“A collection of tax where it is not due is as detestable as its non-payment when it is due.” — Nasim Sikander J, in CIT Companies, Lahore v State Cement Corporation (Pvt) Ltd, Lahore 2002 PTD 1603
The order of the Lahore High Court in Writ Petition No. 24928 of 2026 [Honda Atlas Cars (Pakistan) Limited v Federation of Pakistan & others], passed on April 30, 2026, raises a fundamental constitutional question: can the Federal Board of Revenue (FBR) levy “default surcharge” under section 205 of the Income Tax Ordinance, 2001 where payment obligations were regulated, deferred or suspended through judicial orders passed by constitutional courts?
The issue is of immense national importance because it potentially affects hundreds of taxpayers who challenged the constitutionality of super tax under section 4C of the Income Tax Ordinance, 2001 and complied with interim arrangements ordered by the Lahore High Court [(2023) 128 TAX 90 (H.C. Lah.) & (2024) 129 TAX 702 (H.C. Lah.)], Sindh High Court [(2023) 127 TAX 112 (H.C. Kar.)], Islamabad High Court [(2023) 128 TAX 141 (H.C. Isl.) & (2024) 130 TAX 394 (H.C. Isl.)], and later the Supreme Court/Federal Constitutional Court (FCC) of Pakistan.
The petition before the Lahore High Court arose after the FBR issued a notice on April 2, 2026, under section 205 seeking recovery of “default surcharge” for the tax year 2022. The petitioner argued that no surcharge could lawfully be imposed because payments had throughout remained governed by judicial orders.
The Court itself recorded that recovery proceedings had earlier been stayed subject to the furnishing of post-dated cheques, and later, following orders of the Supreme Court/FCC, 50% of the liability was deposited, and thereafter the remaining disputed amount was deposited immediately after final adjudication.
The petitioner’s argument, as reflected in paragraph 2 of the order, was legally compelling. Section 205 applies where a taxpayer “fails to pay” tax within the time. The expression “fails” is not merely mechanical or arithmetic. It imports a default attributable to taxpayer conduct—negligence, refusal, withholding or inexcusable omission.
Where payment stands deferred because a constitutional court itself has suspended recovery or prescribed payment modalities, the delay cannot legally be attributed to taxpayer default. This is not merely a technical issue of tax administration. It goes to the heart of constitutional governance and the rule of law.
A taxpayer who invokes constitutional jurisdiction to challenge a levy and complies with all judicial directions cannot later be punished for obeying the court. The ancient equitable maxim actus curiae neminem gravabit—an act of the court shall prejudice no one—squarely applies. If constitutional courts regulate recovery through interim orders, the consequences of such judicial arrangements cannot later be converted into grounds for fiscal punishment.
Article 77 of the Constitution mandates that no tax shall be levied except by or under the authority of law
The expression “default” connotes an element of wilful and deliberate failure to fulfil an obligation and negligence in the performance of duty. Not every failure, without any ulterior design and mala fide intention on the part of a person, would equate with the expression “default” as used in its strict legal sense. In the words of the apex court [Ghulam Muhammad Lundkhor v Safder Ali [PLD 1967 SC 530]], the word “default” in legal terminology necessarily imports an element of negligence or fault and means something more than mere non-compliance.
This view is followed in cases reported as Muhammad Hassan Khan v Mirza Abdul Hamid (1981 SCMR 799), Irshad Hussain v Abdul Rehman Kazi (1983 SCMR 471), M. Imamuddin v Surriya Khanum (PLD 1991 SC 317) and NDFC v Naseemuddin (PLD 1997 SC 564).
“Before a person is declared to be in default, it is absolutely necessary that there should have been a demand to make payment of a determined sum which should have remained unresponded to and unattended for a period beyond the period prescribed by law” — Irfan Gul Magsi v Haji Abdul Khaliq Soomro and others 1999 PTD 1302.
Yet despite recording the entire legal position, the Lahore High Court stopped short of deciding the constitutional issue. Instead, it accepted the departmental plea that a “factual controversy” was involved and remitted the matter back to respondent No. 3 for verification and a speaking order, while temporarily restraining recovery of surcharge until such decision. This part of the order deserves serious constitutional scrutiny.
The controversy before the Court was not factual in nature. There was no dispute regarding chronology or compliance. The record already established that: the super tax liability was challenged constitutionally; recovery was stayed by constitutional courts subject to conditions; post-dated cheques and deposits were furnished; payment obligations remained governed by judicial orders; and the remaining liability was deposited after final adjudication.
None of the above facts required departmental verification. The surviving question was purely legal and jurisdictional: whether section 205 could at all be invoked under such circumstances.
Unfortunately, this order reflects a wider institutional trend in tax adjudication where constitutional courts increasingly avoid deciding foundational questions of legality and instead remit matters back to the same executive authorities whose actions are challenged. In practice, this transforms constitutional jurisdiction into a procedural detour rather than an effective constitutional remedy. The constitutional implications of such judicial passiveness are profound.
Article 77 of the Constitution mandates that no tax shall be levied except by or under the authority of law. This constitutional limitation applies equally to ancillary exactions like surcharge, additional tax or penalty. Where the statutory conditions for invoking section 205 are absent, recovery of surcharge becomes an exaction without lawful authority.
Constitutional courts will have to determine whether the lawful exercise of the constitutional right to challenge taxation can itself become the basis for punitive fiscal consequences
The default surcharge under section 205 is not an independent tax. While not mandatory, this compensatory measure addresses the state's loss of timely revenue caused by taxpayer default. However, where recovery itself stood suspended through judicial orders, the state cannot logically claim compensation for a delay it was judicially restrained from enforcing.
If the FBR’s position is accepted, the consequences would be constitutionally dangerous. Every taxpayer obtaining interim relief from the constitutional courts would remain exposed to enormous surcharge liabilities even if they fully complied with judicial directions.
It is a well-established rule that no additional tax or penalty can be levied for the period for which a stay was granted by a court of competent jurisdiction — Masood Textile Mills Ltd. v CIT, Companies Zone, Faisalabad and others (2004) 89 TAX 51 (H.C. Lah.). In many cases, penalties were vacated where 50% of the demand was stayed by appellate authorities — CIT, Karachi v Sultan Sargodha Textile Mills Ltd. (1987) 55 TAX 161 (H.C. Kar.) and CIT v Mushtaq Muhammad Ali (1987) 55 TAX 157 (H.C. Kar.).
The Revenue has always erroneously conceived and interpreted provisions relating to additional tax as mandatory in nature. Taxpayers and their advisers also share this conviction of the Department that assessing officers enjoy no discretion whatsoever in the imposition of penal interest [which in substance is additional tax], even in cases where default was not wilful or deliberate. This interpretation arises from the use of the word “shall” in sections relating to the imposition of additional tax.
This myth needs to be exploded, as it has been ignored both by the Department and the professionals that the mere use of the word “shall” in any provision does not make it mandatory, as held in 2000 PTD 2872 re Allied Bank v ITAT, AJK etc. and M/s Maple Leaf Cement Factory Ltd v The Collector of Central Excise & Sales Tax (Appeals) etc. 1993 MLD 1645 = PTCL 1993 CL 656.
There are authoritative judgments of the higher courts that additional tax is like a penalty. If it is like a penalty, then the rule of wilful and deliberate default shall apply. The following case law supports this view:
(a) Additional tax is in the nature of a “penalty” — Taimur Shah v CIT [1976] 34 TAX 151 (H.C. Kar.) = PLD 1976 Kar. 1030.
(b) Additional tax is not mandatory, and imposition only arises where wilful default exists — M/s Murree Brewery v Naseem PLJ 1994 Lah. 508.
(c) If a person does not act with mala fide intention, the imposition of penalty or the additional charge is not justified — M/s Lone China (Pvt.) Ltd. v Additional Secretary to the Government of Pakistan, PTCL 1995 CL 415.
(d) The assessing officer is obliged under the law to apply his mind to the imposition of penal interest — Schazoo Laboratories Ltd. v CIT, Lahore [1977] 35 TAX 15 (H.C. Lah.) = 1976 PTD 361.
Constitutional litigation itself would become financially punitive. Interim relief would become illusory because the eventual cost of litigation could exceed the disputed tax itself. This would severely undermine access to justice guaranteed under Articles 4 and 10A of the Constitution.
The matter also exposes a deeper pathology in Pakistan’s revenue structure. Increasingly, surcharge provisions are used not as compensatory devices but as coercive revenue extraction mechanisms. In many tax disputes, surcharges and additional tax eventually exceed the principal tax liability itself, blurring the distinction between compensation and punishment.
This extraction-oriented approach is especially troubling in the context of section 4C super tax litigation, where the levy itself was challenged on substantial constitutional grounds involving Entries 47 and 52 of Part I of the Federal Legislative List, Fourth Schedule to the Constitution, double taxation principles, and the limits of Parliament’s taxing competence.
For years, constitutional courts granted interim protections while these issues remained sub judice. Taxpayers arranged finances and business decisions based on court-approved payment structures. To retrospectively convert such judicially protected periods into “default periods” for surcharge purposes is contrary to fairness, legal certainty and constitutional morality.
The Lahore High Court order nevertheless contains one important safeguard. It categorically restrains the recovery of the default surcharge until respondent No. 3 decides the matter after considering judicial orders and relevant facts through a reasoned and speaking order. This interim protection may provide temporary relief to taxpayers facing aggressive recovery proceedings. However, the larger constitutional issue remains unresolved and will inevitably return before the superior courts.
Eventually, constitutional courts will have to determine whether the lawful exercise of the constitutional right to challenge taxation can itself become the basis for punitive fiscal consequences. The answer should be self-evident in any constitutional democracy governed by the rule of law.
Where payment obligations are regulated or suspended by judicial orders, no “default” within the meaning of section 205 arises during the protected period. Any contrary interpretation would punish obedience to courts, undermine constitutional remedies and convert tax administration into coercive extraction untethered from legality. Pakistan’s constitutional order cannot permit such a result.