ISLAMABAD – A recent Supreme Court ruling has provided essential clarity on the income tax exemption criteria for companies holding income under a legal obligation for charitable purposes, overturning a High Court decision that had denied the exemption.
The case centered on a company that claimed exemption on income derived from house property, arguing it was held under a “legal obligation” for charitable purposes as defined under the Second Schedule to the Income Tax Ordinances of 1979 (clause (93)) and 2001 (clause (59)). The High Court had initially denied the claim, asserting the company’s object of promoting “honorable practices” in trade was not charitable.
A three-member bench of the top court comprising Justices Munib Akhtar, Ayesha A. Malik and Aqeel Ahmed Abbasi addressed three core issues. First, it confirmed that a combined reading of the memorandum of association, including specific clauses related to expenditure, established a ‘legal obligation’ on the petitioner to expend its income only to achieve the defined purposes. The Court concluded that income held under a legal obligation for charitable purposes does qualify for exemption under the relevant statutory provisions. Second, applying established precedent, the Court ruled that the object of promoting “honorable practices” and equitable principles in trade and business, and discouraging malpractices, constitutes a “charitable purpose” within the statutory meaning. This is because such activities work to the benefit of the public at large and advance general public utility in economic and commercial life.
However, the Court delivered a critical finding regarding the third issue: entitlement to the exemption requires affirmative evidence that the income has been “actually applied” or “finally set apart” for charitable purposes. The Court found that the Tribunal had failed to make a necessary finding of fact on this requirement, wrongly treating it as automatically established by the finding of a legal obligation. The judgment underscores that while establishing the legal obligation and the charitable nature of the purpose are questions of law, proving the actual application or final setting apart of funds is a separate question of fact that the taxpayer must affirmatively prove to receive the exemption.
While concluding, the ruling confirms that income under a legal obligation for charitable purposes and the promotion of honorable trade practices are both covered under the exemption, but the taxpayer must strictly prove the actual use or earmarking of the income to successfully claim the relief.
