Supreme Court rules that pension fund surpluses are not taxable bank income unless actually refunded to the employer.

Islamabad, October 30, 2026: The Supreme Court has dismissed an appeal filed by the Federal Board of Revenue (FBR) against MCB Bank, ruling that surplus generated in a pension fund cannot be treated as a bank’s taxable income unless the amount is actually refunded to the employer.

In its judgment authored by Justice Aqeel Ahmed Abbasi, the apex court held that under Rule 4 of Part II of the Sixth Schedule to the Income Tax Ordinance, 2001, employer contributions to a pension fund and income earned on those contributions become taxable in the year in which the amount is actually received back by the employer.

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The court observed that although banks operate under a special tax regime prescribed in the Seventh Schedule, it contains no specific provision dealing with pension fund surpluses.

Consequently, the relevant provisions of the Sixth Schedule apply through Rule 9 of the Seventh Schedule.

The judgment clarified that annual actuarial valuations under International Accounting Standard (IAS) 19 may reflect a surplus or deficit in pension fund assets and liabilities. However, merely recognising a surplus in financial statements does not create a taxable income liability.

The Supreme Court further observed that accounting principles cannot independently determine tax liability without support from applicable tax laws.

It also held that tax authorities cannot reject a bank’s consistently followed accounting practices without sound legal grounds.

A three-member bench comprising Justice Irfan Saadat Khan, Justice Aqeel Ahmed Abbasi and Justice Shakeel Ahmed dismissed the civil appeal filed by the Commissioner Inland Revenue and upheld the Lahore High Court’s judgment in favour of MCB Bank.

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