Sindh High Court Stops FBR From Taking Action Against Listed Company

Sindh High Court (SHC) has barred the Federal Board of Revenue (FBR) from taking any coercive action against a company on payment of capital gains tax on the disposal of shares under the Income Tax Ordinance 2001. A new order of the SHC revealed that the applicant company impugns an order dated March 11, 2025, passed by the Appellate Tribunal Inland Revenue (Special Bench), Karachi. It contended that the Applicant company had, in the Tax Year 2017, transferred shares owned by it in two of its associate companies, namely Engro Foods Limited and Engro Fertilizers Limited, each of which is a publicly listed company. The gains for the sale of these shares were the subject of a Show Cause Notice dated 17 September 2020 that was issued saying that the gains from the amount received in respect of such a transfer was amenable to capital gains under section 37A of the Income Tax Ordinance 2001 and therefore the assessment filed by the Applicant was liable to be amended. The Show Cause Notice was responded to by the Applicant and which was decided by the Additional Commissioner (Audit-III) on 26 December 2020 in the following terms: The findings revealed that the taxpayer, through its AR, has maintained that a capital gain arose on the disposal of shares of the two listed entities. Both listed companies, as defined under section 2(47) of the Ordinance, that lose shares were held by the company before July 1, 2012. ‘Therefore, in the return, the related capital gain was claimed as exempt under section 37A read with the then Division VII of Part (of First Schedule to the Ordinance. Taxpayer also provided the break-up of the gains and other details however, relevant details/evidences that could fortify the claim of the taxpayer have not been provided.  However, instant matter warrants detailed scrutiny and further verification from third parties in respect of cost, disposal and gains arisen out of it therefore, matter is not further pursued under section 122(5A) of the Ordinance and warrants verification under relevant provisions of audit. No inference, adverse is drawn at this score.” No appeal was preferred by either the Applicant or the department as against this order. Counsel for the Applicant contends that despite having passed this the order a second Show Cause Notice was issued on 19 April 2023 on the same ground again seeking that an addition had to be made to the assessment bed by the Applicant in the Tax Year 2017 on account of the failure of the Applicant to adjust capital gains, under Section 37 A of the Income Tax Ordinance, 2001, made on the transfer of the same shares in the same two companies i.e. Engro Foods Limited and Engro Fertilizers Limited and on which orders have been passed in effect stating that while capital gains could not be maintained under Section 37A of the Income Tax Ordinance, 2001, the addition could be maintained under Section 37 of the Income Tax Ordinance, 2001. Counsel for the Applicant maintains that while the orders passed and which has been upheld by the ATIR go beyond the purview of the Second Show Cause Notice, he maintains that on merits at the relevant time the transaction of the transfer of shares was not amenable to Capital Gains either under Section 37 or under Section 37A of the Income Tax Ordinance, 2001 and in addition the time frame for adjudicating the Second Show Cause Notice was also beyond the time period prescribed in Section 122 of the Income Tax Ordinance,2001 and on which basis the following questions, which need to be determined, emanate from the order of the ATIR: “The contentions raised by the Applicant merit consideration. In the interim operation of the impugned notice is suspended, and the Respondents are directed not to take any coercive action as against the Applicant,: SHC order added.