LHC rules profit-making subsidiaries of charitable trusts liable for Zakat Deduction

RAWALPINDI: In a landmark judgment, the Lahore High Court (LHC) has ruled that profit-making subsidiaries of charitable trusts are not exempt from compulsory Zakat deduction.

The Rawalpindi Bench, headed by Justice Jawad Hassan, dismissed a petition filed by Foundation University—an educational entity sponsored by the Fauji Foundation—challenging the deduction of Zakat from its investments in National Saving Certificates.

The court held that the university does not qualify for exemption as a charitable institution under the Zakat and Ushr Ordinance, 1980.

Justice Hassan ruled that although the university was established under the Foundation University Ordinance 2002 and sponsored by the Fauji Foundation, it functions as an independent body corporate with financial autonomy, making it liable to Zakat deduction.

The university had approached the court through counsel Sayyid Murtaza Ali Pirzada, seeking to set aside a letter issued by the Ministry of Religious Affairs on April 24, 2018, which declared the institution liable to pay Zakat on its investments.

The petitioner argued that since it was sponsored by Fauji Foundation—a trust created under the Charitable Endowment Act 1890—and reinvested surplus funds to provide quality education, it should be exempt from Zakat.

However, Assistant Attorney General Barrister Zain Mansoor contended that the Zakat and Ushr Ordinance contains a comprehensive framework defining assets and institutions subject to Zakat and that the university’s statutory status does not exempt it from compliance.

The court observed that Section 3(2) of the Foundation University Ordinance 2002 defines the university as a “body corporate” with perpetual succession and the authority to acquire, hold, and dispose of property.

Justice Hassan noted that these attributes establish the university as an independent juristic person, separate from the federal or provincial government.

“The preamble to the statute situates the establishment of the petitioner university within the broader framework of national interest, but that alone does not confer charitable status for fiscal purposes,” the judgment stated.

The court further examined the university’s statutory powers—including entering into agreements, charging fees, appointing staff, and investing funds—and concluded that it operates on a revenue-generating model rather than a purely charitable basis. It also noted that the Higher Education Commission classifies it as a private sector university.

Referring to Section 1(2) of the Zakat Ordinance, the court held that any company, association of persons, or body of individuals—incorporated or otherwise—with majority shares owned by Muslim citizens of Pakistan is liable to Zakat. As a body corporate, the university falls within the ordinance’s definition of "person."

The judgment relied extensively on Supreme Court precedents, including Liaqat National Hospital versus Province of Sindh and Pakistan Telecommunication Employees Trust versus Federation of Pakistan, which held that registration under a charitable law does not automatically confer fiscal exemption and that institutions must meet strict statutory criteria to qualify.

Justice Hassan noted that despite repeated court directions between 2020 and 2024, the university failed to produce documentation establishing its charitable status or identifying any provision granting it exemption from Zakat.

The court also distinguished Administrator General Zakat versus Pakistan Insurance Corporation, observing that the cited case involved a statutory corporation wholly owned by the federal government—unlike Foundation University, which operates independently.

Amicus Curiae Nisar A. Mujahid submitted that educational advancement alone does not confer charitable status without fulfilment of statutory requirements under the ordinance.

Concluding that the petitioner had failed to demonstrate any illegality in the ministry’s letter, the court dismissed the petition with no order as to costs.

The verdict upholds compulsory Zakat deduction from the university’s investments in National Saving Certificates and affirms the position taken by the Ministry of Religious Affairs.