Full Judgment Text & Judicial Ruling

2025 P T D 1509 [Lahore High Court (Rawalpindi Bench)] Before Jawad Hassan and Malik Javid Iqbal Wains, JJ COMMISSIONER INLAND REVENUE (CANTT. ZONE) REGIONAL TAX OFFICE, RAWALPINDI Versus Messrs D-WATSON, CHAKLALA SCHEME-III, RAWALPINDI and another Sales Tax Reference No.07 of 2022, decided on 3rd July, 2025. (a) Sales Tax Act (VII of 1990)--- ----Ss.2(43A), 3(9A), 40(c) & 11---Failure of registered person to integrate a retail outlet fully or partially with the FBR's Computerized System for real-time reporting, offence of---Provision for recovery of tax shortfalls under S. 11 of the Act, 1990, applicability of---Imposition of penalty for violations exclusively covered under other specific provisions of Sales Tax Act, 1990---Whether penalties and default surcharge for non-integration can be imposed under S. 11 of the Sales Tax Act, 1990, or must be confined to the specific penal mechanism under S. 33 of the Act, 1990?---The Commissioner Inland Revenue(the CIR) sought to impose penalties and default surcharge on Tier-1 retailers for failing to fully integrate their retail outlets with the FBR's computerized POS system---The Department relied on S. 11 of the Sales Tax Act, 1990 as the jurisdictional basis to issue show-cause notices and recover such penalties---The Registered Persons challenged this and the Appellate Tribunal set aside the penalty orders---High Court was then called upon to decide as to "whether S. 11 (a machinery provision dealing with recovery of tax shortfalls) could legally be invoked to impose penalties for regulatory breaches under Ss. 2(43A), 3(9A), 40C read with Serial Nos. 24 and 25 of S. 33 (which specifically prescribed penalties for non-integration)?"---Held: While S. 33 of the Act, 1990 governed the creation of liability for specified offences, it did not itself supply the procedural means for recovering such penalty from the Registered Person, if there was no simultaneous tax shortfall---Any proceedings for penalty under serial No.24 or 25 was to be rooted in the express penalty provisions, and the recovery was to follow the adjudication process prescribed by the Act, 1990 or other relevant enabling provisions, but could not default to S. 11 of the Act, 1990 in the absence of a short levied tax---Although S. 33 of the Act, 1990, prescribed various offences and their corresponding penalties, it did not itself provide any independent procedural mechanism for the issuance, adjudication, or recovery of such penalties---Therefore, in the absence of such procedure, reliance could not be placed on a general provision like S. 11 of the Act 1990, which was confined to tax assessment and recovery, to fill that gap by implication---In the present case, the respondents' alleged failure to fully or partially integrate their retail outlet did not, ipso facto, result in a quantifiable shortfall of sales tax that could be brought within the ambit of S. 11 of the Act, 1990---Instead, this default constituted an independent regulatory offence for which a specific penalty was prescribed under Serial Nos.24 and 25 of S. 33 of the Act, 1990---Reliance on S. 11 of the Act, 1990 as the sole jurisdictional basis for issuing a show cause notice to impose penalty and default surcharge for partial or complete non-integration under Ss.2(43A), 3(9A), and 40C of the Act, 1990 was misconceived in law and contrary to the statutory framework---Such action was ultra vires the express scheme of the Act, 1990, which required that the prescribed penalty for these specific regulatory breaches be imposed strictly under the enabling provisions of S. 33 of the Act, 1990, following due process and in accordance with the procedure established by law---Accordingly, the show-cause notice and the consequential order passed pursuant thereto had rightly been set-aside to the extent that they sought to impose penalty and default surcharge solely by invoking S. 11 of the Act, 1990 for violations that were required to be prosecuted exclusively under the specific penal provisions of S. 33 of the Act, 1990---Consequently, the order of the Appellate Tribunal Inland Revenue was upheld to this extent having correctly appreciated the statutory distinction and the limits of jurisdiction prescribed under the Act, 1990---Present reference applications were decided against the applicant department. (b) Sales Tax Act (VII of 1990)--- ----Ss.2(43A), 3(9A), 40(c) &11---Failure to integrate a retail outlet fully or partially with the FBR's Computerized System for real-time reporting, offence of---Provision for recovery of tax shortfalls under S. 11 of the Act, 1990, applicability of---Imposition of penalty for violations exclusively covered under other specific provisions of same statute---Legality and scope---Section 11 of the Act, 1990 is a machinery provision and its statutory object is to empower the Officer of Inland Revenue to detect, assess, and recover any tax, which has either escaped assessment, has not been paid, or has been erroneously refunded---The operative words are "tax not levied or short-levied or erroneously refunded" demonstrating that its entire scope is tethered to the quantification and recovery of a shortfall in tax revenue---The legislative intent of S. 11 of the Act, 1990 is clear from its text, it addresses tax revenue shortfall and its recovery, not regulatory penalties imposed for stands alone statutory breaches unrelated to any deficit in the tax payable---The said provision is silent regarding the creation of offences or the independent imposition of penalties for regulatory breaches that do not necessarily result in a quantifiable tax default---Its scope is not punitive but compensatory and restorative in nature, to protect the exchequer from actual revenue loss---Conversely, the offences for failure to integrate a retail outlet fully or partially with the Board's Computerized System for real-time reporting are distinctly prescribed under Ss. 2(43A), 3(9A) & 40C of the Act, 1990, while the penal consequences for such breaches are codified under S. 33 of the Act, 1990, particularly at Serial Nos. 24 and 25 further observed that the Table appended to S. 33 of the Act, 1990 including inter alia Serial Nos.24 and 25, prescribes various statutory offences along with the corresponding penalties for each specific breach---These provisions clearly adopt a specific general legislative framework, the specific provision, i.e., S. 33 of the "Act" defines the nature of the offence and stipulates the quantum of penalty or default surcharge applicable thereto---However, the Act, 1990 is conspicuously silent on any detailed procedure for the assessment, computation, or recovery of such penalties where no ascertainable tax shortfall is determined---Section 33 of the Act, 1990 by its design, is declaratory in nature---It creates liability, but does not itself furnish a procedural machinery for quantification or recovery---This structural distinction is well entrenched in the jurisprudence that machinery provisions must operate within the express confines of the substantive charging provisions they support---Any attempt to expand a machinery provision, such as S. 11 of the Act, 1990 to cover penalties for purely regulatory defaults (as described at Serial Nos.24 and 25, or similar entries in the Table amounts to reading into the statute a jurisdiction, which the Legislature has not conferred. (c) Interpretation of statutes--- ----Fiscal/tax statutes---Penal provisions---Applicability and scope---Where a fiscal statute provides a penal consequence for breach of a statutory duty, such penal consequence must be enforced strictly within the four corners of the enabling provision---Where a special provision exists, it overrides the general provision to the extent of any overlap, a principle that applies with even greater force where penal consequences are involved---Tax statutes, particularly those prescribing penalties or default surcharges, must be construed strictly---Penal provisions cannot be broadened by administrative construction or implication---It is incumbent upon the department to establish clear statutory authority for each element of any penalty imposed, and an officer must demonstrate precise adherence to the express language of the statute to justify the levy of any penalty or surcharge---Where the legislature has created a distinct penalty for a regulatory contravention without linking it to an ascertainable tax shortfall, the penalty must be enforced strictly under the special provision, not by resorting to a general recovery mechanism intended for unpaid tax. Government of Punjab through Secretary Irrigation and Power and another v. Kunjah Textile Mills Ltd. and others 2025 SCMR 239 rel. Syed Muhammad Abbas, Malik Ittat Hussain Awan, Barrister Muhammad Ibrahim Khan, Dr. G.M. Chaudhry, Manzoor Hussain along with Yousaf Khan, S.O. I.R. (Hqrs) R.T.O., Rawalpindi for Applicant. Atif Waheed, Ch. Imran-ul-Haq, Muhammad Musawar Gill, Zahid Shafiq and Mehmood Subhani, Bilal-ud-Din Butt, Raja Basit Iqbal, Qazi Hafee-ur-Rehman, Ameer-ul-Azeem and Umair Mehmood for Respondent No.1. Date of hearing: 17th April, 2025. JUDGMENT MALIK JAVID IQBAL WAINS, J.---Through this single judgment, we propose to dispose of instant reference application (S.T.R.No.07 of 2022) as well as following reference applications:- 1. S.T.R.No.08 of 2022 (Commissioner Inland Revenue v. Messrs D-Watson and another) 2. S.T.R.No.14 of 2022 (Commissioner Inland Revenue v. Messrs Save Mart and another) 3. S.T.R.No.19 of 2022 (Commissioner Inland Revenue v. Muhammad Furqan Ansari and another) 4. S.T.R.No.27 of 2022 (Commissioner Inland Revenue v. Messrs Pechan Mall and another) 5. S.T.R.No.30 of 2022 (Commissioner Inland Revenue v. Messrs The Bkry Islamabad and another) 6. S.T.R.No.39 of 2022 (Commissioner Inland Revenue v. Sophia Ahmed and another) (Commissioner Inland Revenue v. Messrs Nelson Pharmacy and another) 8. S.T.R.No.45 of 2022 (Commissioner Inland Revenue v. Messrs Karegor/Corobar and another) 9. S.T.R.No.48 of 2022 (Commissioner Inland Revenue v. Messrs Karegor/Corobar and another) 10. S.T.R.No.06 of 2023 (Commissioner Inland Revenue v. Messrs Save Mart and another) 11. S.T.R.No.09 of 2023 (Commissioner Inland Revenue v. Messrs Punjab Cash and Carry and another) 12. S.T.R.No.10 of 2023 (Commissioner Inland Revenue v. Messrs Rawal Mall Makkah Tower and another) 13. S.T.R.No.15 of 2023 (Commissioner Inland Revenue v. Messrs Karegor/Corobar and another) 14. S.T.R.No.18 of 2023 (Commissioner Inland Revenue v. Waseem Noor and another) 15. S.T.R.No.26 of 2023 (Commissioner Inland Revenue v. Messrs Karegor/Corobar and another) 16. S.T.R.No.27 of 2023 (Commissioner Inland Revenue v. Messrs Watson Traders and another) 17. S.T.R.No.37 of 2023 (Commissioner Inland Revenue v. Messrs Shaheen Pharmacy and another) 18. S.T.R.No.13 of 2024 (Commissioner Inland Revenue v. Messrs Save Mart and another) as interpretation of Section 11C of the Sales Tax Act, 1990 (hereinafter referred to as the "Act") is under consideration in all these matters. Facts of the case. 2. Briefly facts of the case necessary for the disposal of these reference applications are that the Registered Person, having NTN 4300729-5 being a Tier-1 retailer, was required, under the provisions of Section 2(43A), Section 3(9A) and Section 40(C) of the Sales Tax Act, 1990 read with the Rule 150E of the Sales Tax Rules, 2006 (hereinafter referred to as the "Rules") to integrate all their retail point of Sales with the Board's Computerized System for real-time reporting of sales w.e.f. 01.09.2020 and issue the integrated Sales Tax Invoices bearing Bar Code and FBR Invoice Number. The Federal Government inserted subsection (6) of Section 8B and new serial numbers 24 and 25 in Section 33 of the "Act" vide Tax Laws (Second Amendment) Ordinance 2019, disallowing input tax and imposing penalty for non-compliance of Section 2(43), Section 3(9A) of the "Act" read with Rule 150E of the "Rules". Whereas, during spot verification of the outlets of the Registered Person on 31.10.2021, it was observed that the Registered Person is not issuing integrated POS invoices, which act of the Registered Person tantamount to avoid the monitoring of real-time sales and due tax payment and is therefore subject to penalty under Section 33(24) of the "Act", whereupon show cause notice was served upon the Registered Person vide C.No.Cantt./POS/2658 dated 18.11.2021, giving an opportunity to the Registered Person to submit written reply along with evidences (if any), documentary or otherwise latest by 02.12.2021, after proper hearing of the case, the Adjudicating Authority disallowed 15% of the adjusted input tax for the month of September to December, 2020 and January, 2021 and directed the Registered Person to pay an amount of Rs.1,696,739.00 under sub-section 6 of Section 8B for violation of Section 2(43A), Section 3(9A) of the "Act" read with Rule 150E of the "Rules" vide order-in-original 98/2021 dated 03.06.2021, which was assailed by the Registered Persons (Respondent No.1) before the CIR(A-III) under Section 46 of the Sales Tax Act, 1990, who rejected the Appeal filed by the Registered Person vide Order-on-Appeal No.75/20 21-2022 Dated 09.11.2021, on the ground that the facts of the case, as discussed above suggest that the Appellant had partially complied with the relevant provisions of law by integrating selected counters with the FBR System while leaving other counters uninstalled for the purpose of FBR POS System, which tantamount to failure to integrate the retail outlet with the FBR System. QUESTIONS OF LAW FRAMED BY THE COURT. 3. Being aggrieved with Order passed by the learned CIR(A-III) vide Order-in-Appeal No.75/2021-2022 dated 09.11.2021, the Registered Person filed Second Appeal against the Order-in-Original wherein the Registered Person assailed both the Order-in-Original and Order-in-Appeal before the learned Appellate Tribunal Inland Revenue, Islamabad on various grounds. The learned Appellate Tribunal Inland Revenue, Islamabad annulled both the Order-in-Original and Order-in-Appeal vide order No.STA.548/IB/2021 dated 22.02.2022 has accepted the appeal of the Registered Person. 4. The following questions of law are proposed and pressed:- (i). Whether under the facts and in the circumstances of the case, the Learned ATIR has failed to appreciate that the Registered Person has committed willful default of the provisions of Section 2(43A), 3(9A) and 40C of the Sales Tax Act, 1990 by not integrated his retail outlet with Board's Computerized System for real time reporting of Sales? (ii). Whether the Learned Appellate Tribunal has not failed to appreciate that the provisions of Section 11 of the Sales Tax Act, 1990 could be pressed into service for the purpose of imposition of penalty/default surcharge, in accordance with the schedule prescribed under the provisions of Section 33 of the Sales Act, 1990, on committing of an offense of willful default by a Registered Person? (iii). Whether the Learned ATIR has failed to appreciate that the provision of Section 11 of the Sales Tax, 1990 confers the powers upon an Officer of Inland Revenue to issue a Show Cause Notice and pass order thereon to impose penalty/default surcharge, in accordance with schedule as prescribed under Section 33 of the Sales Tax Act, 1990 on a Tax Defaulter? (iv). Whether under the facts and in the circumstances of the case, the Learned ATIR has failed to appreciate that the penalties/default surcharge, as prescribed at Serial Nos. 24 and 25 of the Section 33 of the Sales Tax Act, 1990 are imposed after commitment of an offense, as prescribed at Column No.1 of the schedule, by the Registered Persons? (v). Whether under the facts and in the circumstances of the case, the Learned ATIR has failed to appreciate that the Appellant (Respondent No.1) has committed willful default of the provisions of Sections 2(43A), 3(9A) and 40C of the Sales Tax Act, 1990 by not integrated his retail outlet with Boar's Computerized System for real time reporting of Sales? (vi). Whether under the facts and in the circumstances of the case, the Learned ATIR has not failed to appreciate that the amount of Tax involved and the amount of Penalties/Default Surcharge is levied under the schedule provided in Section 33 of the Sales Tax Act, 1990, after issuance of Show-Cause Notice upon the Registered Person and adjudication of the case, strictly in accordance with law? 5. Heard. Record perused. DETERMINATION BY THE COURT. 6. The pivotal question before us is whether the powers conferred under Section 11 of the "Act" extends to the imposition of penalty and default surcharge for violations exclusively covered under Sections 2(43A), 3(9A), and 40C of the "Act", read with Serial Nos. 24 and 25 of Section 33 thereof. 7. At the outset, it must be appreciated that Section 11 of the "Act" is a machinery provision. Its statutory object is to empower the Officer of Inland Revenue to detect, assess, and recover any tax, which has either escaped assessment, has not been paid, or has been erroneously refunded. The operative words are "tax not levied or short-levied or erroneously refunded" demonstrating that its entire scope is tethered to the quantification and recovery of a shortfall in tax revenue. The legislative intent of Section 11 of the "Act" is clear from its text, it addresses tax revenue shortfall and its recovery, not regulatory penalties imposed for stands alone statutory breaches unrelated to any deficit in the tax payable. 8. The said provision is silent regarding the creation of offences or the independent imposition of penalties for regulatory breaches that do not necessarily result in a quantifiable tax default. Its scope is not punitive but compensatory and restorative in nature, to protect the exchequer from actual revenue loss. 9. Conversely, the offences for failure to integrate a retail outlet fully or partially with the Board's Computerized System for real-time reporting are distinctly prescribed under Sections 2(43A), 3(9A), and 40C of the "Act", while the penal consequences for such breaches are codified under Section 33 of the "Act", particularly at Serials 24 and 25 further observed that the Table appended to Section 33 of the "Act", including inter alia Serial Nos.24 and 25, prescribes various statutory offences along with the corresponding penalties for each specific breach. These provisions clearly adopt a specific general legislative framework, the specific provision, i.e., Section 33 of the "Act" defines the nature of the offence and stipulates the quantum of penalty or default surcharge applicable thereto. However, the "Act" is conspicuously silent on any detailed procedure for the assessment, computation, or recovery of such penalties where no ascertainable tax shortfall is determined. Section 33 of the "Act", by its design, is declaratory in nature. It creates liability, but does not itself furnish a procedural machinery for quantification or recovery. 10. This structural distinction is well entrenched in the jurisprudence that machinery provisions must operate within the express confines of the substantive charging provisions they support. Any attempt to expand a machinery provision, such as Section 11 of the "Act", to cover penalties for purely regulatory defaults (as described at Serials Nos. 24 and 25, or similar entries in the Table) amounts to reading into the statute a jurisdiction, which the Legislature has not conferred. 11. Where a fiscal statute provides a penal consequence for breach of a statutory duty, such penal consequence must be enforced strictly within the four corners of the enabling provision. The Officer must cite and rely upon the specific statutory authority for both the imposition and recovery of penalty. Absent clear words to the contrary, a machinery provision designed to recover tax shortfall cannot be used as a fallback to recover regulatory penalties that do not flow from tax under assessment. 12. Accordingly, while Section 33 of the "Act" governs the creation of liability for specified offences, it does not itself supply the procedural means for recovering such penalty from the Registered Person, if there is no simultaneous tax shortfall. Any proceedings for penalty under Serial No.24 or 25 must therefore be rooted in the express penalty provisions, and the recovery must follow the adjudication process prescribed by the Act or other relevant enabling provisions, but cannot default to Section 11 of the "Act" in the absence of a short levied tax. This interpretative distinction is reinforced by the well settled principle of "generalia specialibus non derogant" which dictates that where a special provision exists, it overrides the general provision to the extent of any overlap, a principle that applies with even greater force where penal consequences are involved. 13. Furthermore, it is a settled rule of fiscal interpretation that tax statutes, particularly those prescribing penalties or default surcharges, must be construed strictly. Penal provisions cannot be broadened by administrative construction or implication. It is incumbent upon the Department to establish clear statutory authority for each element of any penalty imposed, and an Officer must demonstrate precise adherence to the express language of the statute to justify the levy of any penalty or surcharge. In this regard, reliance is placed on Government of Punjab through Secretary Irrigation and Power and another v. Kunjah Textile Mills Ltd. and others (2025 SCMR 239), wherein the apex Court has held as under:- "10. It is a cardinal principle of taxing statutes that if more than one reasonable interpretation is possible of the charging, or taxing, provision, then the one more favourable to the putative taxpayer is to be adopted, i.e. the one that either takes him out of the charge altogether or (if such be the case) results in a reduced or lessened burden " 14. The applicant-Department is under a statutory obligation to ensure strict compliance with the legislative framework to prevent any jurisdictional defect and to secure that every Show-Cause Notice and any resulting adjudication order is legally tenable. It is a settled principle that the jurisdiction of an administrative adjudicating officer must be exercised strictly in accordance with the enabling statute. Although Section 33 of the "Act", prescribes various offences and their corresponding penalties, it does not itself provide any independent procedural mechanism for the issuance, adjudication, or recovery of such penalties. 15. Therefore, in the absence of such procedure, reliance cannot be placed on a general provision like Section 11 of the "Act", which is confined to tax assessment and recovery, to fill that gap by implication. Any penal action taken without strict adherence to the proper statutory procedure risks being rendered without lawful authority. Additionally, the scheme of the Sales Tax Act makes a conceptual distinction between tax liability and penal liability. Section 11 of the "Act" addresses the former, Section 33 of the "Act" the latter. The default surcharge is a civil consequence of tax shortfall or late payment, flowing automatically once a shortfall is found under Section 11 of the "Act", but a regulatory violation that does not create or prove a tax shortfall cannot be shoehorned into Section 11 of the "Act". 16. In the present case, the Respondents' alleged failure to fully or partially integrate their retail outlet does not, ipso facto, result in a quantifiable shortfall of sales tax that can be brought within the ambit of Section 11 of the "Act". Instead, this default constitutes an independent regulatory offence for which a specific penalty is prescribed under Serial Nos.24 and 25 of Section 33 of the "Act". The statutory design is deliberate: the Legislature has distinguished between revenue shortfalls, which require recovery through assessment under Section 11 of the "Act", and compliance-related breaches, which attract stand-alone penalties under the schedule to Section 33 of the "Act". 17. It is an established rule of interpretation that, where the Legislature has created a distinct penalty for a regulatory contravention without linking it to an ascertainable tax shortfall, the penalty must be enforced strictly under the special provision, not by resorting to a general recovery mechanism intended for unpaid tax. To hold otherwise would blur the line between tax assessment and regulatory adjudication, which the Act keeps separate by design. Furthermore, the imposition of any penalty that carries civil or quasi-criminal consequences demands adherence to the principles of due process, as enshrined under Articles 4 and 10A of the Constitution of the Islamic Republic of Pakistan, 1973. This necessarily requires that the Registered Person be given clear notice of the alleged…

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