When courts stay recovery, can FBR still impose “default surcharge”?

Dr. Ikramul Haq The order of Lahore High Court in Writ Petition No. 24928 of 2026 [Honda Atlas Cars (Pakistan) Limited v Federation of Pakistan & others] passed on April 30, 2026 raises a fundamental constitutional question: can the Federal Board of Revenue (FBR) levy "default surcharge" under section 205 of the Income Tax Ordinance, 2001 where payment obligations were regulated, deferred or suspended through judicial orders passed by constitutional courts? The issue is of immense national importance because it potentially affects hundreds of taxpayers who challenged the constitutionality of super tax under section 4C of the Income Tax Ordinance, 2001 and complied with interim arrangements ordered by the Lahore High Court [(2023) 128 TAX 90 (H.C. Lah.)] & [(2024) 129 TAX 702 (H.C. Lah.)], Sindh High Court [(2023) 127 TAX 112 (H.C. Kar.)], Islamabad High Court [(2023) 128 TAX 141 (H.C. Isl.)] & [(2024) 130 TAX 394 (H.C. Isl.)], and later the Supreme Court/Federal Constitutional Court (FCC) of Pakistan. The petition before the Lahore High Court arose after FBR issued notice on April 2, 2026 under section 205 seeking recovery of "default surcharge" for tax year 2022. The petitioner argued that no surcharge could lawfully be imposed because payments had throughout remained governed by judicial orders. The Court itself recorded that recovery proceedings had earlier been stayed subject to furnishing post-dated cheques and later, following orders of the Supreme Court/FCC, 50% of the liability was deposited and thereafter the remaining disputed amount was deposited immediately after final adjudication. The petitioner's argument, as reflected in paragraph 2 of the order, was legally compelling. Section 205 applies where a taxpayer "fails to pay" tax within time. The expression "fails" is not merely mechanical or arithmetic. It imports a default attributable to taxpayer conduct-negligence, refusal, withholding or inexcusable omission. Where payment stands deferred because a constitutional court itself has suspended recovery or prescribed payment modalities, the delay cannot legally be attributed to taxpayer default. This is not merely a technical issue of tax administration. It goes to the heart of constitutional governance and rule of law. A taxpayer who invokes constitutional jurisdiction to challenge a levy and complies with all judicial directions cannot later be punished for obeying the court. The ancient equitable maxim actus curiae neminem gravabit-an act of the court shall prejudice no one-squarely applies. If constitutional courts regulate recovery through interim orders, the consequences of such judicial arrangements cannot later be converted into grounds for fiscal punishment. The expression "default" connotes an element of willful and deliberate failure to fulfil an obligation and negligence in the performance of duty. Not every failure without any ulterior design and mala fide intention on the part of a person would equate with the expression "default" as used in its strict legal sense. In the words of the apex court [Ghulam Muhammad Lundkhor v. Safder Ali [PLD 1967 SC 530], the word "default" in legal terminology necessarily imports an element of negligence or fault and means something more than mere non-compliance. Yet despite recording the entire legal position, the Lahore High Court stopped short of deciding the constitutional issue. Instead, it accepted the departmental plea that "factual controversy" was involved and remitted the matter back to respondent No. 3 for verification and a speaking order, while temporarily restraining recovery of surcharge until such decision. This part of the order deserves serious constitutional scrutiny. The controversy before the Court was not factual in nature. There was no dispute regarding chronology or compliance. The record already established that: – super tax liability was challenged constitutionally; – recovery was stayed by constitutional courts subject to conditions; – post-dated cheques and deposits were furnished; – payment obligations remained governed by judicial orders; and – remaining liability was deposited after final adjudication. None of these facts required departmental verification. The surviving question was purely legal and jurisdictional: whether section 205 could at all be invoked under such circumstances. Unfortunately, this order reflects a wider institutional trend in tax adjudication where constitutional courts increasingly avoid deciding foundational questions of legality and instead remit matters back to the same executive authorities whose actions are challenged. In practice, this transforms constitutional jurisdiction into a procedural detour rather than an effective constitutional remedy. The constitutional implications of such a non-action are profound. Article 77 of the Constitution mandates that no tax shall be levied except by or under authority of law. This constitutional limitation applies equally to ancillary exactions like surcharge, additional tax or penalty. Where the statutory conditions for invoking section 205 are absent, recovery of surcharge becomes an exaction without lawful authority. Default surcharge under section 205 is not an independent tax. It is compensatory in nature. Its rationale is that the state is deprived of timely use of revenue due to taxpayer default. However, where recovery itself stood suspended through judicial orders, the state cannot logically claim compensation for a delay it was judicially restrained from enforcing. If the FBR's position were accepted, the consequences would be constitutionally dangerous. Every taxpayer obtaining interim relief from constitutional courts would remain exposed to enormous surcharge liabilities even if they fully complied with judicial directions. Constitutional litigation itself would become financially punitive. Interim relief would become illusory because the eventual cost of litigation could exceed the disputed tax itself. This would severely undermine access to justice guaranteed under Article 4 and Article 10A of the Constitution. The matter also exposes a deeper pathology in Pakistan's revenue structure. Increasingly, surcharge provisions are used not as compensatory devices but as coercive revenue extraction mechanisms. In many tax disputes, surcharge and additional tax eventually exceed the principal tax liability itself. The distinction between compensation and punishment becomes blurred. This extraction-oriented approach is especially troubling in the context of section 4C super tax litigation, where the levy itself was challenged on substantial constitutional grounds involving Entries 47 and 52 of Part I of the Federal Legislative List, Fourth Schedule to the Constitution double taxation principles and the limits of Parliament's taxing competence. For years, constitutional courts granted interim protections while these issues remained sub judice. Taxpayers arranged finances and business decisions based on court-approved payment structures. To retrospectively convert such judicially protected periods into "default periods" for surcharge purposes is contrary to fairness, legal certainty and constitutional morality. The Lahore High Court order nevertheless contains one important safeguard. It categorically restrains recovery of default surcharge until respondent No. 3 decides the matter after considering judicial orders and relevant facts through a reasoned and speaking order. This interim protection may provide temporary relief to taxpayers facing aggressive recovery proceedings. However, the larger constitutional issue remains unresolved and will inevitably return before superior courts. Eventually, constitutional courts will have to determine whether lawful exercise of the constitutional right to challenge taxation can itself become the basis for punitive fiscal consequences. The answer should be self-evident in any constitutional democracy governed by rule of law. Where payment obligations are regulated or suspended by judicial orders, no "default" within the meaning of section 205 arises during the protected period. Any contrary interpretation would punish obedience to courts, undermine constitutional remedies and convert tax administration into coercive extraction untethered from legality. Pakistan's constitutional order cannot permit such a result. ___________________________________________________________________ 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 an 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.