Insurance Proceeds and the Disposal of Fixed Assets are not subject to Sales Tax under the Sales Tax Act, 1990 --- Islamabad High Court, Islamabad

Islamabad 14-02-2025: In a significant ruling, the Islamabad High Court (IHC) has set aside a sales tax demand against M/s Pak Telecom Mobile Ltd., declaring that insurance proceeds and the disposal of fixed assets are not subject to sales tax under the Sales Tax Act, 1990. The decision, authored by Mr. Justice Babar Sattar and Ms. Justice Saman Rafat Imtiaz, nullifies the Additional Commissioner Inland Revenue’s tax demand of Rs. 67.6 million and provides clarity on taxability of insurance proceeds, fixed asset exemptions, and default surcharge penalties.  

The dispute arose when the Additional Commissioner Inland Revenue (ACIR) issued a show-cause notice (28.10.2014) alleging that M/s Pak Telecom Mobile Ltd. had failed to charge and pay sales tax on proceeds from insurance claims and the disposal of fixed assets. The Order-in-Original (01.04.2015) held that insurance proceeds and sales of assets were taxable under Section 3(1)(a) of the Sales Tax Act, 1990.  

Following a series of appeals, including before the Commissioner (Appeals) and the Appellate Tribunal Inland Revenue, both of which upheld the tax department’s stance, the taxpayer filed a reference before the Islamabad High Court (IHC).  

The Court framed three crucial questions for adjudication:  

1. Are insurance proceeds subject to sales tax under Section 3(1)(a) of the Sales Tax Act?  
2. Is the disposal of fixed assets (vehicles, building materials, etc.) exempt from sales tax under Section 13 and the Sixth Schedule (Serial No.6, Table 2)?  
3. Can default surcharge (Section 34) and penalty (Section 33(5)) be imposed in the absence of deliberate tax evasion?  

The Court held that insurance proceeds do not constitute taxable supply because:  

1. “Goods” under Section 2(12) of the Sales Tax Act explicitly exclude actionable claims.  
2. An insurance claim is an actionable claim under Section 3 of the Transfer of Property Act, 1882.  
3. Federal Board of Revenue (FBR) Circular No. 2(10)STP/97 (18.10.2001) supports that insurance proceeds are not subject to sales tax.  

Case References:  

• Sunrise Associates Vs. Govt. of NCT of Delhi [(India, 2006) 5 SCC 603]  
• Union of India Vs. Sri Sarada Mills Ltd. [1973 AIR 281 SC, India]  
• LIC of India Vs. Insure Policy Plus Services Pvt. Ltd. [2016 (2) SCC 507, India]  
• Coca-Cola Beverages Pakistan Ltd. [2017 PTD 2380]  
• Pak Telecom Mobile Ltd. [2017 PTD 2296]  

Insurance proceeds are not liable to sales tax under Section 3(1)(a) of the Sales Tax Act.  

The Court ruled that the sale of fixed assets is exempt from sales tax under Section 13(1) and Sixth Schedule (Serial No.6, Table 2) of the Sales Tax Act.  

1. SRO 490 (2004) prohibits input tax adjustment on vehicles, building materials, office equipment, and electrical appliances meaning their sale is exempt from sales tax.  
2. The tax department failed to prove that the assets were not covered under the exemption.  

Case References:  

• Collector of Customs Vs. Sanghar Sugar Mills Ltd. (PLD 2007 SC 517)  
• Haji Ismail Dossa Vs. Monopoly Control Authority (PLD 1984 Karachi 315)  
• Galloway Vs. Sehill, Seebohm & Co. Ltd. ([1912] 2 K.B. 354, UK)  

Fixed assets are exempt from sales tax, and the demand was wrongly imposed.  

The Court held that default surcharge (Section 34) and penalty (Section 33(5)) apply only if tax liability exists and there is deliberate non-payment (mens rea):  

1. Since no sales tax was due, no penalty could be imposed.  
2. The Additional Commissioner’s imposition of penalties without evidence of intent was unlawful.  
3. Attock Refinery Limited Vs. The Collector of Sales Tax (2021 PTD 1680)   
4. Commissioner Inland Revenue Vs. M/s Bestway Cement (STR No. 257 of 2011)  

No default surcharge or penalty can be imposed.   

 Key Takeaways from the Judgment:

1. Insurance proceeds are not taxable under the Sales Tax Act, 1990.  
2. The sale of fixed assets is exempt under Sixth Schedule (Serial No.6, Table 2) of the Act.  
3. Default surcharge and penalties cannot be imposed without tax liability and intent (mens rea).  
4. The Additional Commissioner Inland Revenue’s tax demand was overturned.  

Final Orders by the Court:

1. The Islamabad High Court (IHC) ruled entirely in favor of M/s Pak Telecom Mobile Ltd.  
2. Tax demand of Rs. 67.6 million was annulled.   
3. The orders of the Additional Commissioner, Commissioner (Appeals), and Appellate Tribunal Inland Revenue were set aside.  

The Court directed its decision to be communicated to the Appellate Tribunal.

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