ISLAMABAD  -  The Islamabad High Court (IHC) Friday restrained the government from collecting the tax on the income of banks.

Besides restraining the government, the bench also issued notices to the Secretary Finance and other respondents directing them to file a report and comments within two weeks in this matter.

A single bench of IHC comprising Justice Babar Sattar conducted hearing of different petitions filed by various banks through Salman Akram Raja Advocate and also issued to the Attorney General for Pakistan (AGP).

In their petitions, the petitioners impugned Rule 6C(6A) of the 7th Schedule of the Income Tax Ordinance, 2001 (“Income Tax Ordinance”).

During the hearing, the counsel for the petitioners stated that the Tax Department is seeking to tax the income derived by the petitioners, which are banking companies, from investments made in Federal Government securities by prescribing the tax rate on the basis of gross advances to deposit ratio.

He argued that in doing so, the respondents are seeking to regulate the banking business of the petitioners, which falls beyond the scope of a Money Bill and is consequently ultra vires Article 73 of the Constitution.

He further argued that the manner in which the charge has been imposed is retroactive, as investments made in Federal Government Securities did not mature during the financial year and the tax chargeable in relation to such investments could not have been enhanced and made applicable retrospectively.

The counsel further stated that the impugned rule is in conflict with Section 46B(3) of the State Bank of Pakistan Act, 1956, as the said statute vests in the State Bank the authority to issue directions to banks regulated by the State Bank of Pakistan and prohibits other public authorities from issuing any directions, which are in conflict with the policies declared by the State Bank of Pakistan.

He contended that the petitioners undertake banking business pursuant to the prudential regulations issued by the State Bank of Pakistan and no other authority is vested with jurisdiction to issue directions to regulate the banking business of the petitioners, which is what has been done through the impugned rule.

After hearing the arguments, the IHC bench issued notices to the respondents directing them to file report and para-wise comments within a period of two weeks.

The bench said that till the next date of hearing “no coercive action will be taken against the petitioners on the basis of any calculation made by the tax department by applying rule 6C(6A) of the 7th Schedule of the Ordinance to its income.”

It added that let a notice also be issued to the office of the Attorney General for Pakistan under Order XXVII-A of the Code of Civil Procedure, 1908 and deferred the proceedings till December 3 for further hearing.