Dr. Ikramul Haq
Modern governance continually commits a perilous error: it assumes that naming something alone can substitute fiction as reality, and that official assertions can replace factual and legitimate reality. Across legal systems, declarations—notifications, and administrative descriptions—are routinely treated as if they possess the power to make fallacies as facts. In tax laws, legal fiction (sic) is increasing becoming legal farce!
The holy Qur’an, in two verses (33:4–5) of Surah al-Ahzab, debunks fallacy—it is neither metaphorical nor moral sermonizing—it is unmistakably legal. The Qur’anic command in these verses is purely legislative guidance. It first dismantles false equivalences—wife is not “mother” by utterance; the adopted is not “biological son” by proclamation—then establishes a rule of attribution: where origin is known it must be followed; where it is unknown, the law must re-categorize (companionship/brotherhood/association) rather than fabricate lineage.
Verse 33:5 moves from negation to rule making. Identity must be attributed to verifiable origin. Where origin is known, attribution must follow it. Where origin is unknown, the holy Qur’an does not permit invention. Instead, it creates an alternative legal category—brotherhood in faith and protected association (mawālī). The law may re-categorize, but it must not falsify. The deeper lesson is epistemic and legislative: law may create classifications, but it cannot manufacture “truth” (sic) by assertion alone. Verbal utterances that sever themselves from reality become what the Qur’an pointedly calls qawlukum bi-afwāhikum—mere mouth-statements.
The Qur’anic guidance on reality-based attribution finds its reflection in Pakistan’s constitutional framework. Article 4 of the Constitution of Islamic Republic of Pakistan [“Constitution”] requires that citizens should be treated “in accordance with law”; Article 10A constitutionalizes due process; Articles 9 and 14 protect right to life and Article 23 and 24 protect property and business from compulsory exaction except by lawful authority and rational classification.
Article 227 of the supreme law of the land goes further, constitutionally obligating conformity of all laws with the holy Qur’an and Sunnah and prohibiting enactment of laws repugnant to Qur’anic injunctions. However, constitutional discipline is not merely textual; it is judicially enforced.
The Supreme Court has repeatedly affirmed that the Constitution is supreme and that laws/instruments inconsistent with it are void. In Sindh High Court Bar Association v Federation of Pakistan (PLD 2009 SC 879), the Court treated constitutional supremacy not as rhetoric but as binding doctrine.
Legal fiction without nexus
Tax laws, more than most fields, use legal fiction indiscriminately. Deeming provisions exist because taxation must sometimes treat something “as if” it were something else—so that avoidance does not defeat liability, and form does not trump substance—Elahi Cotton Mills Ltd. v Federation of Pakistan [1997] 76 TAX 5 (S.C.Pak.); AIR 1931 Lahore 572; Sriramulu Naidu (G) v CTO (1975) 35 STC 531 (AP); Subhash Ganpatrao Buty v Maroti Krishany AIR 1975 Bom, 244; 1998 PTD 1250; ITO v Short Bros (P) Ltd. AIR (1967) SC 81; and (1966) 60 ITR 83 (SC).
A statutory fiction can be legitimate, even necessary. However, valid legal fiction has boundaries: it must be tethered to a coherent purpose, and it must operate within a discernible nexus—a rational connection between the charge, the person charged, the tax period, and the taxable subject. The well-established jurisprudence of country’s Supreme Court enunciates this with clarity.
In Elahi Cotton Mills Ltd v Federation of Pakistan (PLD 1997 SC 582), the Supreme Court articulated controlling principles on tax interpretation, including that legal fictions are limited for a definite purpose and cannot be extended beyond the purpose for which they are created. This is not a technical footnote; it is the constitutional difference between a lawful deeming provision and a drafting trick that converts compulsory exaction into “tax” by nomenclature.
Indian jurisprudence—relevant because our tax heritage/architecture and interpretive precedents have common roots—expresses the same constraint. In CIT, Madras v T.V. Sundaram Iyengar (P) Ltd (Supreme Court of India), the Court warned that a statutory fiction could not be carried beyond its defined purpose; it may not be extended to create consequences the legislature did not specify.
This is the doctrinal core: a legal fiction is valid only within the well-established doctrine of nexus. Once fiction is devoid of nexus, it ceases to be a legal tool and becomes a legal farce. The doctrine of nexus in taxation covers time, person, place, income—and territorial connection.
In taxation, “nexus doctrine” operates on multiple levels:
- Nexus with the person: liability must attach to a legally identifiable subject.
- Nexus with time: a tax must relate to a defined period (tax year) and an event or state within that period.
- Nexus with the taxable subject: income tax must relate to income (actual, accrued, or reasonably attributable through a coherent charging concept), not merely to ownership or existence unless the Constitution and statute clearly create a different tax.
- Territorial nexus: jurisdiction to tax must have a meaningful connection with the transaction/person/object taxed.
On the territorial nexus side, the Indian Supreme Court’s classic statement remains influential: Tata Iron & Steel Co. Ltd v State of Bihar (AIR 1958 SC 452) upheld a tax where there was sufficient territorial connection between the State and the taxed activity—what later commentary calls “nexus theory.”
Pakistan’s courts, too, apply territorial nexus reasoning across public law contexts, and fiscal disputes frequently turn on whether the jurisdiction asserting power has a meaningful connection to what it seeks to regulate or tax.
When deeming becomes coercion: the warning from “real income” and presumptive logic
The most common modern misuse is to treat deeming provisions as a licence to avoid proving the taxable fact. Instead of deeming rules operating as carefully limited bridges from one factual state to a defined legal consequence, they are sometimes deployed as substitutes for inquiry itself.
Pakistan’s Supreme Court has been alive to this danger in the context of presumptive/deemed constructs. In Pakistan State Oil Ltd v Commissioner of Income Tax (2018 PTD 1306), the Court dealt with the logic and limits of presumptive taxation and emphasised that taxation must remain intelligible within the legal scheme—it cannot become an exercise where labels defeat substance.
That is the broader point. The law may deem—but it must not invent. It may classify—but it must not counterfeit.
Qur’anic command: re-categorizing versus falsifying
Surah al-Ahzab (33:4–5) is often read only through the morality lens of social reform, but its legal sweep is deeper. It forbids to let language manufacture legal status. Where truth exists, attribution must follow it. Where truth is unknown, the law must create a humane alternative category—association, fraternity, protection—without falsifying lineage. That is precisely the discipline modern fiscal drafting needs.
Where the state lacks the evidentiary basis to connect a charge to income, it has constitutionally legitimate options: improve enforcement capacity, widen documentation, rationalize rates, reframe tax transparently under the correct constitutional head, and legislate with candour. What it cannot do—without undermining legality itself—is to treat phraseology (“deemed” or “deeming”) as an escape hatch from the doctrine of nexus.
This is also where Article 227 of the Constitution becomes more than a decorative clause. The Qur’an condemns the binding of people through verbal constructs divorced from reality. Then a constitutional provision exists, mandating Qur’anic conformity cannot remain indifferent to statutes that attempt to impose liability through nomenclature without nexus.
The constitutional bottom line
A lawful state is not one that never uses legal fictions; it is one that uses them honestly—within purpose, within nexus, and within constitutional structure. The moment law starts treating baseless assertions/assumptions as if they were reality, it moves from governance to coercion. Pakistan’s constitutional scheme does not permit such a drift.
A particularly instructive illustration is section 7E of the Income Tax Ordinance, 2001. Section 7E imposes a charge on the capital value of immovable property irrespective of whether the property generates income or has any nexus with capacity to earn rent during the tax year. In pith and substance, section 7E is not a charge on income at all; it is a tax on ownership of an asset, camouflaged as income tax on deemed rent.
Tax jurisprudence permits legal fiction only where it establishes nexus—with person, place, time, and income. Section 7E presents none. It deems ownership itself to be income, notwithstanding the fact that no rent is even receivable. This is not a recognised legal fiction; it is a conceptual substitution, replacing reality with assumption.
Section 7E of the Income Tax Ordinance, 2001 thus exemplifies a classic broader institutional malaise—the growing comfort with fiction untethered from doctrine of nexus. Such measures may endure administratively for a time, but jurisprudentially they remain what they are: not valid legal fictions, but a worst example of legal farce.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.