CIR RTO etc Vs Ms. M.Y. Package GT Road

Stereo.HCJDA 38.

Judgment Sheet

IN THE LAHORE HIGH COURT, LAHORE.

JUDICIAL DEPARTMENT

Sales Tax Reference No.241486 of 2018.

Commissioner Inland Revenue, Zone-I, Regional Tax Office, Gujranwala.

Versus

M/s M. Y. Packages, G.T. Road, Rahwali, Gujranwala.

J U D G M E N T.

Date of hearing 28.09.2026.

Applicant by M/s Kausar Parveen and Syed Zain-ul- Abedeen, Advocates.

Respondents by: Mr. Waheed Shahzad Butt, Advocate. Muhammad Humzah Sheikh, Assistant Attorney General for Pakistan representing Federation in connection W.P.

No.27338/2014.

Muhammad Ajmal Zahid, J.— Through this single judgment, we intend to decide the above-captioned Sales Tax Reference as well as W.P. No.27338/2014, as both matters arise out of the same set of proceedings and involve interconnected questions of law and fact.

2.Through the instant Reference Application under Section 47 of the Sales Tax Act, 1990 (“the Act”), the applicant-Department has called in question the order dated 05.04.2018 passed by the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore (“the learned Tribunal”) in S.T.A. No.794/LB/2012, whereby the departmental appeal was dismissed and the order passed by the Commissioner Inland Revenue (Appeals) was maintained. The applicant-Department has proposed several questions of law, therein.

W.P. No.27338/2014.

3.The controversy originates from an investigation conducted by the Directorate General, Intelligence & Investigation, FBR, into an alleged scheme involving misuse of the sales tax registration numbers of 39 registered persons for issuance of purportedly fake sales tax invoices. During the investigation, certain articles, including stamps, blank signed cheque books and computers, were reportedly recovered. Examination of the electronic profiles of the registered persons allegedly disclosed issuance of sales tax invoices in their names and corresponding declarations of input and output tax in their monthly sales tax returns-cum-payment challans.

4.Pursuant to approval of the Board vide C.No.4(4)/STM/2005 dated 04.03.2010, the Directorate, through memo No.C.No.I.I.ST/Inv.Hum/07/2010/4080, dated Nil-05-2010 summoned the respondent under Section 37 of the Act and required production of relevant evidence and documents. The respondent appeared before the Directorate, produced the requisitioned record and deposited an amount of Rs.897,417/- under protest. He was required to produce, inter alia, sales tax invoice summaries, returns-cum-payment challans, purchase registers and documents relating to compliance with Section 73 of the Act for the period from July 2005 to April 2010.

5.Subsequently, a show-cause notice under Section 11 of the Act was issued on 13.04.2011. According to the Department, the respondent had failed to satisfactorily explain certain purchases allegedly made from four suppliers involving input tax of Rs.897,417/-. Consequently, through Order-in-Original dated 29.07.2011, the respondent was directed to deposit the said amount along with penalty equivalent to 100% thereof and default surcharge.

6.The respondent challenged the said order before the Commissioner Inland Revenue (Appeals), Gujranwala. The appeal

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was allowed vide order dated 21.12.2011 to the extent of penalty and default surcharge. The Commissioner (Appeals), while observing that the suppliers had issued fake invoices on the basis of which illegal input tax adjustment had been claimed, also noticed that the respondent had deposited the disputed amount of sales tax before issuance of the audit notice. It was consequently held that wilful default or mens rea had not been established and that, in the circumstances, imposition of penalty under Section 33(11) and (13) and default surcharge under Section 34(1)(c) was not justified.

7.The applicant-Department challenged the aforesaid order before the learned Tribunal. The appeal was dismissed vide order dated 05.04.2018. The learned Tribunal principally relied upon the fact that the purchases had been made from active registered persons after verification of their status from the FBR website and that the entire disputed amount had been deposited, resulting in no loss of revenue. The departmental appeal was consequently dismissed.

8.The Reference Application was admitted by this Court, inter alia, on the following questions of law:

“(i) Whether, on the facts and in the circumstances of the case, the learned ATIR was justified in deleting the imposed penalty and surcharge ignoring the fact that offence of illegal input adjustment by the registered person was confirmed?

(ii)Whether the Appellate Tribunal was justified in deleting default surcharge which is required to be imposed mandatorily under Section 34 of the Sales Tax Act, 1990?”

The remaining questions substantially arise from, and are consequential to, the aforesaid questions. We, therefore, consider the controversy principally with reference to these two questions.

9.Learned counsel for the applicant-Department submits that the respondent claimed inadmissible input tax on the basis of invoices which were subsequently found to be fake and, therefore, the liability to pay the disputed amount as well as the statutory

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penalty and default surcharge stood attracted. It is argued that Section 34 of the Act provides for mandatory levy of default surcharge upon occurrence of the statutory default and that absence of mens rea is immaterial for purposes of such levy. Learned counsel further submits that the subsequent deposit of the disputed amount could not absolve the respondent from the penal consequences of claiming inadmissible input tax.

10.Conversely, learned counsel for the respondent submits that the amount of Rs.897,417/- was deposited under protest and that the Department failed to establish, through independent and legally admissible material, that the respondent had knowingly or fraudulently participated in the alleged scheme involving fake invoices. It is argued that the mere characterization of invoices as fake, without establishing the respondent’s culpable involvement, could not automatically attract the penal provisions of Section 33. Learned counsel further submits that, under the statutory scheme, reference to section 3(3)(a) of the Act, the liability to pay output tax is primarily that of the supplier and that an input tax claim cannot be disallowed, with penal consequences, merely on the basis of assumptions or the alleged default of the supplier.

11.We have heard learned counsel for the parties at considerable length and have examined the available record with their assistance.

12.At the outset, it is necessary to appreciate the precise nature of the allegation against the respondent. The investigation was admittedly directed against a larger alleged scam involving misuse of the registration numbers of various registered persons and issuance of fake invoices. No material has been pointed out before us demonstrating that the respondent was himself a member of, or participant in, the alleged fraudulent network. The allegation against him, as emerging from the proceedings, is narrower: namely, that he claimed input tax adjustment on the strength of

W.P. No.27338/2014.

invoices which the Department subsequently considered to be fake or otherwise inadmissible. Existence of an inadmissible input tax claim and the commission of a penal offence are not necessarily synonymous. A claim may ultimately be found inadmissible for purposes of determining tax liability; however, where penal consequences are sought to be imposed under provisions involving false, forged, fraudulent or knowing conduct, the particular statutory ingredients of the offence must be established against the person upon whom the penalty is sought to be imposed.

13.The august Supreme Court, in "Commissioner Inland Revenue v. M/s Rose Food Industries" (2023 SCMR 2070), and "Commissioner Inland Revenue, Zone-IV, Large Taxpayer Unit, Karachi v. Messrs Al-Abid Silk Mills Ltd." (2023 SCMR 1797), while considering a similar controversy concerning alleged fake/flying invoices, emphasized that liability cannot be fastened upon a taxpayer merely on the basis of assumptions and that the statutory scheme concerning output and input tax has to be applied in accordance with law. The Court recognized, inter alia, that the liability to pay output tax is that of the supplier, whereas the recipient is entitled to deduct admissible input tax subject to the conditions of the Act.

14.In the present case, the respondent appeared before the investigating authority, produced the record requisitioned from him and deposited Rs.897,417/- under protest. Thereafter, the proceedings culminated in the Order-in-Original dated 29.07.2011. However, neither the order of the adjudicating authority nor the material placed before us identifies independent evidence demonstrating that the respondent knowingly or fraudulently participated in the alleged scheme of issuance of fake invoices.

15.The payment of the disputed amount under protest, in these circumstances, cannot by itself be treated as an admission of guilt. A taxpayer may deposit a disputed amount in order to avoid

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further coercive consequences or to protect his business interests while reserving the right to contest the underlying liability. The legal character of such payment must consequently be determined from the circumstances in which it was made and cannot, without more, be elevated to an admission of a penal offence.

16.The subsequent payment, therefore, did not dispense with the Department’s obligation to establish the ingredients of the particular offence for which penalty was imposed. The learned Commissioner (Appeals), while deleting the penalty, recorded a finding that wilful default or mens rea had not been established. The learned Tribunal, after examining the record, maintained that conclusion.

17.We find no material on record demonstrating that the concurrent findings of the appellate authorities suffer from misreading or non-reading of material evidence. In reference jurisdiction, this Court does not ordinarily undertake a fresh appraisal of evidence merely because another factual conclusion may arguably be possible. Therefore, the findings recorded by the learned Tribunal disclose no error of law and/or fact.

18.The penalty imposed upon the respondent requires to be examined independently of the question of default surcharge. The two liabilities arise from different statutory considerations. Penalty under Section 33 is attracted upon commission of an offence specified in the relevant provision, whereas default surcharge under Section 34 operates upon the occurrence of the statutory default contemplated therein. Reliance is placed on the Judgement of Supreme Court in "D.G. Khan Cement Company Ltd. v. Federation of Pakistan" (2004 SCMR 456) recognized the significance of wilful evasion in the context of the applicable penal provisions, whereas in "Messrs Attock Refinery Limited v. Collector of Sales Tax" (2021 PTD 1680), "Deputy Collector, Central Excise and Sales Tax v. ICI Pakistan Limited" (2006

W.P. No.27338/2014.

SCMR 626) and "Commissioner Inland Revenue v. Trillium Pakistan (2019 SCMR 1643) has acknowledged the mandatory/strict liability character of default surcharge.

19.In the present case, the Department proceeded on the basis that the respondent had claimed input tax on fake invoices. Yet, the mere fact that the invoices were subsequently treated as fake or inadmissible does not, without establishing the respondent’s knowledge, participation or other ingredients of the particular offence, automatically establish the penal liability contemplated by Section 33(11) or (13).

20.It is also significant that the respondent had verified the registration status of the suppliers and that the learned Tribunal took note of the fact that the suppliers were active registered persons at the relevant time. This circumstance may not, by itself, conclusively establish the genuineness of every underlying transaction, but it is certainly relevant while determining whether the respondent knowingly or fraudulently participated in the alleged issuance or use of fake invoices.

21.The Department has not identified any material showing that the respondent had knowledge of the alleged fraudulent arrangement or that he had deliberately participated therein. In these circumstances, the conclusion of the learned Tribunal that the ingredients necessary for sustaining the penalty had not been established cannot be said to suffer from an error of law warranting interference under Section 47 of the Act.

22.The position regarding default surcharge stands on a different footing. Default surcharge is not a penalty in the conventional sense and its imposition does not depend upon proof of mens rea where the statutory provision applicable to the relevant period makes the levy consequential upon the occurrence of default. The courts have recognized the mandatory/strict- liability character of Section 34 after the relevant statutory

W.P. No.27338/2014.

amendments. In Messrs Attock Refinery Limited, ICI Pakistan Limited and Trillium Pakistan cases supra, the statutory scheme of Section 34 was considered and default surcharge was treated as attracted upon occurrence of the statutory default, irrespective of whether the default was deliberate or inadvertent.

23.The expression “mandatory”, however, cannot be divorced from the statutory conditions governing its application. Section 34 is attracted where the registered person fails to pay the tax due, or any part thereof, within the time or in the manner prescribed by the Act, rules or notifications. Thus, while mens rea is not a prerequisite to the levy of default surcharge, there must nevertheless be a legally sustainable determination of the underlying tax due and of the period and circumstances constituting the statutory default. The provision cannot be invoked merely because a penalty has been imposed or because an input claim has been disputed.

24.In the present case, the Department has not demonstrated before us that the respondent’s deposit of Rs.897,417/- constituted a delayed payment of tax within the meaning of Section 34 for which surcharge was legally calculable. The amount was admittedly deposited under protest before the issuance of the show-cause notice. The orders of the authorities below, moreover, proceeded principally on the premise that the disputed amount had already been recovered and that the ingredients necessary to sustain the adverse consequences had not been established.

25.The Department has not placed before us any computation or determination establishing the period of default contemplated by Section 34 or demonstrating that, notwithstanding the payment already made, a specific amount of default surcharge had accrued in accordance with the statutory formula applicable to the relevant period. In the absence of such determination, the mere assertion

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that default surcharge is mandatory cannot, by itself, sustain the demand.

26.It follows that the deletion of default surcharge by the appellate authorities cannot be sustained merely on the reasoning that there was no loss of revenue or that the respondent lacked mens rea. Those considerations, stand alone, would not defeat a duly established liability under Section 34. Nevertheless, the conclusion reached by the appellate authorities may be maintained on the broader ground that the Department failed to establish before the competent fora the foundational statutory default necessary to attract Section 34 in the circumstances of the present case.

27.The contention that subsequent payment of the disputed amount necessarily amounts to an admission of guilt also cannot be accepted. Payment of tax and commission of a penal offence are legally distinct matters. A taxpayer may be liable to pay an amount as tax while disputing the allegation of fraud or other penal misconduct. Likewise, a payment expressly made under protest cannot, without supporting evidence, be treated as a confession or admission of the ingredients of an offence under Section 33.

28.Consequently, Section 33(11) or (13) cannot be invoked solely on the basis of the factum of payment. The Department was required to establish the ingredients of the relevant offence independently of such payment. No such material has been identified before us.

29.There is another aspect of the matter which fortifies the conclusion reached by the appellate authorities. The Order-in- Original also proceeded, inter alia, on the alleged failure of the respondent to establish the physical movement or transfer of goods through gate passes, inward and outward records and transport receipts, with reference to Section 22(1)(ea) of the Act. The period

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involved in the present case is July 2005 to April 2010, whereas the requirement relied upon by the Department was introduced subsequently through the Finance Act, 2013. A statutory requirement introduced after the transactions in question cannot ordinarily be employed retrospectively to impose a liability in respect of an earlier period. The Department, therefore, could not have lawfully found an adverse consequence for the period in question upon a record-maintenance obligation which was not operative at the relevant time.

30.The concurrent findings recorded by the Commissioner (Appeals) and the learned Tribunal assume considerable significance. The appellate authorities examined the available record and concluded that the Department had not established the necessary culpable conduct for imposition of penalty. The learned Tribunal further noticed that the suppliers were active registered persons and that the disputed amount had been deposited.

31.The applicant-Department has not been able to identify any material evidence which was ignored or misread by the learned Tribunal, nor has it demonstrated that the Tribunal applied an erroneous principle of law in arriving at its conclusion regarding the penalty. The questions framed by the Department, in substantial measure, seek re-appraisal of the factual controversy rather than determination of a pure question of law.

32.The jurisdiction under Section 47 of the Act is confined to questions of law arising out of the order of the Tribunal. This Court does not ordinarily substitute its own appreciation of evidence for that of the competent appellate forum unless the finding is shown to be perverse, based on no evidence, or the result of misreading or non-reading of material evidence. No such jurisdictional error has been demonstrated in the present case. Reliance is placed on the judgments reported as "Interquest Informatics Services V. The Commissioner of Income Tax" (2025

W.P. No.27338/2014.

SCMR 257), "Commissioner Inland Revenue, (Special Zone for Builders and Developers), Regional Tax Office Islamabad V. Khudadad Heights, Islamabad" (2025 SCMR 716), "Collector of Sales Tax and Central Excises, Lahore V. M/s Qadbros Engineering (Pvt) Ltd, Lahore" (2023 SCMR 939), "Commissioner Inland Revenue, Lahore V. Sargodha Spinning Mills (Pvt) Ltd. Faisalabad" (2022 SCMR 1082), "Pakistan Match Industries (Pvt) Ltd. V. Assistant Collector, Sales Tax and Central Excise Mardan" (2019 SCMR 906), "Army Welfare Trust (Nizampur Cement Project) Rawalpindi V. Collector of Sales Tax (Now Commissioner Inland Revenue), Peshawar" (2017 SCMR 9), "F.M.Y Industries Ltd. V. Deputy Commissioner Income Tax and another" (2014 SCMR 907), "Commissioner of Income Tax, Companies No.1, Karachi V. M/s Hassan Associates (Pvt) Ltd. Karachi" (1994 SCMR 1321)," Commissioner of Income Tax, Central Zone-B V. Messrs Farrokh Chemical Industries" (1992 PTD 523) and "Commissioner Inland Revenue V. S.M. Ilyas & Sons." (1982 46 Tax 113 [SC]).

33.The connected W.P. No.27338/2014 arises from parallel proceedings before the Federal Tax Ombudsman (“FTO”). The respondent-taxpayer had challenged the demand of Rs.897,417/- before the FTO, which, vide order dated 29.08.2011, made certain recommendations, including refund of the amount deposited under protest, cancellation of the Order-in-Original dated 29.07.2011 and initiation of appropriate inquiry into the circumstances surrounding the alleged fraudulent scam. The applicant- Department filed a representation before the President of Pakistan against the recommendations of the FTO. The said representation was partly accepted vide order dated 24.09.2014, which was challenged by the respondent through the connected constitutional petition.

34.The writ petition had earlier been allowed by this Court vide order dated 07.11.2017. The said order was challenged before the

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august Supreme Court of Pakistan through Civil Petition No.280-L of 2018. Vide order dated 16.04.2021, the august Supreme Court allowed the petition, set aside the earlier judgment and remanded the matter to this Court with a direction to hear and decide the writ petition along with the connected Sales Tax Reference, while leaving the parties at liberty to raise their respective pleas of fact and law.

35.We have now considered the controversy in its entirety in the light of the record and the submissions of the parties. The findings recorded herein with respect to the legality of the tax demand, penalty and default surcharge necessarily govern the connected proceedings arising from the same transaction.

36.For the reasons recorded above, we are of the considered view that the applicant-Department has failed to demonstrate any error of law in the order dated 05.04.2018 passed by the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore. In particular, the Department has failed to establish the ingredients necessary for sustaining the penalty imposed under Section 33 against the respondent. As regards default surcharge, although the levy under Section 34 is mandatory upon establishment of the statutory default and does not depend upon mens rea, the Department has failed, in the present case, to demonstrate the requisite statutory default and corresponding liability in a manner sufficient to sustain the surcharge.

37.The questions of law referred to this Court are, accordingly, answered against the applicant-Department and in favour of the respondent-taxpayer, subject to the clarification that the conclusion regarding default surcharge is founded not upon absence of mens rea or mere recovery of the disputed tax, but upon failure of the Department to establish the statutory foundation necessary for levy of surcharge under Section 34.

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38.Consequently, the order dated 05.04.2018 passed by the learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore, in S.T.A. No.794/LB/2012 is maintained and the instant Reference Application is dismissed. The connected W.P. No.27338/2014 is also disposed of in terms of the findings recorded herein.

39.Office is directed to transmit a copy of this judgment, under the seal of the Court, to the learned Appellate Tribunal Inland Revenue in terms of Section 47(5) of the Sales Tax Act, 1990.

(HASSAN NAWAZ MAKHDOOM) (MUHAMMAD AJMAL ZAHID)

JUDGE JUDGE

APPROVED FOR REPORTING.

JUDGE JUDGE

M. Arsalan*