IN THE SUPREME COURT OF PAKISTAN 
(APPELLATE JURISDICTION)  
 
 
PRESENT: 
MR. JUSTICE EJAZ AFZAL KHAN 
MR. JUSTICE MAQBOOL BAQAR 
MR. JUSTICE FAISAL ARAB  
 
 
CIVIL APPEAL NO. 27 OF 2009 
(On appeal against the judgment dated 
09.10.2008 passed by the High Court of 
Sindh, Karachi in ITRA No. 186/2007) 
 
 
Commissioner of Income Tax, Large Taxpayers Unit, Karachi 
… Appellant 
VERSUS 
 
International Power Global Developments Limited, Karachi 
… Respondent 
 
For the Appellant:  
Dr. Farhat Zafar, ASC 
 
 
 
 
Raja Abdul Ghafoor, AOR 
 
For the Respondent: 
Mr. Muhammad Idris, ASC 
 
Date of Hearing:  
21.02.2018 
 
 
JUDGMENT 
 
 
 
 
FAISAL ARAB, J.- The appellant has called in 
question the decision of the High Court of Sindh rendered in an 
Income Tax Reference Appeal (ITRA No.186 of 2007). The subject 
matter of this appeal is the question of law that was decided 
against the department and in favour of the respondent, same is 
reproduced as follows:-  
“Whether on the facts and circumstance of the case the 
Hon’ble Tribunal was not justified in disallowing deduction on 
the applicant’s business expenditure the expenses incurred by 
the applicant on events of sports and social activities 
organized for the benefit of the applicant personnel and 
members of their family.” 
 
CIVIL APPEAL NO. 27 OF 2009 
2
 
2. 
 
The facts of the case are that respondent derives its 
income by rendering operational and maintenance service to the 
Hub-Power Company Limited. In the assessment year 2001-2002 
the respondent incurred an expenditure of Rs.1,200,000/- for 
setting up a sports and recreational facility for its employees who 
reside within its residential colony. The respondent deducted this 
expense while computing its income. The Tax department while 
passing the assessment order disallowed such deduction, which 
was challenged without success upto the stage of Income Tax 
Appellate Tribunal. The respondent then challenged the decision of 
the tribunal in the High Court of Sindh, which answered the 
question of law in the affirmative in favour of the respondent and 
against the tax department vide judgment dated 09.10.2008, hence 
this appeal with the leave of this Court.  
 
3. 
 
Section 15 of the Income Tax Ordinance, 1979 
classifies various heads of income, which includes ‘income from 
business and profession’. Section 22 of the said Ordinance 
describes various sources of income that are chargeable to tax 
under the head ‘income from business and profession’ and 
respondent’s business falls under Section 22. Section 23 describes 
various allowances and other deductibles that can be deducted 
while computing the income derived from business or profession 
falling within the ambit of Section 22. Such deductibles include, 
any rent paid for the premises in which such business or 
profession is carried on; any amount paid for repairs on the 
premises or any other machinery, plant, furniture or fittings used 
CIVIL APPEAL NO. 27 OF 2009 
3
for the purpose of business; any premium paid in respect of 
insurance against risk of damage or destruction to any building, 
machinery, plant, furniture or fittings, or stocks and stores used 
for the purposes of business or profession; depreciation expense; 
any expenditure (not being in the nature of capital expenditure or 
personal expenses of the assesse) laid out or expended wholly and 
exclusively for the purpose of such business or profession. Section 
23(xviii) of the 1979 Ordinance is more significant to examine the 
controversy in hand. It states “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” shall be made in computing income.  
 
 
4. 
 
A plain reading of Section 23 of the 1979 Ordinance 
shows that it specifically spells out in minute detail the types of 
allowances or deductions that can be made in computing the 
income under the head “Income from business or profession”, 
which means that any allowance or expenditure that falls outside 
the pale of Section 23 has to be treated as not deductible from the 
income. In other words, only such allowances and deductions are 
permissible which in some manner have nexus with the income 
that is derived from a business or profession.  
 
5. 
 
Learned counsel for the respondent in support of the 
reasoning given in the impugned judgment has heavily relied upon 
the provision of Section 23(xviii) of the 1979 Ordinance. The only 
question that needs to be answered in the present case, therefore, 
is whether the expense of Rs.1,200,000/- incurred by the 
CIVIL APPEAL NO. 27 OF 2009 
4
respondent in providing a facility for sports and social activities for 
its employees can be deducted while computing income on the 
strength of the provisions of Section 23(xviii). Undeniably the 
expense in question is not a part of the salary or perk or privilege 
which the respondent pays to its employees under the contractual 
obligations for rendering service. It was simply incurred to setup a 
complimentary facility for the employees which has no direct nexus 
with the generation of the respondent’s income derived from 
rendering operational and maintenance services to the Hub-Power 
Company Limited. Hence, on the face of it, the expense in dispute 
neither falls under Section 23(xviii) of the 1979 Ordinance nor any 
other category of allowances or deductibles listed in rest of the 
provisions of Section 23, so as to justify its deduction while 
computing respondent’s income. The High Court of Sindh allowed 
its adjustment simply on the ground that sports and social 
activities boost mental and physical health of a person by 
answering the question of law in the affirmative. This may be so 
but that ipso facto cannot be regarded as a type of allowance that 
can be directly co-related to any category of allowances and 
deductibles listed in Section 23 of the 1979 Ordinance with the 
business activity of the respondent, which is rendering of 
operational and maintenance services to a power generating 
company. The conclusion of the High Court being totally 
misconceived and not based on any provision of Section 23 is not 
sustainable in law. The expenditure in question, therefore, cannot 
be taken into consideration while computing business income of 
the respondent.  
 
CIVIL APPEAL NO. 27 OF 2009 
5
6. 
 
For what has been discussed above, this appeal is 
allowed, the impugned judgment is set aside and the decision of 
the Tribunal is restored.   
 
JUDGE 
 
JUDGE 
 
 
 
JUDGE 
Islamabad, the 
21st of February, 2018 
Approved For Reporting 
Khurram 
 
 
CIVIL APPEAL NO. 27 OF 2009 
6
“22.  
Income from business or profession.- The following incomes shall be 
chargeable under the head "Income from business or profession", namely:- 
 
(a)  
profits and gains of any business or profession carried on, or 
deemed to be carried on, by the assessee at any time during the 
income year; 
 
(b)  
income derived by any trade, professional and similar association 
from specific services performed for its members; and 
 
(c)  
value of any benefit or perquisite, whether convertible in to money 
or not, arising from business or the exercise of a profession. 
 
Explanation.- Where speculative transactions carried on by an 
assessee are of such a nature as to constitute a business, the 
business (hereinafter referred to as “speculation business") shall be 
deemed to be distinct and separate from any other business carried 
on by the assessee. 
 
“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 on; 
 
(ii)  
any local rate, tax, charge or cess in respect of such 
premises paid to any local authority or Government, not 
being any tax payable under this Ordinance; 
 
(iii)  
any amount paid on account of current repairs to any such 
premises or any machinery, plant, furniture or fittings used 
for purposes of business or profession; 
 
(iv)  
any premium paid in respect of insurance against risk of 
damage or destruction to any building, machinery, plant, 
furniture or fittings, or stocks and stores used for the 
purposes of business or profession; 
 
(v)  
in respect of depreciation [including First Year Allowance or 
Reinvestment Allowance or Industrial Building Allowance,] 
of any such building, machinery, plant, furniture or fittings, 
being the property of the assessee, the allowance admissible 
under the Third Schedule, [except depreciation on assets 
given on lease shall be allowed against income from lease 
rentals only]; 
 
(vi)  
in respect of animals which have been used for the 
purposes of the business or profession (otherwise than as 
stock-in-trade) and have died or become permanently 
useless for such purposes, the difference between the 
original cost to the assessee of the animals and the amount, 
if any, realised in respect of the carcasses or animals; 
 
[(via)  any sum paid on or after the first day of July, 1985, to a 
schedule bank, a financial institution, or such modaraba or 
leasing company as is approved by the Central Board of 
Revenue for the purposes of the Third Schedule, by way of 
lease money in respect of an asset taken on lease by the 
CIVIL APPEAL NO. 27 OF 2009 
7
assessee and used for the purposes of any business or 
profession carried on by him;] 
 
(vii)  
any interest paid in respect of capital borrowed for the 
purposes of the business or profession; 
 
[(viia) any sum paid to a modaraba or to a Participation Term 
Certificate holder for any funds borrowed for the purposes 
of the business or profession;] 
 
[(viib) any sum paid or credited to any person maintaining a profit 
and loss sharing account or deposit with a scheduled bank 
by way of distribution of profits by the said bank in respect 
of the said account or deposit;] 
 
[(viic) any sum paid by the House Building Finance Corporation 
constituted under the House Building Finance Corporation 
Act, 1952 (XVIII of 1952), to the State Bank of Pakistan 
(hereinafter referred to as the ‘Bank’) as the share of the 
Bank in the profits earned by the said Corporation on its 
investment in the property made under a Scheme of 
investment in property on partnership in profit and loss, 
where such investment is provided by the Bank under the 
House Building Finance Corporation (Issue and Redemption 
of Certificates) Regulations, 1982;] 
 
[(viicc) any sum paid by the National Development Leasing 
Corporation Limited to the State Bank of Pakistan 
(hereinafter referred to as the ‘Bank’) as the share of the 
Bank in the profits earned by the said Corporation on its 
leasing operations financed out of a credit line provided by 
the Bank on a profit and loss sharing basis;] 
 
 [(viid) any sum paid to a bank under a scheme of musharika 
representing its share in the profits of that Musharika;] 
 
[(viie)  any sum paid to a certificate holder under a Musharika 
scheme approved by the Corporate Law Authority and 
Religious Board formed under the Modaraba Companies 
and Modarabas (Floatation and Control) Ordinance, 1980 
(XXXI of 1980) representing his in the profits of that 
Musharika,:  
 
(viii) 
any sum paid to an employee as bonus or commission for 
services rendered, where such sum would not have been 
payable to him as profits or dividend if it had not been paid 
as bonus or commission: 
 
  
 
Provided 
that 
the 
amount 
of 
the 
bonus 
or 
commission is of a reasonable amount with reference to- 
 
(a)  
the pay of the employee and the conditions of 
his service; 
 
(b)  
the profits of the business or profession for 
the year in question; and 
 
(c)  
the general practice in similar businesses or 
professions; 
 
CIVIL APPEAL NO. 27 OF 2009 
8
(ix) 
in respect of any special reserve created by such financial 
institutions and for such purposes as may be approved by 
the Central Board of Revenue for the purposes of this 
clause, the amount, not exceeding ten percent of the total 
income including such amount, carried to such reserve.  
 
 
 
Provided that no allowance under this clause shall be 
made where the aggregate amount standing in such reserve 
exceeds the paid-up capital of the institution.  
 
(x)  
in respect of bad debts, such amount (not exceeding the 
amount actually written off by the assessee) as may be 
determined 
by 
the 
[Deputy 
Commissioner] 
to 
be 
irrecoverable; 
 
(xi)  
any sum paid to a scientific research institute, polytechnic, 
college or other institution in Pakistan affiliated to any 
University 
or 
Board 
of 
Education 
established 
or 
incorporated by, or under, any Federal or Provincial law, or 
recognised, aided or run by Government or run by any local 
authority, to be used for scientific research or technical 
training in Pakistan; [ ] 
 
(xii)  
any expenditure laid out or expended on scientific research 
in Pakistan related to the business carried on by the 
assessee; 
 
(xiii) 
any expenditure laid out or expended on any educational 
institution or hospital in Pakistan established for the 
benefit of the employees, their families and dependants; 
 
(xiv)  any expenditure laid out or expended on any institute in 
Pakistan established for the training of industrial workers 
recognised, aided or run by Government or run by any local 
authority; 
 
(xv)  
any expenditure laid out or expended on the training of any 
person, being a citizen of Pakistan, in connection with a 
scheme approved by the Central Board of Revenue for the 
purposes of this clause; 
 
(xvi)  any sums paid on account of annual membership 
subscription to a registered trade organisation within the 
meaning of the Trade Organisations Ordinance, 1961 (XLV 
of 1961); 
 
(xvii) any expenditure incurred by an assessee wholly and 
exclusively in connection with his visit abroad as a member 
of a trade delegation sponsored by the Federal Government; 
 
(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; 
 
 
 
[Provided that, where a domestic company has, in 
any 
income 
year, 
incurred 
any 
expenditure 
on 
advertisement or publicity outside Pakistan in respect of 
such goods as may be specified by the Federal Government 
by notification in the official Gazette and as are exported in 
the said income year, or on furnishing of samples of such 
CIVIL APPEAL NO. 27 OF 2009 
9
goods to a person outside Pakistan, deduction in respect of 
the said expenditure allowable under this clause shall be of 
a sum equal to one and one-third times the amount of 
actual expenditure so incurred.] 
 
[(xix)  any transfer to a participatory reserve created by a 
company under section 120 of the Companies Ordinance, 
1984 (XLVII of 1984), in accordance with an agreement 
relating to participatory redeemable capital entered into 
between the company and a banking company as defined in 
the Banking Tribunals Ordinance, 1984: 
 
  
 
Provided that, out of the amount so transferred in 
any income year, not more than five percent of the value of 
participatory redeemable capital shall qualify for deduction 
under this sub-section: 
 
  
 
Provided further that no deduction shall be allowed if 
the amount of the tax-exempted accumulation in the 
participatory reserve exceeds 10 percent of the amount of 
participatory redeemable capital; 
 
[(xx)  any expenditure incurred by an assessee in the purchase of 
one machine, with permanent sealed memory system, used 
for recording and printing cash sales made by him during 
the regular course of his business: 
 
 Explanation.- 
 
(a)  
the expression "any expenditure", as used in clauses 
(xii), (xiii) and (xiv), includes expenditure in the 
nature of capital expenditure; and 
 
(b)  
the expression "paid", as used in this section and 
sections 18, 24 and 31, means actually paid or 
incurred according to the method of accounting upon 
the basis of which the income is computed. 
 
(2)  
Where any such premises, building, machinery, plant, 
furniture or fittings is or are not wholly used for the 
purposes of the business or profession, any allowance or 
deduction admissible under this section shall be restricted 
to the fair proportional part of the amount which would be 
allowable if such premises, building, machinery, plant, 
furniture or fittings were wholly so used. 
CIVIL APPEAL NO. 27 OF 2009 
10
For the convenience sake, Section 23 is referred as follows:- 
“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 on; 
 
(ii)  
any local rate, tax, charge or cess in respect of such premises 
paid to any local authority or Government, not being any tax 
payable under this Ordinance; 
 
(iii)  
any amount paid on account of current repairs to any such 
premises or any machinery, plant, furniture or fittings used 
for purposes of business or profession; 
 
(iv)  
any premium paid in respect of insurance against risk of 
damage or destruction to any building, machinery, plant, 
furniture or fittings, or stocks and stores used for the 
purposes of business or profession; 
 
(v)  
in respect of depreciation [including First Year Allowance or 
Reinvestment Allowance or Industrial Building Allowance,] of 
any such building, machinery, plant, furniture or fittings, 
being the property of the assessee, the allowance admissible 
under the Third Schedule, [except depreciation on assets 
given on lease shall be allowed against income from lease 
rentals only]; 
 
(vi)  
in respect of animals which have been used for the purposes 
of the business or profession (otherwise than as stock-in-
trade) and have died or become permanently useless for 
such purposes, the difference between the original cost to the 
assessee of the animals and the amount, if any, realised in 
respect of the carcasses or animals; 
 
(via)  any sum paid on or after the first day of July, 1985, to a 
schedule bank, a financial institution, or such modaraba or 
leasing company as is approved by the Central Board of 
Revenue for the purposes of the Third Schedule, by way of 
lease money in respect of an asset taken on lease by the 
assessee and used for the purposes of any business or 
profession carried on by him;] 
 
(vii)  
any interest paid in respect of capital borrowed for the 
purposes of the business or profession; 
 
(viia) any sum paid to a modaraba or to a Participation Term 
Certificate holder for any funds borrowed for the purposes of 
the business or profession;] 
 
(viib) any sum paid or credited to any person maintaining a profit 
and loss sharing account or deposit with a scheduled bank 
by way of distribution of profits by the said bank in respect 
of the said account or deposit;] 
 
(viic) 
any sum paid by the House Building Finance Corporation 
constituted under the House Building Finance Corporation 
Act, 1952 (XVIII of 1952), to the State Bank of Pakistan 
(hereinafter referred to as the ‘Bank’) as the share of the 
CIVIL APPEAL NO. 27 OF 2009 
11
Bank in the profits earned by the said Corporation on its 
investment in the property made under a Scheme of 
investment in property on partnership in profit and loss, 
where such investment is provided by the Bank under the 
House Building Finance Corporation (Issue and Redemption 
of Certificates) Regulations, 1982;] 
 
(viicc) any sum paid by the National Development Leasing 
Corporation 
Limited 
to 
the 
State 
Bank 
of 
Pakistan 
(hereinafter referred to as the ‘Bank’) as the share of the 
Bank in the profits earned by the said Corporation on its 
leasing operations financed out of a credit line provided by 
the Bank on a profit and loss sharing basis;] 
 
(viid) any sum paid to a bank under a scheme of musharika 
representing its share in the profits of that Musharika;] 
 
(viie)  any sum paid to a certificate holder under a Musharika 
scheme approved by the Corporate Law Authority and 
Religious Board formed under the Modaraba Companies and 
Modarabas (Floatation and Control) Ordinance, 1980 (XXXI 
of 1980) representing his in the profits of that Musharika,:  
 
(viii) 
any sum paid to an employee as bonus or commission for 
services rendered, where such sum would not have been 
payable to him as profits or dividend if it had not been paid 
as bonus or commission: 
 
  
 
Provided that the amount of the bonus or commission 
is of a reasonable amount with reference to- 
 
(a)  
the pay of the employee and the conditions of 
his service; 
 
(b)  
the profits of the business or profession for the 
year in question; and 
 
(c)  
the general practice in similar businesses or 
professions; 
 
(ix) 
in respect of any special reserve created by such financial 
institutions and for such purposes as may be approved by 
the Central Board of Revenue for the purposes of this clause, 
the amount, not exceeding ten percent of the total income 
including such amount, carried to such reserve.  
 
 
 
Provided that no allowance under this clause shall be 
made where the aggregate amount standing in such reserve 
exceeds the paid-up capital of the institution.  
 
(x)  
in respect of bad debts, such amount (not exceeding the 
amount actually written off by the assessee) as may be 
determined by the Deputy Commissioner to be irrecoverable; 
 
(xi)  
any sum paid to a scientific research institute, polytechnic, 
college or other institution in Pakistan affiliated to any 
University or Board of Education established or incorporated 
by, or under, any Federal or Provincial law, or recognised, 
aided or run by Government or run by any local authority, to 
be used for scientific research or technical training in 
Pakistan;  
CIVIL APPEAL NO. 27 OF 2009 
12
 
(xii)  
any expenditure laid out or expended on scientific research 
in Pakistan related to the business carried on by the 
assessee; 
 
(xiii) 
any expenditure laid out or expended on any educational 
institution or hospital in Pakistan established for the benefit 
of the employees, their families and dependants; 
 
(xiv)  any expenditure laid out or expended on any institute in 
Pakistan established for the training of industrial workers 
recognised, aided or run by Government or run by any local 
authority; 
 
(xv)  
any expenditure laid out or expended on the training of any 
person, being a citizen of Pakistan, in connection with a 
scheme approved by the Central Board of Revenue for the 
purposes of this clause; 
 
(xvi)  any 
sums 
paid 
on 
account 
of 
annual 
membership 
subscription to a registered trade organisation within the 
meaning of the Trade Organisations Ordinance, 1961 (XLV of 
1961); 
 
(xvii) any expenditure incurred by an assessee wholly and 
exclusively in connection with his visit abroad as a member 
of a trade delegation sponsored by the Federal Government; 
 
(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; 
 
 
 
[Provided that, where a domestic company has, in any 
income year, incurred any expenditure on advertisement or 
publicity outside Pakistan in respect of such goods as may 
be specified by the Federal Government by notification in the 
official Gazette and as are exported in the said income year, 
or on furnishing of samples of such goods to a person outside 
Pakistan, deduction in respect of the said expenditure 
allowable under this clause shall be of a sum equal to one 
and one-third times the amount of actual expenditure so 
incurred.] 
 
(xix)  any transfer to a participatory reserve created by a company 
under section 120 of the Companies Ordinance, 1984 (XLVII 
of 1984), in accordance with an agreement relating to 
participatory redeemable capital entered into between the 
company and a banking company as defined in the Banking 
Tribunals Ordinance, 1984: 
 
  
 
Provided that, out of the amount so transferred in any 
income year, not more than five percent of the value of 
participatory redeemable capital shall qualify for deduction 
under this sub-section: 
 
  
 
Provided further that no deduction shall be allowed if 
the amount of the tax-exempted accumulation in the 
participatory reserve exceeds 10 percent of the amount of 
participatory redeemable capital; 
 
CIVIL APPEAL NO. 27 OF 2009 
13
(xx)  
any expenditure incurred by an assessee in the purchase of 
one machine, with permanent sealed memory system, used 
for recording and printing cash sales made by him during the 
regular course of his business: 
 
 Explanation.- 
 
(a)  
the expression "any expenditure", as used in clauses 
(xii), (xiii) and (xiv), includes expenditure in the nature 
of capital expenditure; and 
 
(b)  
the expression "paid", as used in this section and 
sections 18, 24 and 31, means actually paid or 
incurred according to the method of accounting upon 
the basis of which the income is computed. 
 
(2)  
Where any such premises, building, machinery, plant, 
furniture or fittings is or are not wholly used for the purposes 
of the business or profession, any allowance or deduction 
admissible under this section shall be restricted to the fair 
proportional part of the amount which would be allowable if 
such premises, building, machinery, plant, furniture or 
fittings were wholly so used.”