M/s The Attock Oil Company Limited: Vs The Commissioner Inland Revenue, Zone-III, LTO, Islamabad.

  

APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I, ISLAMABAD

ITA No.773/IB/2026

(Tax Year, 2022)

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M/s The Attock Oil Company Limited: Refinery Post Office Morgah, Rawalpindi.		Appellant
	Vs
The Commissioner Inland Revenue, Zone-III, LTO, Islamabad.		Respondent

 

Appellant By:                                   Mr. Imran Younus, FCA

Respondent BY:                               Barrister Liaquat Ali, LA/DR

 

Date of Hearing:                                       02.07.2026

Date of Order:                                          06.07.2026

 

ORDER

"A collection of tax where it is not due is as detestable as its non-payment when it is due." — Mr. Justice Nasim Sikander.

CIT Companies, Lahore v. State Cement Corporation (Pvt.) Ltd. (2002 PTD 1603)

 M. M. AKRAM (Judicial Member): The instant appeal is directed against the order dated April 17, 2026, passed by the learned Deputy Commissioner Inland Revenue, Zone-III, Large Taxpayers Office, Islamabad, under section 205 of the Income Tax Ordinance, 2001 ("the Ordinance") for Tax Year 2022. The appellant has assailed the legality and validity of the impugned order on the grounds set forth in the memorandum of appeal.

2.         INTRODUCTION:

2.1      The present appeal raises an important question concerning the scope and application of section 205 of the Ordinance, particularly whether default surcharge can lawfully be levied where the taxpayer's obligation to pay the principal tax remained regulated by interim and final orders of competent constitutional courts during the pendency of proceedings challenging the constitutional validity of the charging provision itself.

2.2      The facts giving rise to the controversy are largely undisputed. The levy of Super Tax under section 4C of the Ordinance as introduced through the Finance Act, 2022 with retrospective application, was challenged by the appellant before the Islamabad High Court. During the pendency of the constitutional proceedings, the appellant was granted interim protection permitting it to file its return without immediate payment of the disputed levy, subject to compliance with the conditions imposed by the Court. Subsequently, the Honourable Supreme Court modified the interim arrangement by directing the appellant to deposit fifty per cent of the disputed amount, which direction was admittedly complied with. The constitutional litigation ultimately culminated in the judgment of the Constitutional Court of the Supreme Court upholding the validity of section 4C. Thereafter, the Assessing Officer quantified the appellant's liability and, subsequently, initiated separate proceedings under section 205 of the Ordinance for levy of default surcharge for the period commencing from the original due date for filing the return until the date on which the appellant deposited the tax in compliance with the judicial directions.

2.3      Against this factual backdrop, the principal question requiring determination is not whether the Super Tax ultimately became payable, as that question now stands concluded by the judgment of the Constitutional Court. Rather, the controversy is whether the appellant can legally be regarded as having "failed to pay tax" during a period when its obligation to pay stood governed, modified and regulated by binding judicial orders passed by constitutional courts exercising jurisdiction under the Constitution. Stated differently, the Tribunal is called upon to determine whether a taxpayer, who faithfully complies with interim judicial directions while pursuing a bona fide constitutional challenge to the validity of a fiscal levy, can subsequently be visited with the consequences of default surcharge merely because the constitutional proceedings were ultimately decided against it.

2.4      Although section 205 is couched in mandatory terms by providing for the levy of default surcharge where a taxpayer "fails to pay tax" within the prescribed time, the provision cannot be interpreted in isolation or divorced from the constitutional framework within which it operates. The existence of a legally recognizable default is a condition precedent to the invocation of section 205. The expression "fails to pay" necessarily presupposes the existence of an enforceable legal obligation, a failure attributable to the taxpayer, and the absence of any lawful justification for non-payment. Where the statutory obligation to pay is itself modified, deferred or suspended by orders of competent constitutional courts, the determination of default cannot be undertaken by ignoring the legal consequences flowing from such judicial intervention.

2.5      The issue assumes considerable constitutional significance because it transcends a mere question of statutory interpretation and directly engages the principles of constitutional supremacy, legality, the rule of law and fairness in fiscal administration. The guiding constitutional principle governing tax jurisprudence is that the power to levy and recover tax is a sovereign power; however, under our constitutional framework, that power is circumscribed by legality and may be exercised only in the manner authorized by law.  While every taxpayer is under a statutory obligation to discharge taxes lawfully payable, the State is under an equally compelling constitutional obligation not to impose or recover any tax, surcharge or other fiscal burden unless every statutory and constitutional prerequisite authorizing such recovery stands fully satisfied. Consequently, where payment of tax remained regulated by judicial orders passed by competent constitutional courts, the taxpayer cannot, during the currency of such orders, be branded as a defaulter merely because the litigation ultimately culminated in favour of the Revenue. Any contrary interpretation would effectively penalize obedience to judicial orders, diminish the efficacy of constitutional remedies, render interim judicial protection illusory, and offend the rule of law itself.

2.6      It therefore becomes necessary to examine the scope of section 205 in the light of the statutory scheme of the Ordinance, the constitutional protections guaranteed under Articles 4, 10A and 77 of the Constitution, and the settled judicial principles governing the concept of "default", the legal effect of interim judicial orders and the doctrine actus curiae neminem gravabit, before determining whether the impugned levy of default surcharge can be sustained in the facts and circumstances of the present case.

3.       FACTS OF THE CASE:

3.1      The facts of the case, briefly stated, are that section 4C of the Ordinance providing for the levy of super tax was inserted through the Finance Act, 2022 with retrospective effect from Tax Year 2022. The constitutional validity of section 4C, including its retrospective application, was challenged by the appellant before the Islamabad High Court. Vide interim order dated December 21, 2022, the High Court permitted the appellant to file its return of income for Tax Year 2022 without payment of super tax, subject to furnishing post-dated cheques with the Registrar of the Court. In compliance with the said order, the appellant filed its return on December 30, 2022 without discharging the super tax liability. The Department assailed the interim relief before the Supreme Court, which, vide order dated March 28, 2023, modified the interim arrangement by directing the appellant to deposit 50% of the super tax liability within two weeks of the said order. The appellant duly complied with the said direction by depositing Rs.325,770,038 on 10 April 2023 within the period stipulated by the Honourable Supreme Court.

3.2      Subsequently, the Finance Act, 2023 retrospectively enhanced the rate of Super Tax for Tax Year 2023, giving rise to a fresh round of constitutional challenges before the Islamabad High Court. The constitutional validity of the enhanced levy and certain provisions of section 4C again came under judicial scrutiny, culminating in the detailed judgments rendered by the Islamabad High Court in Fauji Fertilizer and others v. Federation of Pakistan [(2023) 128 Tax 141], decided on July 20, 2023, and Pakistan Oilfields Limited and others v. Federation of Pakistan [(2024) 130 Tax 394], decided on March 15, 2024. Through the aforesaid judgments, the High Court declared various aspects of the levy, including its retrospective application and certain provisions of section 4C, to be unlawful, while reading down the provision in specified respects. Consequent upon the pendency of the said constitutional proceedings and the principles enunciated in the aforesaid judgments, the appellant also obtained interim protection from the Islamabad High Court vide order dated August 8, 2023, whereby the Department was restrained from creating any demand of Super Tax beyond the rate prevailing prior to the Finance Act, 2023 or otherwise inconsistent with the principles laid down in the said judgments. The said interim protection was subsequently confirmed by the Islamabad High Court vide order dated March 8, 2024.

3.3      Ultimately, the constitutional validity of section 4C was upheld by the Federal Constitutional Court through its short order dated January 27, 2026. Consequent upon the judgment of the Constitutional Court, the Deputy Commissioner Inland Revenue issued a show-cause notice dated February 10, 2026 proposing the levy of super tax under section 4C and, after affording an opportunity of hearing, passed an order dated February 18, 2026 creating a demand of Rs.31,308,790. The said order was subsequently rectified on March 9, 2026, whereby a refund of Rs.294,461,248 was determined in favour of the appellant. The order dated 18 February 2026 determining the principal liability under section 4C did not determine any liability towards default surcharge under section 205. Thereafter, the Deputy Commissioner initiated independent proceedings under section 205 by issuing a show-cause notice dated 6 April 2026 proposing the levy of default surcharge under section 205 of the Ordinance on the alleged delayed payment of super tax and, after completion of the proceedings, passed the impugned order dated 17.04.2026 creating the default surcharge liability in respect of the alleged default from 01.01.2023 to 09.04.2023, i.e 99 days, giving rise to the present appeal. The appellant has challenged the aforesaid order primarily on the ground that no default within the meaning of section 205 could be attributed to it during the period when payment of the disputed tax stood regulated by binding judicial orders passed by the constitutional courts.

4.         SUBMISSIONS ON BEHALF OF THE APPELLANT:

The case came up for hearing on 02.07.2026. The learned Authorized Representative ("AR") appearing on behalf of the appellant assailed the impugned proceedings both on jurisdictional grounds as well as on merits. The substance of his submissions is summarized as follows:

4.1.      Independent proceedings under Section 205 are without lawful authority.

The learned AR vehemently contended that the initiation of independent proceedings under Section 205 of the Ordinance after passing a separate order under Section 4C determining the Super Tax liability, is wholly without jurisdiction and contrary to the scheme of the Ordinance. It was argued that the order dated 18.02.2026, passed under Section 4C, merely determined the appellant's Super Tax liability and did not adjudicate upon or impose any liability towards default surcharge under Section 205. Since the appellant had already discharged the tax liability determined through the said order (albeit under protest), the subsequent issuance of the show cause notice dated 06.04.2026 proposing levy of default surcharge under Section 205 constitutes a second and independent proceeding, which is legally impermissible. In support of this contention, the learned AR placed strong reliance upon the judgment of the Honourable Sindh High Court reported as 2024 PTD 1218, wherein it was held that where the principal tax liability and the consequential liability to default surcharge arise from the same cause of action, both issues ought to be determined simultaneously and that independent proceedings for levy of default surcharge after determination of the principal liability are not legally sustainable.

4.2.      No liability to default surcharge arose as the tax was paid before the due date specified in the demand notice.

Without prejudice to the foregoing objection, the learned AR submitted that, on a proper construction of Sections 4C, 137 and 205 of the Ordinance, default surcharge is attracted only where tax remains unpaid beyond the due date legally prescribed for payment. According to the learned AR, where Super Tax is determined by the Commissioner under section 4C(4), the liability becomes enforceable only upon issuance of a notice of demand under section 137 of the Ordinance. Consequently, a fresh statutory due date comes into existence through such notice. It was contended that the appellant had admittedly discharged the entire Super Tax liability before expiry of the period specified in the notice of demand and, therefore, no default surcharge could legally be computed under section 205.

4.3.      Harmonious construction of Sections 4C(3) and 4C(4).

The learned AR further argued that subsections (3) and (4) of section 4C operate in distinct fields and must be construed harmoniously. According to him, section 4C(3) governs cases where a taxpayer voluntarily pays Super Tax along with the return, whereas section 4C(4) applies where no such payment is made and the liability is subsequently determined by the Commissioner. It was submitted that if the original return filing date is treated as the due date even after determination under section 4C(4), the entire purpose of subsection (4) would become redundant. Such an interpretation would render the statutory mechanism prescribed by Parliament nugatory. Therefore, it was argued that the enforceable due date must necessarily commence from the notice of demand issued under section 137 and not from the original due date for filing of the return.

4.4.      Return filed under Section 120 constitutes a deemed assessment.

The learned AR further submitted that the appellant's return for Tax Year 2022 stood accepted under section 120 of the Ordinance and consequently attained the status of a deemed assessment. Once the return had become a deemed assessment, it was argued, the Department could not retrospectively contend that the Super Tax became payable from the original date of filing of the return for purposes of computing default surcharge under section 205. According to the learned AR, the liability, if any, became legally enforceable only upon determination by the Commissioner.

4.5.      The amount was not legally "due" until determined by the Commissioner.

Developing the aforesaid submission further, the learned AR contended that the expression "tax due" necessarily refers to an amount which has become legally payable and enforceable under law. It was argued that until the Commissioner passed an order determining liability under section 4C, no enforceable demand existed against the appellant. Consequently, the amount could not be regarded as "tax due" for purposes of section 205 and default surcharge could not be computed from the original return filing date.

4.6.      No failure to pay existed during the subsistence of judicial stay orders.

The learned AR next submitted that the levy and recovery of Super Tax remained the subject matter of constitutional litigation before the superior courts. It was argued that the Honourable Islamabad High Court initially granted protection to the appellant and that the matter subsequently remained pending before the Honourable Supreme Court of Pakistan. During the subsistence of such judicial protection, it was contended, there existed no enforceable obligation to pay the disputed amount and, therefore, there could be no "failure to pay" within the contemplation of section 205. The learned AR relied upon a number of judicial precedents wherein it has been held that additional tax, interest or default surcharge cannot be charged for the period during which recovery of tax remained suspended under valid orders passed by competent courts.

4.7.     Compliance with judicial orders negates the very concept of default.

The learned AR submitted that the appellant had, at every stage of the constitutional proceedings, acted strictly in accordance with the interim and final directions issued by the Islamabad High Court and the Honourable Supreme Court. The obligation to pay Super Tax during the pendency of the constitutional challenge did not remain governed solely by the statutory provisions of the Ordinance but stood modified and regulated by binding judicial orders. Having faithfully complied with every such direction, the appellant could not, either in law or on principle, be characterized as a defaulter. Any contrary view would amount to penalizing obedience to judicial orders, rendering constitutional remedies illusory and undermining the authority of the superior courts.

4.8.      Doctrine of actus curiae neminem gravabit.

The learned AR further contended that the maxim actus curiae neminem gravabit squarely applies to the present case. It was argued that no litigant should suffer prejudice by reason of an act of the Court. Since the appellant regulated its conduct entirely in accordance with judicial directions governing payment of the disputed levy, it could not subsequently be burdened with default surcharge merely because the constitutional proceedings ultimately concluded in favour of the Revenue.

4.9.      Constitutional protection under Articles 4, 10A and 77.

The learned AR submitted that the impugned proceedings are inconsistent with the constitutional guarantees embodied in Articles 4, 10A and 77 of the Constitution. It was argued that no tax or ancillary fiscal liability can be imposed except by authority of law and in accordance with due process. Default surcharge being a statutory consequence of default cannot be levied unless every statutory condition precedent to its imposition stands fully satisfied. Where payment of tax remained governed by judicial orders passed in constitutional proceedings, the essential ingredient of legally recognizable default was absent.

4.10.    Bona fide constitutional challenge and absence of legally attributable default.

The learned AR submitted that the appellant had throughout acted bona fide by invoking the constitutional jurisdiction of the superior courts to challenge the validity of section 4C. The dispute related to substantial questions of constitutional and fiscal law and not to any attempt to evade payment of tax. Throughout the pendency of the proceedings, the appellant complied with every judicial direction regulating payment of the disputed levy. It was therefore argued that no default attributable to the appellant arose so as to attract section 205 of the Ordinance. Reliance was placed upon various judgments of the Honourable Supreme Court of Pakistan, the High Courts and the Appellate Tribunal Inland Revenue to contend that where payment remains regulated by judicial orders and the taxpayer acts bona fide in pursuing constitutional remedies, default surcharge cannot lawfully be imposed.

4.11.    Benefit of favourable judicial pronouncements on the substantive levy.

The learned AR further submitted that the appellant had succeeded before the Honourable Islamabad High Court, which had declared the levy of Super Tax under section 4C to be unconstitutional in proceedings initiated by the appellant and similarly situated taxpayers. Accordingly, so long as those judgments remained operative, the appellant could not legally be regarded as a defaulter, nor could any liability towards default surcharge accrue during the currency of those judicial pronouncements.

4.12.    Absence of wilful default or mens rea.

The learned AR also contended that default surcharge under section 205 is not a charging provision but merely a statutory mechanism intended to secure compliance with the payment provisions of the Ordinance. According to him, such liability cannot be imposed mechanically without establishing deliberate or wilful default on the part of the taxpayer. It was argued that the appellant had throughout acted bona fide by invoking the constitutional jurisdiction of the superior courts to challenge the validity of section 4C. The dispute related to a genuine question of constitutional and legal interpretation and not to any deliberate attempt to evade payment of tax. Reliance was placed upon various judgments of the Honourable Supreme Court of Pakistan, the Sindh High Court, the Peshawar High Court and the Appellate Tribunal Inland Revenue to contend that where liability is genuinely disputed on legal grounds and the taxpayer acts bona fide without mala fide intention, default surcharge ought not to be levied.

4.13.    Distinction from the Byco Petroleum judgment.

Lastly, the learned AR sought to distinguish the judgment of the Honourable Supreme Court in Commissioner Inland Revenue v. Byco Petroleum Pakistan Limited. It was argued that the said judgment arose under section 34 of the Sales Tax Act, 1990, which, after amendment, expressly imposed liability for default surcharge through the words "whether wilfully or otherwise." According to the learned AR, section 205 of the  Ordinance contains no such language and, therefore, the statutory scheme considered in Byco Petroleum is materially different from that governing default surcharge under the  Ordinance. It was accordingly submitted that the ratio of the said judgment is inapplicable to the facts and circumstances of the present appeal.

In view of the foregoing submissions, the learned AR prayed that the show-cause notice dated 6 April 2026 and the consequential order dated 17 April 2026 passed under section 205 of the Ordinance be declared unlawful, without lawful authority and of no legal effect. It was submitted that the independent proceedings under section 205 were without jurisdiction; that no legally recognizable default arose during the period the appellant's obligation to pay remained regulated by judicial orders of the superior courts; that the appellant had faithfully complied with every judicial direction governing payment of the disputed levy; and that the impugned levy of default surcharge is therefore liable to be set aside in its entirety.

5.       SUBMISSION ON BEHALF OF THE DEPARTMENT:

On the other hand, the learned Departmental Representative (DR) supported the impugned order and controverted the submissions advanced on behalf of the appellant. It was argued that the proceedings under section 205 of the Ordinance have been lawfully initiated and correctly sustained under the statutory scheme. The substance of the submissions is summarized as follows:

5.1.     Super Tax under section 4C is a substantive charge creating immediate tax liability.

The learned DR submitted that section 4C of the Ordinance is a substantive charging provision introduced through the Finance Act, 2022, which creates a direct and independent liability to Super Tax upon the specified class of taxpayers. It was contended that the liability arises by operation of law upon fulfilment of the statutory conditions and is not dependent upon any assessment order or subsequent adjudication by the Commissioner. It was further submitted that under the self-assessment regime, the taxpayer is under a statutory obligation to correctly compute and discharge the tax liability arising under the law at the time of filing the return. Any subsequent determination or verification by the tax authorities is merely declaratory in nature and does not affect the point in time when the liability originally accrues under the statute.

5.2.     Statutory due date governs liability; failure beyond that date constitutes default.

The learned DR further submitted that Super Tax became payable on the statutory due date prescribed for filing of return for Tax Year 2022. Since the appellant admittedly did not discharge the Super Tax liability at the time of filing its return on 30.12.2022, a default automatically occurred upon expiry of the statutory due date. It was argued that the subsequent payment made on 10.04.2023 did not erase the intervening period of default but merely brought it to an end. Consequently, liability to default surcharge under section 205 arose for the entire period commencing from the statutory due date till the date of actual payment.

5.3.     Section 137 is a recovery mechanism and does not defer tax liability.

The learned DR contended that section 137 of the Ordinance is purely procedural in nature and operates only as a machinery provision for recovery of tax already due under the charging provisions. It neither creates any new liability nor postpones the statutory due date of payment. It was submitted that acceptance of the appellant’s interpretation would lead to an anomalous situation whereby taxpayers could defer payment of admitted tax until issuance of a demand notice, thereby defeating the purpose of the self-assessment regime and undermining the statutory scheme of timely payment of tax.

5.4.     Liability under section 205 is automatic and compensatory in nature.

The learned DR further submitted that section 205 operates automatically once tax payable under the Ordinance remains unpaid beyond the prescribed due date. The provision does not require any separate adjudication of default once delayed payment is established. It was contended that default surcharge is compensatory in nature and is intended to recompense the exchequer for deprivation of revenue during the period of default. Accordingly, the Assessing Officer merely applied the statutory formula for computation of surcharge without exercising any discretionary jurisdiction.

5.5.     Facts of delayed payment are admitted and undisputed.

The learned DR emphasized that the material facts are not in dispute, namely that:

i. the return for Tax Year 2022 was filed on 30.12.2022;
ii. Super Tax was not paid along with the return;
iii. the liability was discharged only on 10.04.2023; and
iv. no payment was made during the intervening period.

In view of the admitted chronology, it was submitted that all ingredients necessary for the application of section 205 stand satisfied and the period of default is clearly established. Based on the foregoing submissions, the learned DR prayed that the appeal be dismissed. It was contended that the impugned order is legal and in accordance with the Ordinance, as the liability to Super Tax arose under section 4C, the appellant failed to discharge the same within the statutory time, section 137 does not alter the due date of payment, and consequently the default surcharge under section 205 was correctly levied for the period of delay.

6.       FINDINGS AND QUESTIONS FOR DETERMINATION:

Upon careful consideration of the impugned order, the rival submissions of the parties and the relevant provisions of the Ordinance, the following questions arise for determination by this Tribunal:

Questions for Determination:

1.   Whether the proceedings initiated under section 205 of the Income Tax Ordinance, 2001, are maintainable in law where the principal tax liability has already been determined under section 4C?

2.   Whether, in the facts and circumstances of the present case, the appellant can be said to have committed a “default” within the meaning of section 205 during the period in which payment of Super Tax remained subject to interim and final orders of the constitutional courts?

3.   Whether the principles of actus curiae neminem gravabit and the constitutional guarantees under Articles 4, 10A and 77 of the Constitution preclude the levy of default surcharge for the period during which payment of Super Tax remained governed by judicial orders?

4.   Whether section 205 of the Ordinance operates automatically and independently of the legal effect of interim or final judicial orders governing the time and manner of payment of tax?

5.   What is the true scope and effect of section 205 of the Ordinance in the factual and legal context of the present case?

7.       Statutory Framework:

Before adverting to the questions formulated for determination, it is appropriate to examine the statutory scheme embodied in sections 4C, 120, 137 and 205 of the Ordinance, the legal connotation of the expression "default", the effect of interim and final orders of constitutional courts regulating payment of tax, and the settled constitutional principles governing the levy and recovery of fiscal liabilities.

It is a well-settled principle of statutory interpretation that a taxing statute must be read as an integrated whole, and no provision can be construed in isolation. Each provision must be interpreted harmoniously so as to give effect to the legislative intent and to avoid internal inconsistency. The Honourable Supreme Court of Pakistan in Elahi Cotton Mills Ltd. v. Federation of Pakistan (PLD 1997 SC 582), held that in fiscal statutes, effect must be given to the plain language of the legislature while ensuring that all provisions are read in their proper context. Similarly, in Messrs Mustafa Impex v. Government of Pakistan (PLD 2016 SC 808), it was reiterated that statutory provisions must receive a harmonious construction so as to advance the legislative scheme rather than defeat it.

Viewed in this perspective, sections 4C, 120, 137 and 205 operate in distinct yet interrelated fields within the overall scheme of the Ordinance.

7.1      Section 4C – Charging provision creating liability to Super Tax.

i.         Section 4C, inserted through the Finance Act, 2022, is a substantive charging provision whereby Parliament has imposed Super Tax upon specified categories of taxpayers whose income exceeds the prescribed threshold. A charging provision occupies a foundational position in fiscal legislation, as it is the source from which tax liability originates. It is well recognised that the distinction between charging provisions and machinery provisions is fundamental in tax law. In Elahi Cotton Mills Ltd. v. Federation of Pakistan (PLD 1997 SC 582), the Honourable Supreme Court observed that the charging provision creates the liability, whereas the machinery provisions provide the mechanism for assessment, computation, and recovery of the tax so levied. Similarly, the Supreme Court of India in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), held that charging and machinery provisions together constitute an integrated code, although the machinery provisions cannot operate independently of the charging provision. Accordingly, section 4C is the source of the substantive liability to Super Tax.

ii.        Once the conditions prescribed under section 4C are fulfilled, liability arises by operation of law. Such liability does not depend upon issuance of any assessment order, demand notice, or separate adjudicatory process.

iii.       Under the self-assessment regime embodied in the Ordinance, every taxpayer is under a statutory obligation to compute its taxable income, determine the tax payable, and discharge the admitted liability within the prescribed time. The filing of a return thus carries with it a statutory obligation of payment in accordance with law.

iv.       Consequently, where Super Tax becomes payable under section 4C, the liability accrues in accordance with the statute and becomes enforceable on the due date prescribed under the Ordinance.

7.2.     Legal Effect of Deemed Assessment under Section 120 of the  Ordinance.

i.          Contention of the Appellant.

The learned AR has contended that the appellant’s return for Tax Year 2022, having attained the status of a deemed assessment under Section 120 of the Ordinance, precludes the treatment of tax as payable from the original return filing date for the purposes of computation of default surcharge under Section 205. It is argued that the liability became enforceable only upon passing of an order under Section 4C(4) and issuance of a notice of demand under Section 137. This submission necessitates examination of the true legal effect of a deemed assessment under Section 120 and its interplay with the charging and recovery provisions of the Ordinance.

ii.        Scheme and Object of Section 120.

Section 120 embodies the principle of self-assessment, which forms a foundational feature of the Ordinance. Under this scheme, a taxpayer computes taxable income, determines tax payable in accordance with law, and files a return which, where not subjected to further scrutiny or amendment, is treated as an assessment order by operation of law. The object of Section 120 is to simplify the assessment regime, minimise administrative intervention, and promote voluntary compliance by recognising the taxpayer’s return as the basis of assessment. The provision thus dispenses with the necessity of a formal assessment order in every case and creates a statutory fiction whereby the return is treated as an assessment order for assessment purposes.

iii.       Scope of the Legal Fiction.

It is a well-settled principle of statutory interpretation that a legal fiction must be confined strictly to the purpose for which it is created and cannot be extended beyond its legitimate field. Section 120 deems the return to be an assessment order; however, it does not alter the substantive incidence of tax, does not modify the charging provisions, and does not defer the statutory due date of payment. The fiction operates solely within the domain of assessment and cannot be extended to rewrite the time of accrual, exigibility, or enforceability of tax liability under other provisions of the Ordinance. The Honourable Supreme Court has consistently held that statutory fictions must be given full effect within their intended sphere but cannot be stretched so as to defeat or modify substantive provisions of the statute. Accordingly, Section 120 must be applied in its limited field without permitting it to intrude into charging or recovery provisions.

iv.       Distinction between Assessment and Liability.

A clear doctrinal distinction exists between tax liability and its assessment. Tax liability arises directly from the charging provisions enacted by Parliament, whereas assessment is merely the process of quantifying and formalising that liability. Whether such quantification occurs through an express assessment order or by statutory fiction under Section 120 does not affect the origin or existence of the liability itself. The deemed assessment, therefore, neither creates the tax liability nor postpones the point at which such liability becomes due and payable; it only recognises the return as an assessment order for procedural purposes.

v.         Whether Section 120 Alters the Statutory Due Date.

The argument advanced by the appellant, if accepted, would attribute to Section 120 a legal consequence not contemplated by the legislature. Nothing in Section 120 suggests that the statutory due date for payment of tax stands deferred until the issuance of an assessment order under Section 4C(4) or a demand under Section 137. Nor does the provision stipulate that default surcharge under Section 205 becomes operative only after such subsequent determination. The liability to Super Tax arises under Section 4C read with the relevant charging and payment provisions, and the obligation to discharge such liability is anchored to the statutory due date prescribed therein. Section 120 merely recognises the return as an assessment order for assessment purposes; it neither substitutes nor suspends the charging mechanism nor the timeline of payment. To hold otherwise would effectively permit the concept of deemed assessment to operate as a device for postponing statutory payments until departmental action is taken, thereby undermining the self-assessment regime and the certainty of fiscal obligations intended by Parliament.

vi.       Relationship between Section 120 and Section 205.

The controversy before us is not, in substance, whether the appellant's liability to Super Tax arose on the statutory due date. Nor is it whether the return attained the status of a deemed assessment under Section 120. The real controversy concerns the stage at which the machinery provision contained in Section 205 becomes operative for the purpose of imposing default surcharge.

Section 205 is not itself a charging provision. It is a consequential provision intended to compensate the revenue where a taxpayer remains in default of a statutory obligation to pay tax after it has become due. Its application, therefore, depends not merely upon the existence of an unpaid tax liability but upon the existence of a legally operative default capable of attracting the statutory consequence prescribed by the legislature.

Accordingly, while Section 120 cannot be construed as postponing either the accrual of liability under Section 4C or the statutory due date for payment, it is equally impermissible to conclude that Section 205 must inexorably operate for every day following the original due date irrespective of subsequent judicial intervention. The question under Section 205 is not merely whether tax remained unpaid, but whether the taxpayer continued to remain in actionable default during the relevant period.

vii.      Continuing Default and Judicial Modification of the Obligation to Pay.

Ordinarily, where tax becomes payable on the prescribed due date and remains unpaid, the default continues from day to day until payment is made, and default surcharge under Section 205 follows as a statutory consequence.

The present case, however, stands on a materially different footing. Before coercive recovery could lawfully proceed, the constitutional jurisdiction of the superior courts was invoked. The Islamabad High Court, and subsequently the Honourable Supreme Court, did not merely suspend recovery proceedings. Rather, they themselves regulated the appellant's obligation to pay by directing payment in specified instalments and within prescribed timelines. Those judicial directions temporarily displaced the ordinary statutory incidents governing immediate recovery and substituted a court-regulated mechanism for discharge of the admitted liability.

The appellant complied with every payment directed by the superior courts. Consequently, although the original statutory liability remained intact and the technical default arising upon expiry of the statutory due date was never extinguished, the appellant cannot, during the currency of those binding judicial orders, be regarded as remaining in a continuing actionable default so as to attract the compensatory consequence envisaged by Section 205.

viii.      Conclusion on the Appellant's Contention under Section 120

For these reasons, we are unable to accept the appellant's submission that the deemed assessment contemplated by Section 120 postponed either the accrual of liability or the statutory due date for payment of Super Tax. The liability arose under Section 4C on the date prescribed by the Ordinance, and the return attaining the status of a deemed assessment neither deferred that liability nor altered the statutory timetable for its discharge.

Nevertheless, the rejection of the appellant's argument under Section 120 does not conclude the controversy under Section 205. The appellant succeeds, not because liability arose only upon the order passed under Section 4C(4), but because the subsequent judicial orders lawfully regulated the manner and timing of payment. During the subsistence of those orders, the appellant's compliance with every judicial direction precluded the invocation of Section 205 for that period. The relief thus flows, not from the doctrine of deemed assessment under Section 120, but from the legal effect of binding judicial orders governing the taxpayer's obligation to pay.

7.3      Section 137 – Machinery Provision for Recovery of Tax.

i.          Nature and Scope of Section 137

Section 137 operates in a field distinct from the charging provisions of the Ordinance. Unlike Section 4C, it neither creates nor imposes any tax liability. Rather, it provides the statutory machinery for recovery of tax which has already become due and payable under the substantive provisions of the Ordinance. The expression "tax payable" employed in Section 137 necessarily presupposes the prior existence of a legally enforceable tax liability. The provision, therefore, proceeds on the footing that the liability has already arisen under the relevant charging section, leaving only its enforcement to be regulated through the prescribed recovery mechanism.

ii.         Purpose and Effect of the Provision

The object of Section 137 is purely administrative and procedural. It authorises the Commissioner to serve a notice of demand requiring payment where tax, already due under the Ordinance, remains unpaid. The notice contemplated by Section 137 does not create or crystallise the tax liability; it merely communicates and enforces an obligation that already exists in law. Consequently, the issuance of a notice of demand is a step in the process of recovery and cannot be regarded as the event that gives rise to the liability itself or postpones the date on which such liability becomes payable.

Acceptance of the appellant's contention would invert the statutory scheme by making the existence of tax liability dependent upon the issuance of a recovery notice. Such an interpretation would enable every taxpayer to defer payment until departmental action is initiated, thereby defeating the legislative policy underlying the self-assessment regime and rendering the statutory due dates prescribed by the Ordinance largely ineffective.

iii.         Harmonious Construction with the Charging Provisions

It is a settled principle of statutory interpretation that a statute must be construed as a coherent whole, and no provision should be interpreted in a manner that renders another provision redundant, otiose, or devoid of practical effect. The charging provisions determine the incidence of tax, while Section 137 merely provides the machinery for its recovery. Each provision operates within its own distinct sphere and must be given effect accordingly.

Construed harmoniously, Section 137 neither determines the date on which tax becomes payable nor alters the statutory due date prescribed under the charging provisions. Its function is confined to facilitating the recovery of tax that has already become due in accordance with law. To attribute to Section 137 the effect of creating or postponing tax liability would impermissibly convert a machinery provision into a charging provision, contrary to both the language of the Ordinance and settled principles governing the interpretation of fiscal statutes.

iv.        Effect on the Present Case

The order passed under Section 4C(4), and the consequential notice issued under Section 137 did not create the appellant's liability to Super Tax, nor did they defer the statutory due date prescribed under Section 4C. Their legal effect was confined to quantifying and enforcing an existing liability. The appellant's entitlement to relief from default surcharge, therefore, cannot be founded upon the issuance of the demand notice under Section 137, but falls to be determined independently with reference to the scope and operation of Section 205 in the light of the binding judicial orders regulating the payment of tax.

7.4      Section 205 – Compensatory Liability for Delayed Payment

i.          Nature and Object of Section 205

Section 205 provides for the levy of default surcharge where any tax payable under the Ordinance is not paid on or before the prescribed due date. The provision stipulates that where tax remains unpaid beyond the statutory date of payment, the taxpayer shall be liable to default surcharge computed for the period commencing immediately after the due date and continuing until payment is made or until the statutory conditions attracting such liability otherwise cease to operate. The use of the expression "shall be liable" manifests the legislative intent that default surcharge is a statutory consequence of delayed payment and is not ordinarily dependent upon any separate adjudication or exercise of administrative discretion.

The provision is, however, not a charging section creating an independent tax liability. Rather, it is a consequential provision which operates upon an existing liability that has become due and payable under the charging provisions of the Ordinance.

ii.         Compensatory Character of Default Surcharge

The rationale underlying Section 205 is compensatory rather than penal. Its purpose is to compensate the public exchequer for being deprived of the use of revenue during the period in which tax lawfully due remains unpaid. Revenue due to the State possesses an inherent economic value. Where a taxpayer retains such money beyond the period prescribed by law, the Government is correspondingly deprived of its beneficial use. Default surcharge is designed to compensate for that deprivation and to preserve the economic value of public revenue pending payment.

iii.         Judicial Recognition of the Compensatory Principle

The distinction between compensatory interest and penal consequences has long been recognised in fiscal jurisprudence. The Supreme Court of India in Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income Tax (1986) 160 ITR 961, held that interest for delayed payment of tax is compensatory in character and ordinarily follows upon fulfilment of the statutory conditions. Likewise, in J.K. Synthetics Ltd. v. Commercial Taxes Officer (1994) 4 SCC 276, the Court observed that interest constitutes compensation for withholding tax lawfully due to the State and is not dependent upon the completion of separate assessment proceedings. Similarly, in Pratibha Processors v. Union of India (1996) 11 SCC 101, the Court succinctly explained:

"Interest is compensatory in character and is imposed on an assessee who has withheld payment of tax as and when it is due."

The same distinction has been recognised in Pakistani fiscal jurisprudence, where default surcharge has consistently been treated as compensatory in nature and distinguishable from a statutory penalty.

iv.        Distinction between Default Surcharge and Penalty

A clear distinction exists between a statutory penalty and default surcharge. A penalty is imposed for a statutory breach and ordinarily requires satisfaction of the conditions specifically prescribed by the legislature for penal consequences. Default surcharge, by contrast, is compensatory. Subject to the fulfilment of the statutory conditions governing its operation, it follows by operation of law upon delayed payment of tax. Consequently, considerations such as mens rea, intention, negligence, or bona fide conduct are ordinarily irrelevant unless the statute expressly makes them material.

v.        Relevance to the Present Case

The compensatory nature of Section 205 also defines the limits of its operation. While the provision ordinarily applies where tax remains unpaid after the statutory due date, its application necessarily depends upon the continued existence of a legally operative default during the period for which surcharge is sought to be levied. Where the obligation to pay has, by virtue of binding judicial orders, been lawfully regulated as to the time and manner of payment, and the taxpayer has faithfully complied with those directions, the statutory basis for treating the taxpayer as remaining in continuing default during that regulated period requires independent examination. The issue, therefore, is not whether Section 205 is mandatory in its operation, but whether, on the facts of the present case, the statutory conditions for its continued application remained satisfied throughout the period for which default surcharge has been charged.

7.5.     Harmonious Construction of Sections 4C(3) and 4C(4) of the Ordinance.

i.          Contention of the Appellant

A substantial portion of the appellant's case rests upon the contention that subsection (4) of Section 4C creates a fresh and independent point of enforceability and that liability to default surcharge under Section 205 can arise only after the Commissioner determines the Super Tax liability under Section 4C(4) and issues a notice of demand under Section 137. According to the appellant, until such determination is made, no enforceable obligation exists for the purposes of attracting default surcharge. Since this submission constitutes the foundation of the appellant's challenge, it becomes necessary to examine the true scope, object and relationship of subsections (3) and (4) of Section 4C within the statutory framework of the Ordinance.

ii.         Nature and Purpose of Section 4C

Section 4C, introduced through the Finance Act, 2022, is the charging provision whereby Parliament imposed Super Tax upon specified categories of taxpayers. Its placement in Chapter II of the  Ordinance, which deals with the charge of tax, is of considerable significance, as it manifests the legislative intention that the liability to Super Tax arises directly by operation of the statute itself and not by virtue of any subsequent assessment, determination or recovery proceedings.

The distinction between a charging provision and machinery provisions is firmly embedded in fiscal jurisprudence. In Elahi Cotton Mills Ltd. v. Federation of Pakistan (PLD 1997 SC 582), the Honourable Supreme Court explained that every taxing statute consists of a charging provision creating the liability and machinery provisions regulating its assessment, collection and recovery. Machinery provisions are intended to facilitate implementation of the charging provision and cannot be construed so as to postpone, suspend or alter the substantive liability created by Parliament. The same principle was reiterated in PLD 1991 SC 308, wherein the Court held that machinery provisions regulate the enforcement of an existing liability but do not themselves create or postpone substantive tax obligations.

It follows that the liability to Super Tax originates by virtue of Section 4C itself as the charging provision, whereas subsections (3) and (4) regulate the manner in which that statutory liability is to be voluntarily discharged, administratively determined and ultimately enforced. Neither subsection enlarges nor diminishes the substantive liability created by the charging section.

iii.         Scope of Section 4C(3)

Subsection (3) embodies the primary statutory obligation cast upon every taxpayer falling within the ambit of Section 4C. It reflects the legislative policy of voluntary compliance under the self-assessment regime by requiring the taxpayer to compute and discharge the Super Tax in accordance with the provisions of the Ordinance and within the time prescribed by law. The subsection operates at the first stage of the statutory process, namely, voluntary compliance by the taxpayer without the necessity of prior intervention by the tax authorities.

The  Ordinance is founded upon the principle of self-assessment. A taxpayer is expected to determine the tax payable, furnish the return of income and discharge the tax liability within the prescribed statutory period. The obligation imposed by subsection (3) is, therefore, direct and self-operative. It arises by force of the statute itself and is not contingent upon any prior assessment, determination or order passed by the Commissioner.

iv.        Scope of Section 4C(4)

Subsection (4) operates in an entirely different sphere. It empowers the Commissioner to determine the correct quantum of Super Tax payable where the taxpayer has either failed to discharge the liability voluntarily or where the amount paid is considered deficient or incorrectly computed.

The provision is thus supervisory and remedial in character. It enables the tax administration to verify compliance with the charging provision and to quantify the liability where voluntary compliance has not been achieved. It does not create the liability; rather, it provides the statutory mechanism for determining the extent of a liability which has already arisen under Section 4C.

The distinction between the creation of liability and its determination is well recognised in fiscal jurisprudence. Liability arises by operation of the charging provision enacted by Parliament, whereas assessment or determination merely quantifies, verifies or confirms the amount payable under that existing liability. Acceptance of the appellant's construction would obliterate this fundamental distinction by converting a provision intended merely for administrative determination into the very source of tax liability. Such an interpretation would be inconsistent with settled principles governing fiscal legislation, under which machinery provisions facilitate implementation of an existing liability but neither create, suspend, nor postpone that liability. It is, however, clarified that where the income declared by the taxpayer is subsequently determined, amended or modified under any provision of the Ordinance, whether pursuant to an assessment, amendment, appeal, revision or any other lawful proceeding, and such determination has the effect of increasing or decreasing the taxable income forming the basis of Super Tax, the liability under Section 4C shall correspondingly stand recomputed on the basis of the income so determined. In such circumstances, the additional Super Tax, if any, shall become payable with reference to the amended determination, and the due date for payment of such additional Super Tax shall commence from the date on which the amended determination is made or otherwise becomes payable in accordance with the provisions of the Ordinance. Consequently, where such additional Super Tax is not discharged within the prescribed due date, the liability to default surcharge under Section 205 shall also arise and be computed accordingly from the expiry of the due date applicable to the additional Super Tax so determined. This clarification applies only to the additional liability arising as a consequence of the subsequent modification of income and does not detract from the principle that Super Tax, on the income originally declared by the taxpayer, remains payable under the self-assessment regime in accordance with Section 4C(3).

v.         Harmonious Operation of Subsections (3) and (4)

The coexistence of subsections (3) and (4) reflects the legislative architecture of the self-assessment system. Subsection (3) governs the ordinary situation in which the taxpayer voluntarily computes and pays the Super Tax in accordance with law. Subsection (4), on the other hand, addresses the exceptional situation in which voluntary compliance does not occur or is considered deficient, thereby necessitating administrative intervention for determination of the correct quantum of tax.

The two provisions are, therefore, complementary rather than conflicting. One regulates voluntary compliance under the self-assessment regime, while the other provides the machinery for administrative determination where such compliance is absent or inadequate. Read harmoniously, each provision operates within its own distinct sphere while advancing the common legislative objective of ensuring effective implementation of the charging provision.

 

vi.        Whether Section 4C(4) Postpones the Statutory Due Date

The appellant has argued that once proceedings are initiated under subsection (4), the statutory due date for payment stands shifted to the date specified in the notice of demand issued under Section 137. We are unable to accept this proposition.

Nothing in the language of subsection (4) suggests that Parliament intended to postpone or suspend the statutory obligation imposed under subsection (3). The provision merely empowers the Commissioner to determine the correct quantum of Super Tax payable where voluntary compliance has not occurred or is considered deficient. It does not provide that the tax shall become payable only upon such determination, nor does it prescribe a fresh statutory due date for payment. Had the legislature intended to defer the incidence or enforceability of the liability until the Commissioner's determination, it could have employed express language to that effect. The absence of such language is both deliberate and significant and cannot be supplied through judicial interpretation.

Moreover, the appellant's construction would produce consequences wholly inconsistent with the legislative scheme. Every taxpayer could simply abstain from paying Super Tax until the Commissioner initiated proceedings under subsection (4) and thereafter contend that no default existed prior to issuance of the notice of demand. Such an interpretation would substantially render subsection (3) ineffective, defeat the legislative objective underlying the self-assessment regime, and permit indefinite postponement of statutory obligations until departmental action is taken.

It is a settled principle of statutory interpretation that a statute must be construed harmoniously so as to give effect to every provision enacted by Parliament and to avoid any construction that renders one provision redundant, otiose or ineffective. The interpretation advanced by the appellant fails to satisfy this principle. Conversely, construing subsection (3) as embodying the taxpayer's primary obligation of voluntary compliance and subsection (4) as conferring upon the Commissioner the power to determine the correct quantum of an already existing liability preserves the efficacy of both provisions and gives coherent effect to the statutory scheme.

vii.        Application to the Present Case

Applying the foregoing principles to the facts of the present case, it is an admitted position that the appellant filed its return of income for Tax Year 2022 on 30 December 2022 without payment of Super Tax under Section 4C of the  Ordinance. Such non-payment, however, was not occasioned by any dispute regarding the statutory due date prescribed under the Ordinance. Rather, it was in conformity with the interim order dated 21 December 2022 passed by the Islamabad High Court, whereby the appellant was permitted to file its return without payment of Super Tax, subject to furnishing post-dated cheques before the Registrar of the Court.

Subsequently, the Honourable Supreme Court, by order dated 28 March 2023, modified the interim arrangement and directed the appellant to deposit fifty per cent of the Super Tax liability within two weeks. In compliance with the said judicial direction, the appellant deposited an amount of Rs.325,770,038 on 10 April 2023.

Following the constitutional litigation culminating in the judgment of the Federal Constitutional Court dated 27 January 2026 upholding the constitutional validity of Section 4C, the Deputy Commissioner Inland Revenue proceeded to determine the appellant's Super Tax liability by order dated 18 February 2026, which was subsequently rectified on 9 March 2026, resulting in a refund of Rs.294,461,248 to the appellant.

The determination made under subsection (4) was, therefore, quantificatory and adjudicatory in character. It ascertained the correct quantum of a liability that had already arisen under Section 4C; it neither created that liability nor substituted a fresh statutory due date for its payment. To the extent directed by the superior courts, the appellant had already discharged the liability in accordance with the judicially regulated payment schedule. The Commissioner's order merely quantified the amount legally payable after adjudication of the constitutional challenge and adjustment of the amounts already deposited.

This conclusion, however, should not be understood as determinative of the appellant's liability to default surcharge under Section 205. The rejection of the appellant's contention that liability arose only upon the order passed under subsection (4) merely establishes that the statutory obligation existed from the due date prescribed by law. Whether default surcharge could nevertheless be levied during the period in which payment stood regulated by the binding orders of the Islamabad High Court and the Honourable Supreme Court is an independent question governed by the scope and operation of Section 205 and the legal effect of those judicial directions.

viii.       Conclusion

We are, therefore, of the considered view that subsections (3) and (4) of Section 4C operate in distinct yet complementary spheres. Subsection (3) embodies the statutory obligation of every taxpayer to compute and discharge the Super Tax in accordance with the self-assessment regime and within the time prescribed by law, whereas subsection (4) confers upon the Commissioner the authority to determine the correct quantum of that liability where voluntary compliance has not occurred or is considered deficient. The exercise of that jurisdiction neither suspends nor extinguishes the underlying statutory obligation, nor does it shift the point of time from which the liability is regarded as having arisen. Any contrary interpretation would undermine the legislative architecture of self-assessment, render subsection (3) substantially ineffective, and transform subsection (4) from a machinery provision into a source of substantive liability, an interpretation plainly inconsistent with the language, scheme and object of the  Ordinance.

Accordingly, we hold that the order passed under Section 4C(4) did not create the appellant's liability to Super Tax, nor did it postpone the statutory due date for payment prescribed under the Ordinance. The appellant's entitlement to relief from default surcharge, if any, must therefore be examined independently under Section 205 in light of the binding judicial orders governing the time and manner of payment during the pendency of the constitutional proceedings.

7.6.     Interpretation of Key Expressions Employed in Sections 4C, 137 and 205 of the  Ordinance.

The principal controversy in the present appeal requires an examination of certain expressions employed in Sections 4C, 137 and 205 of the Ordinance, particularly the expressions "tax payable", "tax due", "assessed tax", "demanded tax", "failure to pay", "default", "levy" and "mens rea". Although these expressions are not exhaustively defined in the Ordinance, their meaning is well established through settled principles of fiscal jurisprudence and judicial interpretation. It is a settled rule of statutory interpretation that the words used in a fiscal statute must be construed in the context of the statute as a whole and not in isolation. Charging provisions and machinery provisions constitute an integrated statutory scheme and must be interpreted harmoniously so as to give effect to the legislative intent. The Honourable Supreme Court of Pakistan in Elahi Cotton Mills Ltd. v. Federation of Pakistan (PLD 1997 SC 582), recognised the distinction between provisions creating tax liability and those providing the machinery for assessment and recovery. Likewise, the Supreme Court of India in CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC) observed that while charging and machinery provisions operate together, the latter merely facilitate the enforcement of a liability already created by the former.

i.              Tax Payable and Tax Due.

The expression "tax payable" denotes the statutory obligation to pay tax arising directly from the charging provision upon fulfilment of the conditions prescribed therein. The liability is created by operation of law and does not depend upon the passing of an assessment order or the issuance of a demand notice. The expression "tax due", though closely related, signifies tax which has become immediately enforceable because the time prescribed by law for its payment has arrived. Thus, tax becomes due when the liability created by the charging provision remains unpaid after the statutory due date. Under the self-assessment scheme embodied in the  Ordinance, tax may become due by reason of the return filed by the taxpayer, the operation of a charging provision, a deemed assessment or a formal assessment. Consequently, the expression "tax due" is not confined to tax determined through assessment proceedings. The Supreme Court of India in Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) 160 ITR 961 (SC) held that liability to statutory interest commences when tax becomes payable under the statute and does not await completion of assessment proceedings. In the context of Section 4C, therefore, the liability to Super Tax arose by virtue of the charging provision itself, and upon expiry of the prescribed due date without payment, the amount assumed the character of "tax due".

ii.        Assessed Tax and Demanded Tax.

The expression "assessed tax" refers to the amount determined or quantified through assessment proceedings. Assessment is essentially a process of verification and quantification; it ordinarily does not create the underlying tax liability unless the statute expressly provides otherwise. Similarly, "demanded tax" denotes the amount specified in a statutory notice issued for purposes of recovery, including a notice under Section 137. Such a notice is procedural in character. It informs the taxpayer of an existing statutory liability and initiates the recovery process; it neither creates nor enlarges that liability. Acceptance of the appellant's contention that liability arises only upon issuance of a demand notice would fundamentally undermine the self-assessment regime established under the Ordinance by permitting taxpayers to defer payment until recovery proceedings are initiated. Such an interpretation is inconsistent with both the statutory language and the legislative scheme.

iii.       Failure to Pay and Default.

Section 205 employs the expression "failure to pay", which simply denotes non-payment of tax within the time prescribed by law. The provision is objective in nature. Once it is established that tax was legally payable and remained unpaid beyond the statutory due date, the requirement of "failure to pay" stands satisfied. The legislature has consciously refrained from qualifying the expression by words such as "wilfully", "knowingly" or "fraudulently". Where Parliament intends intention or misconduct to constitute an essential ingredient, it expressly incorporates such language, particularly in penal provisions. The absence of any such qualification in Section 205 demonstrates that mere delay in payment is sufficient to attract the statutory consequence. Correspondingly, "default" occurs immediately upon expiry of the statutory due date without payment. It is not contingent upon the issuance of a notice under Section 137, commencement of recovery proceedings or the passing of an assessment order. Default is a statutory consequence flowing automatically from non-payment within the prescribed period. This interpretation preserves the efficacy of the self-assessment regime. Any contrary construction would enable taxpayers to withhold payment indefinitely until the Department initiated recovery proceedings, thereby rendering Section 205 substantially ineffective.

iv.       Levy.

The expression "levy" has consistently received a comprehensive meaning in fiscal jurisprudence. It encompasses the entire process of taxation, namely the imposition of liability, assessment or quantification, and recovery. In Elahi Cotton Mills Ltd. (PLD 1997 SC 582), the Honourable Supreme Court explained that taxation ordinarily consists of declaration of liability, assessment and recovery. Similarly, the Supreme Court of India in Assistant Collector of Central Excise v. National Tobacco Co. of India Ltd. (1972) 2 SCC 560 held that, unless the statutory context indicates otherwise, the expression "levy" includes the complete process of taxation from imposition to collection. Accordingly, the levy of default surcharge under Section 205 refers to the statutory imposition and recovery of a compensatory charge consequent upon delayed payment of tax.

v.        Mens Rea.

The appellant has contended that payment of Super Tax was delayed because the constitutional validity of Section 4C remained under challenge before the superior courts, thereby negativing any intentional default. The submission cannot be accepted. The doctrine of mens rea is primarily applicable to criminal or penal liability. Its application to fiscal legislation depends entirely upon legislative intent. Where the statute creates a civil or compensatory liability independent of fault, proof of intention is unnecessary. Section 205 neither describes default surcharge as a penalty nor employs expressions such as "wilfully", "knowingly", "fraudulently" or "intentionally". The provision merely prescribes a compensatory consequence for delayed payment of tax. The Supreme Court of India in Pratibha Processors v. Union of India (1996) 11 SCC 101 authoritatively distinguished interest from penalty by holding that interest is compensatory in character, whereas penalty is ordinarily imposed for deliberate or contumacious conduct. Likewise, in J.K. Synthetics Ltd. v. Commercial Taxes Officer (1994) 4 SCC 276, it was held that liability to statutory interest arises automatically upon delayed payment and does not depend upon proof of deliberate default. The same principle applies to default surcharge under Section 205. The relevant enquiry is confined to whether tax was legally payable and whether payment was delayed. The taxpayer's intention or bona fide belief regarding the validity of the levy does not postpone the statutory consequence prescribed by law.

vi.       Application to the Present Case.

Applying the foregoing principles to the admitted facts, it is evident that Section 4C itself created the appellant's liability to Super Tax. Upon expiry of the prescribed due date without payment, the amount became tax due, thereby constituting a default within the meaning of Section 205. The subsequent order passed under Section 4C(4) merely quantified an existing statutory liability, while the notice issued under Section 137 constituted a procedural step for recovery. Neither the assessment order nor the demand notice created the liability or postponed the commencement of default surcharge. Accordingly, we are unable to accept the appellant's contention that Super Tax became due only upon issuance of the order under Section 4C(4) or the demand notice under Section 137. Such an interpretation is inconsistent with the language of the Ordinance, the distinction between charging and machinery provisions, and the self-assessment scheme enacted by Parliament.

8.       Now we turn to the proposed questions. 

Question No. I

Whether the proceedings initiated under section 205 of the Income Tax Ordinance, 2001, are maintainable in law where the principal tax liability has already been determined under section 4C?

8.1      The learned AR has challenged the maintainability of the proceedings initiated under Section 205 of the Ordinance, after determination of the appellant's liability under Section 4C. The principal reliance has been placed upon the judgment of the Honourable Sindh High Court titled China Power Hub Generation Company (Pvt) Ltd V. Pakistan through Secretary Ministry of Finance and others reported as 2024 PTD 1218, wherein it was observed that where the principal tax liability and the consequential liability towards default surcharge arise out of the same cause of action, both liabilities should ordinarily be determined simultaneously and that initiation of separate proceedings may not, in appropriate cases, be legally sustainable.

8.2      We have given anxious consideration to the submission. There can be little cavil with the proposition that, as a matter of sound administrative practice and to avoid multiplicity of proceedings, it is ordinarily desirable that the principal tax liability and any consequential liability towards default surcharge be determined contemporaneously wherever the statutory framework and factual circumstances permit. Such an approach promotes certainty, procedural economy and avoidance of unnecessary litigation. However, administrative desirability is distinct from statutory compulsion. The question before us is not whether simultaneous determination is preferable, but whether the Ordinance prohibits separate proceedings under Section 205 after determination of the principal liability. That question must be answered by reference to the language and scheme of the Ordinance itself.

8.3      It is equally well settled that a judicial precedent is an authority only for what it actually decides. The ratio of a judgment cannot be divorced from the statutory provisions considered or the facts upon which it proceeds. As observed by the Honourable Supreme Court in Province of East Pakistan v. Muhammad Mehdi Ali Khan (PLD 1959 SC 387), the precedential value of a decision is confined to the point actually decided in the factual and legal context in which it arose. A precedent cannot be mechanically extended to materially different statutory provisions merely because certain expressions employed therein appear to be of general application.

8.4      The statutory framework considered by the Honourable Sindh High Court in 2024 PTD 1218 is materially distinguishable from the present case. That matter arose in the context of Sections 161 and 205 of the Ordinance. Section 161 deals with the statutory liability of a withholding agent who has failed to deduct or collect tax as required by law. The liability imposed under Section 161 is vicarious in character, arising from the withholding obligation itself, while the liability under Section 205 constitutes the consequential default surcharge arising from the same withholding default. Since both liabilities emanate from the same statutory breach and substantially involve the same factual inquiry, the Honourable High Court observed that they ought ordinarily to be determined together.

8.5      The present case stands on an entirely different statutory footing. Section 4C is itself the charging provision creating the taxpayer's substantive liability to Super Tax. That liability arises directly by operation of law and is discharged through the self-assessment mechanism embodied in the Ordinance. Section 205, on the other hand, neither creates nor determines the tax liability. It merely provides for the compensatory consequence that may arise where tax already payable under the Ordinance remains unpaid beyond the period recognised by law as attracting default surcharge. Accordingly, proceedings under Sections 4C and 205, although related, perform distinct statutory functions. One determines the existence and quantum of the principal tax liability; the other concerns the consequences, if any, arising from delayed discharge of that liability. The two provisions therefore operate in complementary, but legally distinct, spheres.

8.6      Nothing contained in the language of Section 205 requires that the liability towards default surcharge must invariably be determined simultaneously with the principal tax liability. Nor does the Ordinance prescribe that failure to adopt a composite proceeding renders subsequent proceedings under Section 205 without jurisdiction. On the contrary, the statutory scheme recognises that determination of the principal liability and adjudication of the consequential liability may, depending upon the circumstances of a particular case, occur at different stages. This becomes particularly evident where, as in the present matter, the principal liability remained embroiled in constitutional litigation before the superior courts and the taxpayer's obligation to make payment stood regulated by successive judicial orders. In such circumstances, the issue whether default surcharge is legally leviable necessarily requires consideration of matters extending beyond the mere determination of the principal liability.

8.7      The independent statutory character of proceedings under Section 205 is further reflected in the appellate framework established by the Ordinance. Section 127 expressly provides a separate right of appeal against an order passed under Section 205. While the liability under Section 205 is undoubtedly consequential upon the existence of an underlying tax liability, the legislature has nevertheless recognised the independent adjudicatory character of an order levying default surcharge by making it separately appealable. This legislative design is inconsistent with the proposition that proceedings under Section 205 must invariably form part of the principal assessment proceedings.

8.8      The facts of the present case further demonstrate why separate proceedings were not legally impermissible. The appellant had already deposited the amount directed by the Honourable Supreme Court on 10 April 2023 in compliance with the judicial directions regulating payment of Super Tax. Thereafter, following the conclusion of the constitutional litigation, the Deputy Commissioner passed the order under Section 4C(4) determining the correct quantum of Super Tax payable, which was subsequently rectified, resulting in a substantial refund to the appellant. The proceedings initiated thereafter under Section 205 did not seek to reopen or redetermine the principal liability. Their sole purpose was to examine whether, having regard to the statutory scheme and the effect of the judicial orders governing payment, any default surcharge was legally recoverable.

8.9      For these reasons, we are unable to accept the appellant's contention that the proceedings under Section 205 were without lawful authority merely because they were initiated separately from the proceedings under Section 4C. The judgment reported as 2024 PTD 1218, rendered in the distinct statutory context of Sections 161 and 205, cannot be construed as laying down an inflexible rule that default surcharge must invariably be determined simultaneously with every principal tax liability under the Ordinance. Its application necessarily depends upon the statutory provisions involved and the factual matrix of the particular case.

8.10    We, therefore, hold that the proceedings initiated under Section 205 of the Ordinance were maintainable in law notwithstanding the prior determination of the appellant's liability under Section 4C. Whether the levy of default surcharge is sustainable on the merits is, however, a separate question, which falls to be determined upon the legal effect of the judicial orders regulating the appellant's obligation to pay Super Tax during the pendency of the constitutional proceedings.

9.       Question No. II

Whether, in the facts and circumstances of the present case, the appellant can be said to have committed a “default” within the meaning of section 205 during the period in which payment of Super Tax remained subject to interim and final orders of the constitutional courts? 

Having examined the statutory framework of the  Ordinance, in its entirety, we are of the considered view that although the appellant's liability to Super Tax arose upon the statutory due date prescribed under Section 4C, the appellant cannot, for the purposes of Section 205, be regarded as remaining in a legally operative default during the period in which the superior courts themselves regulated the timing, manner and extent of payment through binding judicial orders. The controversy is, therefore, not whether the liability existed, for it undoubtedly did, but whether the delay in payment during the currency of those judicial directions constituted a default of the character contemplated by Section 205 so as to attract default surcharge.

9.1      As already held, the liability to Super Tax arose directly by operation of Section 4C and did not depend upon the subsequent order dated 18.02.2026 passed under Section 4C(4). Likewise, Section 137 merely provides the machinery for recovery of tax lawfully payable, and neither creates the liability nor postpones the statutory due date for its discharge. Ordinarily, therefore, where tax lawfully payable remains unpaid beyond the prescribed period, Section 205 becomes capable of operation, and default surcharge follows as the statutory consequence of such default.

9.2      The present case, however, is materially distinguishable. Immediately after the enactment of Section 4C, the appellant invoked the constitutional jurisdiction of the Honourable Islamabad High Court challenging the constitutional validity of the levy. While entertaining the petition, the High Court consciously regulated the appellant's obligation to pay by permitting the return to be filed without immediate payment of Super Tax, subject to furnishing post-dated cheques before the Registrar of the Court. Subsequently, the Honourable Supreme Court modified the interim arrangement and directed deposit of fifty per cent of the disputed liability within the stipulated period, which direction the appellant admittedly complied with. Throughout the relevant period, therefore, the appellant's obligation regarding payment of Super Tax was governed not merely by the statutory provisions of the Ordinance but also by binding judicial directions issued in exercise of the constitutional jurisdiction of the superior courts.

9.3      The present controversy can only be properly resolved by distinguishing three separate legal concepts. The first is the existence of the statutory liability created by Section 4C. The second is the ordinary statutory obligation to discharge that liability within the prescribed period. The third is the legal effect of binding judicial orders which regulate the timing, manner and extent of payment pending adjudication of the constitutional challenge. The present case falls within the third category. The judicial orders neither extinguished the appellant's liability nor suspended the operation of Section 4C. Rather, they temporarily regulated the manner in which that existing liability was to be discharged during the pendency of the constitutional proceedings. During that period, the appellant's immediate legal obligation was measured by the judicial directions themselves, and compliance therewith constituted compliance with the law.

9.4      The question before us is, therefore, not whether the statutory due date expired, for that is undisputed. Nor is it whether the liability under Section 4C continued to subsist, for that question has already been answered in the affirmative. The real issue is whether a taxpayer who faithfully complies with binding judicial directions regulating payment can nevertheless be regarded as remaining in the kind of default contemplated by Section 205 throughout the currency of those directions.

9.5      Section 205 is undoubtedly attracted by delayed payment of tax lawfully payable under the Ordinance. Its operation is ordinarily automatic, and being compensatory rather than penal, it does not depend upon proof of mala fide intention, negligence or wilful disregard of statutory duty. Nevertheless, before the statutory consequence can arise, it must first be established that the delay in payment is legally attributable to the taxpayer in circumstances constituting a default within the meaning and contemplation of Section 205.

9.6      Where, however, the superior courts themselves regulate the timing, manner and extent of payment through binding judicial orders, the legal character of the delay necessarily changes. The taxpayer is no longer free either to insist upon immediate payment contrary to the judicial directions or to disregard the conditions imposed by the Court. Its immediate legal obligation becomes compliance with those judicial directions. Such compliance cannot simultaneously be characterised as a default for the purposes of invoking Section 205, for the law does not contemplate that obedience to a binding judicial order should itself become the source of statutory default.

9.7      Applying these principles to the present case, the appellant's liability under Section 4C unquestionably remained in existence from the statutory due date. However, throughout the period during which the interim and subsequent orders of the Honourable Islamabad High Court and the Honourable Supreme Court remained operative, the appellant complied with every judicial direction regarding the timing and extent of payment. The delay in payment during that period was, therefore, not legally attributable to any omission or failure on the part of the appellant but was the direct consequence of the judicial mechanism regulating the discharge of the disputed liability.

9.8      Accordingly, although the statutory liability under Section 4C arose on the prescribed due date, the appellant cannot, during the currency of the binding judicial orders and so long as those directions were faithfully complied with, be regarded as remaining in default within the meaning of Section 205. The jurisdictional condition necessary for invoking default surcharge was, therefore, absent during that protected period, and the levy of default surcharge for such period cannot be sustained in law.

10.     Question No. III

Whether the principles of actus curiae neminem gravabit and the constitutional guarantees under Articles 4, 10A and 77 of the Constitution preclude the levy of default surcharge for the period during which payment of Super Tax remained governed by judicial orders?

Having concluded that the appellant cannot, during the currency of the binding judicial orders, be regarded as remaining in default within the meaning of Section 205 of the  Ordinance, we are further of the considered view that this conclusion finds independent support in the equitable doctrine actus curiae neminem gravabit as well as the constitutional guarantees embodied in Articles 4, 10A and 77 of the Constitution of the Islamic Republic of Pakistan, 1973. These principles do not override the statutory framework of the Ordinance; rather, they reinforce the conclusion that a taxpayer cannot lawfully be visited with adverse fiscal consequences solely because it acted in faithful compliance with binding judicial directions issued by competent constitutional courts.

10.1    The maxim actus curiae neminem gravabit—that an act of the Court shall prejudice no one- is among the oldest and most firmly established principles of the common law and has repeatedly received recognition and approval from the Honourable Supreme Court of Pakistan. The doctrine is founded upon elementary notions of justice, fairness and the orderly administration of justice. It postulates that where a litigant acts in accordance with the directions of a competent court, no adverse legal or financial consequence should subsequently be fastened upon him merely because the Court, in the exercise of its constitutional jurisdiction, regulated the rights and obligations of the parties pending final adjudication. The rationale underlying the doctrine is both simple and compelling: no person should suffer prejudice because of an act of the Court over which he had neither control nor choice.

10.2    The facts of the present case attract the doctrine in its fullest application. Immediately after the enactment of Section 4C, the appellant invoked the constitutional jurisdiction of the Honourable Islamabad High Court challenging the constitutional validity of the levy. While entertaining the constitutional petition, the High Court consciously regulated the appellant's obligation to pay by permitting the filing of the return without immediate payment of Super Tax, subject to furnishing post-dated cheques before the Registrar of the Court. Subsequently, the Honourable Supreme Court modified the interim arrangement and directed the appellant to deposit fifty per cent of the disputed liability within the prescribed period. The appellant admittedly complied with every judicial direction issued by the superior courts. Accordingly, the timing, manner and extent of payment during the protected period were regulated by the operative judicial orders passed by the constitutional courts. The appellant's immediate legal obligation was therefore measured by those judicial directions, compliance with which constituted compliance with the law itself. If, notwithstanding such faithful compliance, the appellant is burdened with default surcharge for the very period during which the constitutional courts regulated the payment of the disputed levy, the resulting financial prejudice would arise directly from obedience to the Court's own orders. Such a consequence is precisely what the doctrine actus curiae neminem gravabit exists to prevent.

The doctrine assumes even greater significance where the Court itself regulates the manner in which a statutory obligation is to be discharged pending adjudication. Once the constitutional courts, in exercise of their constitutional jurisdiction, regulated the time and manner in which the statutory obligation was to be performed, compliance with that judicially regulated mechanism became compliance with the law. The Revenue cannot subsequently disregard the legal effect of those judicial directions and revert exclusively to the original statutory timetable for the sole purpose of imposing default surcharge. To permit such an approach would allow a litigant to suffer financial prejudice directly because of faithful obedience to binding judicial orders—a consequence which the doctrine actus curiae neminem gravabit emphatically forbids.

10.3    The same principle has also received recognition in Pakistani fiscal jurisprudence. In Masood Textile Mills Ltd. v. Commissioner of Income Tax (2003 PTD 2653), the Honourable Lahore High Court held that additional tax or surcharge could not be recovered for the period during which recovery remained regulated or restrained by judicial orders. The said principle was subsequently affirmed by the Honourable Supreme Court in The Commissioner of Income Tax, Companies Zone, Faisalabad and others v. Masood Textile Mills Limited and others (KLR 2003 SC 223).

The underlying principle emerging from the aforesaid judgments is that where the Revenue itself is bound by an order of a competent court regulating or restraining recovery, it cannot subsequently seek compensation for the delay occasioned by that very judicial intervention. The Revenue cannot, on the one hand, accept and act upon the binding force of judicial orders regulating recovery and, on the other, seek compensation from the taxpayer for the very delay brought about by compliance with those orders. Such a position would offend not only the doctrine actus curiae neminem gravabit but also the fundamental requirement of fairness that underlies the administration of fiscal laws.

10.4    It is equally important to appreciate the legal effect of interim and interlocutory orders passed by constitutional courts. Such orders are not merely procedural arrangements, nor are they advisory in character. They constitute binding judicial commands enforceable alike against the taxpayer and the Revenue. Whether the constitutional court directs that recovery shall remain suspended, that payment shall be deferred, that a specified proportion of the disputed tax shall be deposited, that post-dated cheques shall be furnished, or otherwise regulates the manner in which the statutory obligation is to be discharged pending adjudication, each such direction necessarily modifies the enforceability of the statutory obligation during the currency of the judicial proceedings.

During that protected period, the taxpayer's immediate legal obligation is no longer measured exclusively by the original statutory timetable but by faithful compliance with the operative judicial directions. To characterise such compliance as constituting a statutory "default" would amount to treating obedience to the Court as disobedience to the law itself, a proposition wholly incompatible with settled principles governing the administration of justice.

It is equally significant that although the constitutional litigation ultimately culminated in the validation of Section 4C, the constitutional courts did not determine the distinct statutory question whether default surcharge under Section 205 remained recoverable for the period during which payment stood regulated by their interim orders. The constitutional adjudication resolved the validity of the charging provision alone. The ancillary question concerning the applicability of Section 205 consequently falls for independent determination under the statutory framework of the Ordinance.

10.5    The above conclusion is further reinforced by the constitutional guarantees contained in Articles 77, 4 and 10A of the Constitution. Article 77 embodies the constitutional mandate that no tax shall be levied or collected except by or under the authority of law. Although the default surcharge under Section 205 is ancillary to the principal tax liability, it nevertheless constitutes a fiscal exaction recoverable by the State. Article 77 does not merely require the existence of statutory authority for such an exaction; it also requires that the authority conferred by statute be exercised strictly within the limits prescribed by law. Section 205 undoubtedly constitutes statutory authority for the levy of default surcharge. However, its application is expressly conditional upon the existence of a default within the meaning of that provision. Where, for the reasons already discussed, a taxpayer cannot legally be regarded as remaining in default during the currency of binding judicial orders regulating payment, the statutory condition precedent to the levy of surcharge is absent. Recovery of default surcharge in such circumstances would therefore travel beyond the authority conferred by Section 205 and consequently offend the constitutional command embodied in Article 77.

10.6    Likewise, Articles 4 and 10A guarantee every citizen the right to be treated strictly in accordance with law and ensure fairness through due process. The constitutional jurisdiction vested in the superior courts exists to enable citizens to seek authoritative determination of disputed legal rights, including challenges to the constitutional validity of fiscal legislation. If a taxpayer who bona fide invokes that constitutional jurisdiction and faithfully complies with every interim and final judicial direction is nevertheless exposed to default surcharge merely because the dispute remained sub judice, the exercise of the constitutional remedy would carry an unintended fiscal disadvantage notwithstanding the taxpayer's complete obedience to the Court's orders.

Such an interpretation would inevitably discourage litigants from invoking the constitutional jurisdiction of the superior courts for vindication of their legal rights and would substantially dilute the guarantees of lawful treatment and fair process secured by Articles 4 and 10A of the Constitution. Constitutional remedies cannot be transformed into instruments for imposing additional fiscal burdens upon litigants who have acted throughout in accordance with binding judicial directions.

10.7    Conclusion

Viewed cumulatively, the statutory framework of the  Ordinance the settled meaning of the expression "default" in Section 205, the doctrine actus curiae neminem gravabit, the binding character of judicial orders, the principles recognised in Masood Textile Mills Ltd. and affirmed by the Honourable Supreme Court, together with the constitutional guarantees embodied in Articles 4, 10A and 77 of the Constitution, all converge upon the same legal conclusion.

During the period in which the Honourable Islamabad High Court and thereafter the Honourable Supreme Court regulated the appellant's obligation to pay Super Tax, and the appellant faithfully complied with every judicial direction issued from time to time, the delay in payment was not legally attributable to the appellant. The statutory condition necessary for the invocation of Section 205 was therefore absent. Consequently, default surcharge could not lawfully be levied for that protected period.

Any contrary interpretation would permit a litigant to suffer adverse fiscal consequences solely because it obeyed binding judicial orders regulating the discharge of its statutory obligations. Such a result would not only be inconsistent with the proper construction of Section 205 of the Ordinance but would also offend the equitable doctrine actus curiae neminem gravabit and the constitutional guarantees governing lawful fiscal exactions, fair treatment and due process under the Constitution of the Islamic Republic of Pakistan, 1973.

11.     Question No. IV

Whether section 205 of the Ordinance operates automatically and independently of the legal effect of interim or final judicial orders governing the time and manner of payment of tax?

The question whether Section 205 of the  Ordinance operates in a purely mechanical and self-executing manner, wholly detached from the surrounding legal context, must be answered by a careful synthesis of the statutory scheme and the settled principles of interpretation enunciated by the superior courts. We are unable to endorse either of the extreme positions advanced before us.

11.1    On the one hand, the contention that default surcharge under Section 205 is contingent upon proof of mens rea in the strict criminal sense is clearly untenable. Section 205 does not create a penal or quasi-criminal liability requiring proof of wilful intent, mala fides or subjective culpability. It operates within the civil and compensatory domain of fiscal law. Once the statutory conditions for its application are satisfied, the consequence of default surcharge follows by operation of law without requiring proof of mens rea.

11.2    On the other hand, the submission advanced on behalf of the Revenue that Section 205 operates in a purely automatic and mechanical fashion, irrespective of surrounding legal and factual circumstances, is equally unsustainable. Although the provision is capable of automatic computation once its triggering conditions are satisfied, the existence of those conditions is not a matter of mere formality. The applicability of Section 205 depends upon the establishment of a jurisdictional fact, namely that tax lawfully payable remained unpaid beyond the prescribed due date and that such non-payment constitutes a legally cognizable default attributable to the taxpayer. Unless and until this foundational requirement is satisfied, the machinery of Section 205 does not come into operation.

11.3    A clear distinction, therefore, must be drawn between the automatic quantification of default surcharge once liability is established, and the anterior legal inquiry as to whether the liability itself arises. Section 205 becomes operative only where tax lawfully payable remains unpaid beyond the prescribed time, and such delay is legally attributable to the taxpayer in circumstances constituting a default in law. Where, however, the superior courts themselves regulate the timing, manner and extent of payment through binding judicial orders, the legal character of non-payment during such period cannot be equated with an actionable default under Section 205. During the subsistence of such judicial directions, the taxpayer’s immediate legal obligation is defined by the operative court orders, and compliance therewith constitutes compliance with law. Upon cessation of such judicial protection, Section 205 regains full operation in accordance with the statutory framework.

11.4    This interpretation is further supported by the nature of fiscal exactions which are additional to the principal tax liability. The superior courts have consistently recognized that provisions imposing additional tax, default surcharge or analogous fiscal consequences, although civil in nature, possess a compensatory-cum-quasi-penal character. In Taimur Shah v. Commissioner of Income Tax (1976) 34 TAX 151 = PLD 1976 Karachi 1030, additional tax was characterized as being in the nature of a penalty. In Murree Brewery v. Naseem (PLJ 1994 Lahore 508), it was emphasized that fiscal consequences of a penal character do not follow in a purely automatic manner without consideration of the factual and legal context. In M/s Lone China (Pvt.) Ltd. v. Additional Secretary (PTCL 1995 CL 415), it was observed that where the taxpayer’s conduct does not reflect culpable default, the imposition of penal consequences cannot be treated as a matter of routine. Similarly, in Schazoo Laboratories Ltd. v. Commissioner of Income Tax (1977) 35 TAX 15 = 1976 PTD 361, it was held that the assessing authority must apply an independent judicial mind to the relevant facts before imposing fiscal penalties or analogous consequences.

11.5    These authorities collectively reinforce the principle that even where fiscal statutes employ mandatory language, the imposition of additional fiscal consequences is not to be viewed in isolation from the legal and factual context in which non-payment occurs. The reliance placed by the Revenue on the expression “shall” occurring in Section 205 is, therefore, not determinative. It is well settled that the use of the word “shall” is not conclusive of absolute automatism. As held in Allied Bank Limited v. Income Tax Appellate Tribunal (2000 PTD 2872) and Maple Leaf Cement Factory Ltd. v. Collector of Central Excise (1993 MLD 1645), the interpretation of a statutory provision must take into account legislative intent, context, subject matter, and the broader principles of justice, rather than being confined to literal construction alone.

11.6    Accordingly, Section 205 cannot be construed as a rigid mechanical formula operating irrespective of legal impediments, judicial directions, or the absence of a legally recognizable default. Its operation is automatic only after the jurisdictional facts constituting a default in law are duly established. Where such facts are absent, whether due to binding judicial regulation of the obligation or other lawful justification, the provision remains inapplicable for that period. To hold otherwise would be to sever Section 205 from its legal foundation and convert a compensatory fiscal mechanism into an indiscriminate exaction, a consequence which is neither supported by the statutory scheme of the Ordinance nor by the jurisprudence of the superior courts.

12.     Question No.V

What is the true scope and effect of Section 205 of the Income Tax Ordinance, 2001, in the factual and legal context of the present case?

Having examined the scheme of the  Ordinance in its entirety, we are of the considered view that Section 205 is neither an independent charging provision nor a purely mechanical recovery provision operating irrespective of the surrounding legal context. Properly construed, it is a consequential and compensatory provision which becomes operative only upon the existence of the statutory conditions prescribed therein.

12.1    The statutory framework of the Ordinance draws a clear distinction between the creation of tax liability, the determination of that liability, the machinery for its recovery, and the fiscal consequence of delayed payment. Section 4C creates the substantive liability to Super Tax and obliges every taxpayer falling within its ambit to compute and discharge that liability under the self-assessment regime. Section 120 merely treats a duly filed return as a deemed assessment for assessment purposes, and neither creates nor postpones the underlying liability. Section 137 provides the machinery for recovery of tax already payable and does not determine the point at which the liability arises or becomes due. Section 205 occupies yet another distinct field. It does not create any tax liability nor does it extend the time prescribed for payment. Rather, it provides for the levy of default surcharge as compensation for delayed payment of tax lawfully payable under the Ordinance.

12.2    Although the operation of Section 205 is automatic once its statutory conditions are fulfilled, its applicability is not divorced from the legal circumstances governing the taxpayer's obligation to pay. Before default surcharge can be levied, it must first be established that the tax remained unpaid beyond the prescribed period in circumstances constituting a legally cognizable default attributable to the taxpayer. The automatic nature of the provision relates to the computation of default surcharge after the jurisdictional facts exist; it does not dispense with the requirement that those foundational facts must first be established in accordance with law.

12.3    The present case is distinguished by the fact that, immediately after the introduction of Section 4C, the constitutional validity of the levy became the subject of proceedings before the Honourable Islamabad High Court and thereafter before the Honourable Supreme Court of Pakistan. During the pendency of those proceedings, the superior courts consciously regulated the timing, manner and extent of payment through binding judicial orders. The appellant complied with every such direction, including the furnishing of post-dated cheques before the High Court and the subsequent deposit of fifty per cent of the disputed liability pursuant to the order of the Honourable Supreme Court. These judicial orders neither extinguished the liability created by Section 4C nor postponed its statutory incidence. They nevertheless regulated the enforceability and discharge of that liability during the pendency of the constitutional proceedings. Consequently, throughout the protected period, the appellant's immediate legal obligation was measured by the operative judicial directions, compliance with which constituted compliance with the law itself.

12.4    In these circumstances, although the liability to Super Tax unquestionably arose upon the statutory due date prescribed under Section 4C, the delay in payment during the currency of the judicial orders cannot, in law, be regarded as a default within the contemplation of Section 205. The delay was not legally attributable to any omission or failure on the part of the appellant but resulted from the judicial mechanism regulating payment of the disputed levy. The jurisdictional fact necessary for the invocation of Section 205 was, therefore, absent during that period.

12.5    This interpretation accords not only with the statutory scheme of the Ordinance but also with the settled doctrine that an act of the Court should prejudice no one (actus curiae neminem gravabit), the principles recognised in fiscal jurisprudence concerning recovery of additional fiscal liabilities during periods governed by judicial orders, and the constitutional guarantees embodied in Articles 4, 10A and 77 of the Constitution. These principles do not override the statute; rather, they reinforce the conclusion that Section 205 cannot be invoked where the statutory condition of a legally operative default is absent because the taxpayer has faithfully complied with binding judicial directions regulating payment.

12.6    Accordingly, we hold that Section 205 is a compensatory provision intended to indemnify the public exchequer for delay in payment of tax lawfully attributable to the taxpayer. It does not operate in a vacuum, nor does it apply merely because the statutory due date has expired. Its operation is automatic only after the existence of a legally cognizable default has been established. Where, as in the present case, the superior courts themselves regulated the timing and manner of payment and the taxpayer complied with every judicial direction, the delay in payment cannot be treated as a default within the meaning of Section 205 for the protected period. Consequently, default surcharge for that period is not sustainable in law.

13.     CONCLUSION:

13.1    For the reasons recorded hereinabove, we hold that the appellant's liability to Super Tax arose by operation of Section 4C of the  Ordinance upon the prescribed statutory due date. Neither the deemed assessment under Section 120, nor the machinery provisions contained in Section 137, nor the subsequent determination made by the Commissioner under Section 4C(4) created the liability or postponed the date on which it became payable. The order passed under Section 4C(4) merely determined and quantified a statutory liability that had already arisen under the charging provision.

13.2    We further hold that Section 205 is a consequential and compensatory provision intended to compensate the public exchequer for delay in the payment of tax lawfully attributable to the taxpayer. Although its operation is automatic once the statutory conditions prescribed therein are fulfilled, its applicability is necessarily conditioned upon the existence of a legally cognizable default. The automatic computation of default surcharge cannot be divorced from the anterior determination that the delay in payment is legally attributable to the taxpayer in circumstances constituting a default within the meaning of the Ordinance.

13.3    In the present case, immediately after the enactment of Section 4C, the constitutional validity of the levy became the subject of proceedings before the Honourable Islamabad High Court and thereafter before the Honourable Supreme Court of Pakistan. During the pendency of those proceedings, the superior courts consciously regulated the timing, manner and extent of payment of the disputed levy through binding judicial orders. The appellant faithfully complied with every operative direction issued from time to time, including the furnishing of post-dated cheques and the subsequent deposit of the amount directed by the Honourable Supreme Court.

13.4    Although the statutory liability under Section 4C continued to subsist throughout the relevant period, the appellant's immediate legal obligation during the currency of the judicial orders was measured by those binding directions. Consequently, the temporary delay in payment cannot, in law, be regarded as a default attributable to the appellant. The jurisdictional fact necessary for invoking Section 205 was therefore absent during the protected period. The doctrine actus curiae neminem gravabit, the principles recognised in the fiscal jurisprudence discussed hereinabove, and the constitutional guarantees embodied in Articles 4, 10A and 77 of the Constitution reinforce this conclusion by precluding the imposition of adverse fiscal consequences upon a litigant who has acted in faithful compliance with binding judicial orders.

13.5    Accordingly, we hold that the Assessing Officer rightly determined the appellant's liability to Super Tax under Section 4C of the Ordinance. However, the levy of default surcharge under Section 205 for the period during which the appellant's obligation to pay remained regulated by the interim and final orders of the superior courts is without lawful authority and cannot be sustained. The impugned order levying default surcharge for the said protected period is, therefore, set aside to that extent. Subject to the above observations, the appeal stands allowed in the aforesaid terms.

  

 

 

	-SDD            -SD-                          (M. M. AKRAM)              JUDICIAL MEMBER
-SD- (SHARIF UD DIN KHILJI) MEMBER