IN THE SUPREME COURT OF PAKISTAN 
(APPELLATE JURISDICTION) 
 
 
PRESENT: 
MR. JUSTICE DOST MUHAMMAD KHAN 
MR. JUSTICE QAZI FAEZ ISA 
MR. JUSTICE FAISAL ARAB 
 
 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L 
TO 3149-L OF 2016 
(On appeal against the judgment dated 28.04.2016 passed by the Lahore High 
Court, Lahore in PTR Nos. 69 to 71/2014, 364 to 366/2013, 477 to 482/2015) 
 
 
Sr. No 
 Parties’ names 
 Case No.  
 
1. 
 Husnain 
Cotex 
Limited 
through its Chief Executive 
Vs. 
Commissioner 
Inland 
Revenue, Lahore 
 CP Nos. 3364 to 3366 
of 2016 
 
2. 
  
M/s Ghulam Rasool and Co. 
Pvt Ltd. Vs. Commissioner 
Inland Revenue, Lahore  
  
CP Nos. 3517 to 3519 
of 2016 
 
3. 
  
M/s Sarwar & Company (Pvt) 
Ltd, Lahore Vs. The Appellate 
Tribunal Inland Revenue etc 
  
CP Nos. 3147-L to 
3149-L of 2016  
 
 
For the Petitioners: 
Mr. Muhammad Akram Sheikh, Sr. ASC 
 
 
 
 
Mr. Muhammad Iqbal Hashmi, ASC 
 
 
 
 
Mr. Ahmed Nawaz Ch, AOR (Absent) 
(In Civil Petition Nos. 3366 & 3517 to 3519/2016) 
 
Mr. Sajid Ijaz Hotiana, ASC 
 
 
 
 
Mr. Ahmed Nawaz Ch, AOR (Absent)  
 
 
 
 
(In Civil Petition No. 3364/2016) 
 
 
 
 
 
Mr. Muhammad Raheel Kamran, ASC 
 
 
 
 
Mr. Ahmed Nawaz Ch, AOR (Absent)  
(In Civil Petition No. 3365/2016) 
 
Rana Muhammad Afzal, ASC 
 
 
 
 
Mr. Imtiaz A. Shoukat, AOR (Absent) 
 
 
 
 
(In Civil Petition Nos. 3147-L to 3149-L/2016) 
 
For the Respondents: 
Nemo  
 
 
 
 
(In Civil Petition No. 3364/2016) 
 
Hafiz Ahsan Ahmed Khokhar, ASC 
 
 
 
 
Raja Abdul Ghafoor, AOR 
(In Civil Petition No. 3365, 3366, 3517 to 3519 & 
3147-L to 3149-L/2016) 
 
Date of Hearing:  
26.01.2017 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
2
 
 
JUDGMENT 
 
 
 
FAISAL ARAB, J.- In order to grant tax relief to the 
taxpayers of certain areas of the province of Khyber Pakhtunkhwa, 
FATA and PATA, whose business suffered on account of internal 
strife, the government in June, 2010 invoked the provisions of 
Section 53 of the Income Tax Ordinance, 2001 (hereinafter referred 
as the Ordinance) under which exemptions or concessions are 
granted on such incomes or to such persons that are listed in the 
Second Schedule to the Ordinance. Consequently, Clause 126F 
was inserted in Part I of the Second Schedule which reads “Profits 
and gains derived by a taxpayer located in the most affected and 
moderately affected areas of Khyber Pakhtunkhwa, FATA and PATA 
for a period of three years starting from the tax year 2010”. Thus by 
virtue of Clause 126F, all profits and gains derived by the 
taxpayers located in the affected areas stood exempt from income 
tax for a period of three years.  
 
 
2. 
 
One of the petitioners is a private limited company 
whereas the remaining two are public limited companies, not listed 
on the Stock Exchange. They have their business establishments 
either in Lahore or Multan. As they derive income from executing 
construction contracts, their business activity, by virtue of Section 
153(1) (c) and 153(3) read with Section 169(b) of the Ordinance 
falls within the domain of ‘final tax regime’. Hence the amount 
deducted at the rate specified in the First Schedule of the 
Ordinance from the payments made to them towards fulfillment of 
their contractual obligations are to be treated as their final tax 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
3
liability. Accordingly, the petitioners submitted their income tax 
statements under Section 115 of the Ordinance for each of the tax 
years 2010, 2011 & 2012 disclosing the deductions made from the 
payments received against their respective contracts performed in 
the affected areas. Later it occurred to the petitioners that they 
were entitled to claim exemption on such payments in terms of 
Clause 126F, so they applied to the Commissioner for refund of the 
amounts deducted towards their income tax liability. They initially 
succeeded 
in 
obtaining 
refund, 
however, 
the 
Additional 
Commissioner, Inland Revenue issued show cause notices to the 
petitioners under Section 122(5A) of the Ordinance, proposing to 
disallow 
the 
exemption 
that 
was allowed 
earlier 
by 
the 
Commissioner. 
After 
hearing 
the 
matter, 
the 
Additional 
Commissioner held that as the petitioners fall within the domain of 
‘final tax regime’ and not under ‘normal tax regime’, the exemption 
granted under Clause 126F was not intended for them. This 
decision was challenged in appeal before the Commissioner Inland 
Revenue (Appeals-II), Lahore. After his decision in appeal, the 
aggrieved party assailed the appellate orders before the Appellate 
Tribunal, Inland Revenue, which held that the petitioners were 
entitled for exemption. The tax department then filed References 
before the Lahore High Court which vide impugned judgments 
reversed the findings of the Tribunal after holding that the 
petitioners fall within the domain of ‘final tax regime’ whereas the 
term ‘profits and gains’ occurring in Clause 126F was relatable to 
such taxpayers only who fall within the domain of ‘normal tax 
regime’, hence not entitled to claim exemption. Feeling aggrieved 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
4
by such decision the petitioners have preferred these petitions for 
leave to appeal.  
 
3. 
 
Mr. Muhammad Akram Sheikh, learned counsel for 
the petitioners in CPLA Nos. 3366 & 3517 to 3519 of 2016 
submitted that the provisions of Section 153(1)(c) and Section 
153(3) of the Ordinance are attracted to the case of the petitioners 
whereby they in each tax year are required to furnish a statement 
of their income to the Commissioner under Section 115 of the 
Ordinance and are not obliged to furnish return of income as 
provided in Section 114 of the Ordinance. He then submitted that 
irrespective of the fact that petitioners business concerns are 
located outside the affected areas, as they have executed 
construction contracts in the affected areas during the exempt 
years, they were entitled for exemption under Clause 126F. He 
submitted that accordingly the petitioners furnished a revised 
statement with the Commissioner under Section 115(4) of the 
Ordinance and sought refund of the tax deducted at source by the 
contract awarding entity by invoking Section 170 of the Ordinance. 
In support of his argument, the counsel for the petitioners referred 
to Circular No. 14 of 2011 dated 6th October, 2011 issued by 
Federal Board of Revenue. It interprets the scope of the word 
‘located’ appearing in Clause 126F in order to describe as to which 
category of taxpayers could avail the benefit of exemption. The 
relevant portion of this Circular is reproduced below:- 
 
“Government of Pakistan 
Revenue Division 
Federal Board of Revenue 
Inland Revenue Wing 
****** 
C.No.4(40ITP/2009.PT-I-142122-R 
Islamabad, 6th October, 2011 
 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
5
Circular No. 14 of 2011 
(Income Tax) 
 
Subject: 
Exemption under Clause (126F) of Part I of Second 
Schedule to the Income Tax Ordinance, 2001 – 
Clarifications Regarding 
 
 
Clause (126F) was inserted in Part I of Second Schedule to the Income 
Tax Ordinance, 2001, through Finance Act, 2010, to grant fiscal relief to 
the taxpayers whose businesses were adversely affected during the on-
going strife in the Khyber Pakhtunkhwa (KPK), Federally Administered 
Tribal Areas (FATA), and the Provincially Administered Tribal Areas (PATA), 
for a period of three years w.e.f. Tax Year 2010. In follow up thereto, a 
number of communications were issued by the Board to define and clarify 
the parameters of Clause (126F) including SROs, Circulars, and letters, 
which being prone to varying interpretations, may have caused certain 
degree of confusion in some respects.  
 
2. 
Queries have been received in the Board as regards the availability of 
exemption under Clause (126F) with reference to the location of the 
taxpayer, the location of the business, and other allied matters. In 
supersession of all earlier clarifications issued by the Board, in order to 
streamline the operation of Clause (126F), and ensure its standardized 
implementation across the board, the instructions as contained in the 
succeeding paragraphs will henceforth apply.  
 
3. 
The word “located” as used in Clause (126F) can possibly have more 
than one dimension. The relevant scenario along with the corresponding 
exemption/taxable status are outlined below:- 
 
Sr# 
Situation 
Exemption/Taxability 
(i) 
The taxpayer is located inside the 
affected and moderately affected 
areas (hereinafter ‘the specified 
areas’), and his business is also 
carried on inside the specified 
areas. 
 
Exempt 
(ii) 
The taxpayer is located outside 
the 
specified 
areas 
but 
his 
business is carried on within the 
specified areas. 
 
Exempt 
(iii) 
The taxpayer is located inside the 
specified areas, but his business 
is carried on outside the specified 
areas. 
 
Taxable 
(iv) 
The taxpayer is located outside 
the 
specified 
areas, 
but 
his 
business is partly carried on 
inside the specified areas. 
Exempt to the extent 
of 
the 
income 
attributable 
to 
the 
business 
operations 
carried on inside the 
specified areas. 
 
 
4. 
Thus, it is apparent that the provisions of Clause (126F) have to be 
applied keeping in view the facts of each case. 
 
5. 
Accordingly, the field formation may decide each case on merit in the 
light of the above instructions upon filing of a claim in this regard by the 
taxpayer. 
 
-sd- 
(Shahid Mehmood Sheikh) 
Secretary-IR (Exemptions/Rules)” 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
6
 
4.   
 
In support of his contention, Mr. Muhammad Akram 
Sheikh also relied upon the judgments reported in the cases of 
Commissioner of Income Tax Peshawar Vs. Islamic Investment 
Bank (2016 SCMR 816), Elahi Cotton Mills Ltd. Vs. Federation of 
Pakistan (PLD 1997 Supreme Court 582), Commissioner of Income 
Tax Legal Division Vs. Khurshid Ahmad (PLD 2016 Supreme Court 
545) and Army Welfare Sugar Mills Ltd. Vs. Federation of Pakistan 
etc (NLR 1992 Tax 186). The other counsel representing the rest of 
the petitioners in CPLA Nos. 3364, 3365 and 3147-L to 3149-L of 
2016, adopted the same line of arguments that were advanced by 
Mr. Muhammad Akram Sheikh.  
 
5. 
 
Learned counsel for the respondents defended the 
reasoning given in the impugned judgment by arguing that the 
concession granted under Clause 126F was only intended for the 
taxpayers of ‘normal tax regime’ who were located in affected areas 
whereas businesses of all the petitioners are located in Punjab and 
fall within the domain of ‘final tax regime’, therefore, the benefit of 
exemption was rightly denied to them. He further submitted that 
the Circular No.14 of 2011 interpreting the scope of exemption, 
upon which much reliance was placed by the counsel for the 
petitioners, was subsequently recalled on 06.10.2011 as it did not 
depict the true interpretation of Clause 126F.  
 
6. 
 
Before examining the applicability of exemption 
granted under Clause 126F to the case of the petitioners, two types 
of taxpayers are to be kept in mind. One who fall within the 
domain of ‘normal tax regime’, whose net profit in a tax year is 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
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determined by matching costs with the income, after taking into 
consideration 
various 
other 
factors 
such 
as 
allowances, 
deductions, 
depreciations, 
rebates, 
amortization 
etc. 
The 
applicable rate of income tax is then applied to the net profit thus 
arrived at to determine the tax liability of the tax year. The other 
type of taxpayers are of the petitioners’ kind who fall within the 
domain of ‘final tax regime’ by virtue of Section 153(1)(c) and 
153(3) read with Section 169(b) of the Ordinance. Their income tax 
liability in a tax year is a certain percentage deducted from the 
payments which are made to them by the contract awarding entity 
towards the performance of the contract at a rate specified in the 
First Schedule to the Ordinance. The income tax that is thus 
deducted at source fully discharges the contractor from his income 
tax liability irrespective of what profits and gains he has actually 
made as the same are of no consideration for the purposes of 
determining his tax liability.  
 
7.  
 
A person who was carrying on business in the affected 
areas but was unable to sell his goods or services to the extent he 
used to in normal business environment is the person who can 
only be described as an affectee of the adverse business 
environment. It was thus the adverse business environment which 
directly impacted his business with the result that his profits and 
gains diminished. The whole stimulus behind the tax exemption 
granted in 2010 under Clause 126F on the face of it was that 
sometime in the past the businesses located in the affected areas 
could not make profits on account of adverse business 
environment that was being experienced there. So it was purely an 
external factor that diminished the capacity of the businesses to 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
8
make profits and gains that was germane in granting tax 
exemption under Clause 126F. Hence exemption in question was 
intended for such taxpayers only. These taxpayers could only be 
the ones who fall under the ‘normal tax regime’. As to the 
taxpayers who fall under the ‘final tax regime’, they face no such 
situation. Firstly, they are not located in the affected areas. They 
only went to the affected areas when they succeeded in securing 
contracts, which in itself created business opportunity for them, 
adverse business environment notwithstanding. Their business 
activity starts only when they secure contracts. It can very well be 
imagined that before he submits his bid, he estimates the 
component of all costs that he is to incur towards the fulfillment of 
his contractual obligation. To cost he adds his margin of profit. He 
then adds the income tax liability at the rate specified in the First 
Schedule to the Ordinance. Where the contract is awarded to be 
performed in the areas affected by adverse business environment, 
the same has no impact on contractor’s margin of profit which he 
has already incorporated in the contract price. The contractor is 
thus not affected by any external factor that is not conducive for 
doing good business. So the business environment of the area 
where contract is to be performed doesn’t have any correlation with 
contractor’s profit and gains. They, therefore, cannot equate 
themselves with those taxpayers falling under the domain of 
‘normal tax regime’ whose businesses being located in affected 
areas suffered financially on account of adverse business 
environment. While determining the scope of exemption granted 
under Clause 126F, one should not lose sight of the fact that the 
precise reason for granting tax relief under Clause 126F was to 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
9
ameliorate the financial conditions of certain taxpayers who were 
real affectees of business environment that had affected their 
capacity to make profits and gains from their businesses. To 
extend the benefit of this exemption to the other category of 
taxpayers who did not even exist in the affected areas before 
succeeding in obtaining contracts to be performed there could 
never have been envisioned by the Legislature while incorporating 
Clause 126F in the Ordinance. We are, therefore, of the considered 
opinion that in view of the distinction between the two categories of 
taxpayers discussed above, the taxpayers such as the petitioners 
who fall under the domain of ‘final tax regime’ cannot claim 
exemption under Clause 126F. The case law relied upon by 
petitioners’ counsel, therefore, has no application to the case in 
hand.  
 
8. 
 
As to the legal effect of the Circular No. 14 of 2011, 
suffice is to state that it was issued with the intention to interpret 
Clause 126F in a manner so that the benefit of exemption is 
extended even to such taxpayers also who were located outside the 
affected areas but they partly did business in the affected areas. In 
our view this explanatory Circular does not depict the correct 
interpretation of the scope of Clause 126F as it traveled into 
altogether a different direction from what we have discussed 
hereinabove. It appears that ultimately better sense prevailed with 
the Federal Board of Revenue as we were informed by learned 
counsel for the department that Circular No. 14 of 2011 was 
subsequently withdrawn vide letter dated 07.06.2013. 
 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
10
9. 
 
In addition to what has been discussed above, it may 
also be mentioned here that in terms of clause (e) of Sub-Section 
(2) of Section 169, no refund of the tax deducted from the 
payments made to the taxpayers falling under ‘final tax regime’ can 
be claimed if the same have been deducted at the rate chargeable 
under the provisions of the Ordinance. Therefore, the petitioners 
being taxpayers who fall within the domain of ‘final tax regime’ 
could not have claimed refund of the deducted tax even otherwise 
as it is not their case that the deductions were made at the rate 
higher than the rate specified in the Second Schedule of the 
Ordinance.   
 
10. 
 
We, therefore, conclude that the tax exemption granted 
in the year 2010 under Clause 126F from its tenor could only have 
been intended for the taxpayers falling under the domain of 
‘normal tax regime’ whose profitability while doing business in the 
affected areas had diminished in the past on account of an 
external factor i.e. political strife that affected the profitability of 
doing business there. The exemption was never meant for the 
taxpayers like the petitioners whose businesses fall within the 
domain of ‘final tax regime’ for whom the question of experiencing 
loss of business opportunity on account of internal strife does not 
arise. They made their presence in the affected area only when 
they had in their hands a business opportunity to make profits 
and gains in the form of contracts to be executed there. The 
income tax department shall accordingly proceed to recover the 
income tax that has been wrongly refunded to any of the 
petitioners.  
 
CIVIL PETITION NOs. 3364 TO 3366, 3517 TO 3519 & 3147-L TO 3149-L OF 2016 
11
11. 
 
We vide short order dated 26.01.2017 dismissed these 
nine petitions and the above are the detailed reasons for the same.  
 
 
  
 
JUDGE 
 
JUDGE 
 
JUDGE 
 
Islamabad, the  
26th of January, 2017 
Approved For Reporting 
Khurram. 
