Section 133(5) of the Ordinance.

JUDGE

JUDGE

Date of hearing and announcement of judgment ............ 11.06.2026

Date of preparation and signing of Judgment ............... 06.08.2026

D.B Hon’ble Mr. Justice Syed Arshad Ali and Hon’ble Mr. Justice Kamran Hayat Miankhel Mahmood Shah, PS