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ATTN: Sheikh Asif Salam

From:   Dr Ikramul Haq

Sub: Non-Application of Section 50(1) regarding payments on account                           of Golden Handshake

On behalf of our clients (List Annexed), we want to bring to your kind notice the following vis-à-vis non-application of deduction of tax at source on payments relating to Golden Handshake:

  1. The order of the Honourable Lahore High Court in the case of Nasir Mahmood Dar Etc v The Federation of Pakistan, (1998) 78 Tax 1 (H.C. Lah) is still in the field. The Income Tax Department is bound to follow the said judgement in view of Article 201 of the Constitution of Pakistan. The said order (copy enclosed for ready reference) clearly debars the deducting authorities to deduct tax under section 50(1) of the Income Tax Ordinance (Hereinafter “the Ordinance”) in respect of payments relating to Golden Handshake and even ordered the tax authorities to refund the money that was deducted and deposited with it by the employers by following the instructions contained in CBR’s Circular No.15 of 1997, which was declared unlawful by the Honourable Court.

2. The amounts relating to loss of employment are capital receipts and are not taxable under the Ordinance. The following judgements are relevant wherein the Pakistani Courts have held that these payments are taxable as Salary income in the hands of employees:

  • 10 Tax 241 (S.C)
    • 9 Tax 38 (Trib)
    • 1 Tax (III-101)

3. It is worthwhile to mention that the Commissioner of Appeals, Karachi, in a recent decision (copy enclosed) while following the earlier judgement of the learned Income Tax Appellate Tribunal has held that such payments are in the nature of capital receipts and hence not taxable under the Ordinance.

In view of above, we request you not to deduct tax at source on payments made under the Golden Handshake Scheme, as it will tantamount to contempt of court. If you need any further assistance from us, please do let us know.

Sincerely Yours

Dr Ikramul Haq                                                                       Sheikh Asif Salam, FCA

(Advocate)                                                                              (Chartered Accountant)

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