ATIR rules Section 2(36) approval not mandatory for public universities

LAHORE: The Appellate Tribunal Inland Revenue (ATIR), Lahore has ruled that approval as a Non-Profit Organization (NPO) under Section 2(36) of the Income Tax Ordinance, 2001 is not a mandatory requirement for a public sector university to claim tax exemption under Clause 126.

The tribunal issued this important ruling on August 18, 2026 in Commissioner Inland Revenue, CTO Lahore v. M/s Syed Ali Hajvery University Trust, ITA No. 2723/LB/2022. It dismissed the appeal filed by the Federal Board of Revenue (FBR) and upheld the university’s tax exemption for Tax Year 2015.

Under the ruling, the tax demand of Rs. 1,830,454 along with proceedings relating to default surcharge, also could not be sustained.

What was dispute?

The FBR had initiated proceedings against Hajvery University for Tax Year 2015 under Section 122(5A). The university had declared its income of Rs. 6,373,722 as exempt under Clause 126 of the Income Tax Ordinance.

The tax department argued that the university did not meet the definition of a “public sector university” under Clause 126 and did not have approval as a Non-Profit Organization under Section 2(36). On this basis, the FBR imposed tax and default surcharge on the university.

University’s position

Hajvery University maintained that it was established by the Government of Punjab under the Hajvery University Lahore Ordinance, 2002 solely for educational purposes and on a non-profit basis.

The university’s key legal argument was that Clause 126 does not make approval under Section 2(36) a mandatory condition for tax exemption. Therefore, a condition that does not exist in the law cannot be added through interpretation.

Key observations by ATIR

The two-member bench comprising Nisar Mahmood and Barrister Zargham Lakhiser held that, under Clause 126, the primary consideration is whether the university was established solely for educational purposes and without a profit motive.

The tribunal observed that:

• Clause 126 does not make approval under Section 2(36) a mandatory condition.
• Sections 2(36) and 100C relate to Non-Profit Organizations whereas Clause 126 provides a separate statutory exemption for public sector universities.
• Hajvery University was established under provincial law and is subject to government oversight. The Governor serves as its Patron while the government has powers relating to inspection and the appointment of the Rector. Therefore, it can be considered a public sector university.
• In a similar matter, the tribunal had already ruled in favor of the university for Tax Year 2014. No change in law or facts was presented in the current case that would justify a different conclusion.

Reference to Islamabad High Court judgment

In its ruling, ATIR also referred to the Islamabad High Court case CIR v. Foundation University which laid down principles concerning the retrospective application of approval requirements relating to Non-Profit Organizations.

FBR’s appeal rejected

The tribunal held that the FBR failed to establish that the university was not a public sector university or that it had been established for profit. The FBR also failed to establish that approval under Section 2(36) was a mandatory legal requirement for claiming tax exemption under Clause 126.

Consequently, ATIR Lahore dismissed the FBR’s appeal upheld the Commissioner (Appeals) decision and set aside the assessment against the university.

Important legal precedent for public sector universities

The tribunal’s decision establishes an important legal principle: where the law expressly grants tax exemption to a particular institution, the tax authorities cannot withdraw that exemption by imposing an additional condition that is not provided for in the law.

Under this ruling, a public sector university cannot be denied tax exemption under Clause 126 merely because it does not have approval as a Non-Profit Organization under Section 2(36).