Cir vs M/S Al Hamad etc.

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

STR No.68 of 2025 The Commissioner Inland Revenue, Refund Zone, LTO, Multan Versus M/s Al-Hamad Corporation (Pvt.) Limited, Lahore

JUDGMENT

Date of hearing: 22.09.2026.

Applicant by: Mr. Muhammad Suleman Bhatti, Advocate. Respondent by: Barrister Hassan Akhtar, Advocate.

MUHAMMAD SAJID MEHMOOD SETHI, J.:- Through instant Reference Application under Section 47 of the Sales Tax Act, 1990 (“the Act of 1990”), following question of law, asserted to have arisen out of impugned order dated 30.07.2025, passed by learned Appellate Tribunal Inland Revenue of Pakistan, Division Bench, Multan (“Appellate Tribunal”), has been pressed and argued for our opinion:- “Whether in the facts and circumstances of the case, learned ATIR was justified to treat the order passed under sub-section (2) and (3) of section 11 of the Sales Tax Act, 1990 as audit proceedings under Rule 36(1) of Chapter V of the Sales Tax Rules, 2006 for deleting the demand of further tax raised under Section 3(1A) of the Sales Tax Act, 1990?”

2.Briefly, the respondent claimed refund of Rs.280,192,777/- for the tax periods March 2019 to June 2019, out of which an amount of Rs.228,958,709/- was processed, sanctioned and disbursed. Thereafter, post-refund audit proceedings were undertaken under Rule 36(1) of the Sales Tax Rules, 2006 (“the Rules of 2006”). Notices under section 11 of the Act read with Rule 36(1) were issued to the respondent and, according to the Department, the requisite record and information were not furnished. Consequently, an ex parte order dated 26.11.2024 was passed under section 11, creating a total demand of Rs.113,374,480/-, comprising principal sales tax of Rs.25,667,100/-,

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further tax of Rs.82,308,595/- and penalty of Rs.5,398,785/-. The assessment comprised three observations. Observation No.1 related to inadmissible input tax/refund of Rs.5,337,709/- under section 8(1) of the Act; Observation No.2 related to further tax of Rs.82,308,595/- under section 3(1A) on taxable supplies made to unregistered persons; and Observation No.3 related to inadmissible input tax of Rs.20,329,391/- with reference to sections 7, 23 and 73 of the Act. The learned Tribunal remanded Observations Nos.1 and 3 for fresh examination but annulled Observation No.2 on the reasoning that the proceedings had originated from post-refund audit under Rule 36(1) of the Rules of 2006, the scope whereof, according to the Tribunal, was confined to verification of input tax paid by suppliers and compliance with section 73 and could not be extended to further tax on supplies made to unregistered persons.

3.Learned counsel for the applicant-department contends that the learned Appellate Tribunal misconstrued the nature of the proceedings by treating the order passed under section 11(2) and (3) of the Act of 1990 as an audit proceeding under Rule 36(1) of the Rules of 2006. He further submits that Rule 36(1) merely provides the mechanism for post-refund verification and does not curtail the substantive assessment jurisdiction vested in the competent officer under section 11. He further contends that further tax under section 3(1A) is a statutory liability and, once the taxable supplies to unregistered persons were detected, the same could lawfully be assessed under section 11. In support, he has relied upon the judgment dated 18.11.2024, passed by a learned Division Bench of this Court in S.T.R. No.66872 of 2019 titled Commissioner Inland Revenue, Zone- I, Gujranwala v. M/s Yarn Kings (Pvt.) Limited, Gujranwala and connected matters.

4.Conversely, learned counsel for the respondent supports the impugned judgment and submits that Rule 36(1) of the Rules of 2006 constitutes a special post-refund audit mechanism and confines the proceedings to the matters expressly contemplated therein. He

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contends that the Assessing Officer could not travel beyond that limited purpose by raising further tax under section 3(1A) of the Act of 1990. He further argues that the respondent was covered by the zero-rating regime under SRO 1125(I)/2011, as amended by SRO 491(I)/2016, issued under section 71 of the Act, and that supplies made during the relevant period were consequently not liable to further tax. In support, he has referred to Commissioner Inland Revenue Zone-I, Regional Tax Office, Quetta v. Messrs Hajvairy Steel Industries (Pvt.) Limited, Quetta and another (2023 SCMR 681).

5.Arguments heard. Available record perused.

6.The only part of the Appellate Tribunal’s order in issue before this Court is its annulment of Observation No.2, namely the demand of further tax of Rs.82,308,595/- under Section 3(1A) of the Act of 1990 on taxable supplies made to unregistered persons. Observations No.1 and 3 were remanded and are not in question. The Tribunal annulled Observation No.2 on two premises: first, that Rule 36(1) confined the proceedings so as to exclude further tax; and secondly, that the respondent’s zero-rated status under SRO 1125(I)/2011, as amended by SRO 491(I)/2016, exempted its supplies from further tax. Although the question is framed around Rule 36(1), it cannot be answered without examining both premises, since the annulment stands only if both are sound. Each is a question of law, being one of the interpretation of a statutory rule and provision, and of the effect of subordinate legislation on a statutory levy, and falls within the jurisdiction conferred by Section 47 of the Act of 1990. We examine them in turn.

7.Rule 36(1) of Chapter V of the Sales Tax Rules, 2006 provides for post-sanction audit of a refund, including verification of input tax payments by suppliers and compliance with section 73 of the Act. The fact that the proceedings originated from such post-refund audit, however, does not determine the legal character of the order ultimately passed under section 11(2) and (3). Rule 36(1) identifies the procedural occasion for scrutiny; it does not, either expressly or by

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necessary implication, convert an assessment made under the Act into an audit proceeding or curtail the substantive statutory jurisdiction conferred by section 11 of the Act of 1990.

8.Section 11, on the other hand, provides the statutory mechanism for assessment and recovery where tax has not been paid, has been short-paid or has been erroneously refunded. A distinction, therefore, has to be maintained between the source of detection and the source of statutory jurisdiction. The circumstance that a discrepancy comes to the notice of the Department during a post-refund audit may explain the initiation of proceedings, but it does not, by itself, determine the statutory action which the competent officer may take where jurisdiction is exercised under section 11. To construe Rule 36(1) otherwise would amount to reading into it a limitation upon section 11 which is neither expressed in the rule nor otherwise discernible from the statutory scheme.

9.Rule 36(1) and section 11 can, and should, operate harmoniously. Rule 36(1) regulates post-refund scrutiny and enables verification of the correctness of a refund already sanctioned, whereas section 11 provides the statutory machinery for assessment and recovery of liability found to be due. The former cannot reasonably be construed as an independent jurisdictional code overriding the latter. The principle is also consistent with the approach adopted by the Hon’ble Supreme Court in Wazir Ali Soomro v. Water and Power Development Authority and others (2006 SCMR 37), wherein statutory power was held to remain subject to the framework of law, while a procedural restriction was not to be construed as taking away the substantive statutory power itself unless the language of the law so required. Likewise, in Sanaullah Sani v. Secretary Education Schools and others (2024 SCMR 80), the Hon’ble Supreme Court emphasized that the entire field of statutory powers under which an authority has acted is to be examined before its action is held to be without lawful authority. Applying that principle here, Rule 36(1) cannot be read in

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isolation from section 11 so as to restrict the latter merely because the relevant discrepancy was detected during post-refund audit.

10.The learned Appellate Tribunal, therefore, fell into error in treating the order passed under section 11(2) and (3) as though it were itself an audit proceeding under Rule 36(1). The relevant question was whether the competent officer, having exercised jurisdiction under section 11, could determine a liability otherwise imposed by the Act. The procedural origin of the proceedings could not, without statutory basis, deprive him of that jurisdiction. The impugned reasoning thus conflates the mechanism through which the discrepancy was detected with the statutory authority under which the liability was assessed and cannot be sustained.

11.The manner in which the learned Appellate Tribunal approached the controversy also calls for consideration in the light of the settled requirement of reasoned adjudication. In Muhammad Iqbal Chaudhry and another v. Secretary, Ministry of Industries and Production, Government of Pakistan and others (PLD 2004 Supreme Court 413), Government of Sindh through Land Acquisition Officer and others v. Muhammad Juman and another (2009 SCMR 1407), and Sanaullah Sani’s case supra, the Hon’ble Supreme Court emphasized that a judicial or quasi-judicial order must manifest application of mind to the material questions arising for determination. In Messrs Poly Pack Ltd. v. Customs and Central Excise Appellate Tribunal and others (2005 PTD 2566), this Court, in the context of appellate tax adjudication, likewise held that an order which does not advert to the questions involved or record findings on the controversies and is devoid of reasons cannot be sustained as a proper judicial order. The principle is attracted here because the learned Appellate Tribunal was required to examine the relationship between Rule 36(1) and section 11 as part of the statutory scheme, rather than treating the procedural source of the proceedings as determinative of the extent of the substantive jurisdiction under section 11.

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12.The aforesaid conclusion, however, does not by itself dispose of the legality of the further tax under section 3(1A), because the learned Appellate Tribunal also proceeded on the premise that supplies made by a person covered by SRO 1125(I)/2011, as amended by SRO 491(I)/2016, were outside the scope of further tax. This aspect is, therefore, required to be examined independently, as the validity of Observation No.2 also depends upon the legal effect of the said notifications after the amendments introduced through the Finance Act, 2017.

13.Prior to the Finance Act, 2017, section 3(1A) imposed further tax on taxable supplies made to persons who had not obtained a registration number, while section 4 contained a non-obstante clause which, in its then form, operated notwithstanding the provisions of section 3. SRO 1125(I)/2011, issued under section 4(c), extended zero-rating to specified export-oriented sectors, including textiles, and SRO 491(I)/2016 subsequently extended that regime to supplies made to unregistered persons. The statutory position was materially altered by the Finance Act, 2017.

14.Through the Finance Act, 2017, section 3(1A) was amended by expressly bringing section 4 within its framework, while section 4(1) was simultaneously amended so that its non-obstante clause operated notwithstanding section 3 except sub-section (1A). The two amendments have to be read together. Their combined effect is that the availability of zero-rating under section 4 could no longer, merely by virtue of such status, exclude the levy of further tax under section 3(1A). Any other construction would substantially deprive the express amendments to sections 3(1A) and 4 of their intended effect.

15.This precise statutory development was considered by a learned Division Bench of this Court vide judgment dated 18.11.2024, passed in S.T.R. No.66872 of 2019 titled Commissioner Inland Revenue, Zone-I, Gujranwala v. M/s Yarn Kings (Pvt.) Limited, Gujranwala. The questions before the Court included the effect of SRO 491(I)/2016 vis-à-vis section 3(1A), as well as the extent to which

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subordinate legislation could operate contrary to the substantive provisions of the Act. After examining the amendments introduced through the Finance Act, 2017, the learned Division Bench held that the amended sections 3(1A) and 4 brought supplies made by the specified export-oriented sectors to unregistered persons within the ambit of further tax and that SRO 1125(I)/2011, as amended by SRO 491(I)/2016, could not continue to operate contrary to the amended parent statute insofar as levy of further tax was concerned.

16.The ratio of Yarn Kings’ case (supra) directly applies to the present controversy. The learned Division Bench also examined the scope of section 71 and held that its non-obstante clause could not independently override the substantive levy created by section 3(1A). A notification issued under section 71, therefore, remained subservient to the substantive provisions of the Act insofar as the levy of further tax was concerned. The principle of lex posterior derogat legi priori i.e. a later law repeals an earlier law, was also noticed in the context of the amendments introduced through the Finance Act, 2017. Consequently, the legal position applicable to the tax periods in question, which fall after 01.07.2017, has to be determined with reference to the amended statutory framework and not merely on the basis of the earlier wording of sections 3 and 4 or the notifications issued under that earlier regime.

17.The subsequent striking down of SRO 584(I)/2017 in Messrs T.U. Plastic Industry Co. (Pvt.) Ltd. v. Federation of Pakistan and others (2019 PTD 1542) does not undo the amendments made by Parliament to sections 3(1A) and 4. As explained in Yarn Kings’ case supra, it was the legislative amendments themselves which materially altered the statutory relationship between zero-rating under section 4 and further tax under section 3(1A). Likewise, the subsequent rescission of SRO 1125(I)/2011 by SRO 694(I)/2019 does not revive the earlier statutory position or enable the notification, during the intervening period, to prevail over the amended parent statute. The continued existence of the earlier notification could not, to the extent

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of further tax on taxable supplies made to unregistered persons, override the amended provisions of the Act.

18.The reliance upon Messrs Hajvairy Steel Industries’ case supra does not lead to a different conclusion. The controversy in that case arose with reference to tax periods preceding the amendments introduced through the Finance Act, 2017 and, therefore, did not engage with the materially altered relationship between sections 3(1A) and 4 which governs the present case. A judgment rendered with reference to an earlier statutory regime cannot govern a subsequent controversy where the legislature has materially amended the provisions constituting the basis of liability. Accordingly, the respondent’s coverage under SRO 1125(I)/2011, as amended by SRO 491(I)/2016, did not, during the relevant period, exclude the operation of section 3(1A) in respect of taxable supplies made to unregistered persons.

19.Once it is held that Rule 36(1) did not restrict the statutory jurisdiction conferred by section 11 and that the zero-rated regime under SRO 1125(I)/2011 and SRO 491(I)/2016 did not, after the Finance Act, 2017 amendments, exclude further tax leviable under section 3(1A), the legal basis upon which the learned Appellate Tribunal annulled Observation No.2 disappears. The order dated 26.11.2024 was expressly passed under section 11(2) and (3), and Observation No.2 recorded further tax of Rs.82,308,595/- in respect of taxable supplies made to unregistered persons. The learned Appellate Tribunal, having proceeded on an erroneous interpretation of Rule 36(1) and the legal effect of the aforementioned SROs, was consequently not justified in annulling the said Observation.

20.In view of the foregoing discussion, the proposed question of law is answered in the negative, in favour of the applicant-department and against the respondent-taxpayer.

The Reference Application is accordingly allowed. The impugned judgment dated 30.07.2025 passed by the learned Appellate Tribunal is set aside to the extent whereby Observation No.2

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concerning further tax under section 3(1A) was annulled, and Observation No.2 of the order dated 26.11.2024 is restored. Consequently, the demand of further tax amounting to Rs.82,308,595/- under section 3(1A) shall stand revived. Observations Nos.1 and 3, having already been remanded by the learned Appellate Tribunal and not being the subject of the question pressed before this Court, shall remain undisturbed.

21.Office shall send a copy of this judgment under the seal of the Court to the learned Appellate Tribunal in terms of Section 47(5) of the Sales Tax Act, 1990.

(Sultan Tanvir Ahmad) (Muhammad Sajid Mehmood Sethi) Judge Judge

APPROVED FOR REPORTING

Judge Judge

*A.H.S.*