Pakistan Case LawINNOVATIVE BISCUITS (PVT.) LTD. Versus COMMISSIONER INLAND REVENUE, LTO, LAHORE
This appeal concerns the disallowance of input tax adjustment by the Commissioner Inland Revenue for supplies made by the appellant, a registered person, to an unregistered person exceeding the statutory threshold prescribed under Section 73(4) of the Sales Tax Act, 1990. The core legal question was whether the payment of "further tax" under Section 3(1A) of the Sales Tax Act, 1990, exempts a taxpayer from the input tax disallowance mandated by Section 73(4) of the same Act, and whether their concurrent application constitutes double taxation or violates Articles 18 and 25 of the Constitution of Pakistan 1973. The Tribunal held that Section 3(1A) and Section 73(4) operate as distinct and independent provisions; the former governs output tax liability while the latter restricts input tax eligibility. Consequently, the payment of further tax does not entitle a taxpayer to input tax adjustments where the statute expressly prohibits them. The Tribunal affirmed the orders of the lower authorities, ruling that the disallowance was legally sound and did not violate constitutional principles. The appeal was dismissed.
- Does the payment of further tax under Section 3(1A) of the Sales Tax Act, 1990, exempt a registered person from the input tax disallowance mandated by Section 73(4) of the same Act?
- Does the concurrent application of Section 3(1A) and Section 73(4) of the Sales Tax Act, 1990, constitute double taxation?
- Is the disallowance of input tax under Section 73(4) of the Sales Tax Act, 1990, a violation of the fundamental rights guaranteed under Articles 18 and 25 of the Constitution of Pakistan 1973?
- Section 73(4), Sales Tax Act 1990
- Section 3(1A), Sales Tax Act 1990
- Section 11(E), Sales Tax Act 1990
- Section 6(2), Sales Tax Act 1990
- Section 7(1), Sales Tax Act 1990
- Section 26, Sales Tax Act 1990
- Section 33, Sales Tax Act 1990
- Section 34(1)(a), Sales Tax Act 1990
- Section 2(25), Sales Tax Act 1990
- Section 8(1)(m), Sales Tax Act 1990
- Article 18, Constitution of Pakistan 1973
- Article 25, Constitution of Pakistan 1973
- Sales Tax Rules, 2006
ORDER
ZAHID SIKANDAR, MEMBER.--- The instant appeal has been filed by the registered person against Order No.12 dated 21.01.2026 passed by Commissioner Inland Revenue (Appeals-I), Lahore whereby the learned appellate authority upheld the order-in-original dated 16.09.2025 and confirmed the disallowance of input tax amounting to Rs.19,299,083/- made under section 73(4) of STA along with default surcharge and penalty.
2.Brief facts of the case are that for tax periods Feb-2024 to May-2024 it revealed that the appellant made taxable supplies exceeding the statutory threshold of 10 million rupees in a tax period to unregistered persons namely Muhammad Shafique (CNIC: 3630297151173) who was not registered person under STA at the time of said transactions. Therefore, the registered person was not entitled to claimed input tax attributable to such taxable supplies in terms of section 73(4) of the STA. Despite crossing the threshold prescribed under section 73(4), the appellant adjusted inadmissible input tax against those supplies. Accordingly proceedings under section 11(E) were initiated by way of issuing show-cause notice dated 29.04.2025. The relevant portion of the show-cause notice is reproduced as under:
1. Whereas according to the provisions of section 73(4) of the Sales Tax Act, 1990 a registered person is not entitled to deduct input tax (credit adjustment or deduction of input tax) which is attributable to such taxable supplies exceeding, in aggregated, one hundred million rupees in financial year or ten million rupees in a tax period as are made to a certain person who not a registered person under the Sales Tax Act, 1990.
2. And whereas, scrutiny of Sales Tax Act and Federal Excise returns furnished by you M/s. Innovative Biscuits (Pvt.) Ltd, Lahore (NTN: 2247712) for the tax period February, 2024 to May,2024 has revealed that you have declared taxable supplies exceeding in ten million rupees in a tax period during the said tax periods to a person namely Muhammad Shafiqe (CNIC 3630297151173) who was not a registered person under the Sales Tax Act, 1990 at the time of said transactions. As per above mentioned laws, you were not entitled to claim/adjust input tax attributable to said taxable supplies exceeding in ten million rupees in a tax period against output tax. However, as per our declarations (ST and FE returns) you have not surrendered the relevant input tax as inadmissible input tax in accordance with the law. The said irregularity has resulted into short payment of sales tax amounting to Rs.19,299,083/-. Month wise details of said taxable supplies and short payment of sales tax are as follows:
Tax period
Value of supplies (Rs)
Total sales (Rs)
Input tax claimed for the month (Rs)
Inadmissible input tax claimed (Rs)
Feb-24
31,539,155/-
437,696,345/-
68,439,115/-
4,931,528/‑
Mar-24
23,041,375/-
589,234,569/-
89,464,075/-
3,498,395/‑
Apr-24
30,235,972/-
681,444,301/-
102,381,995/-
4,542,732/‑
May-24
42,867,529/-
787,004,225/-
116,146,764/-
6,326,427/‑
Total
127,684,031/-
2,495,379,440/-
376,431,949/-
19,299,083
3.Now, on the basis of above, you M/s. Innovative Biscuits (Pvt.) Ltd, Lahore (NTN: 2247712) are charged with the contravention of the provision of section 6(2), 7(1), and 73(4) of the Sales Tax Act, 1990 read with relevant provisions of Chapter II of the Sales Tax Rules, 2006. Furthermore, you have also failed to furnish true, complete, and correct returns which is in violation of section 26 of the Act read with relevant rules. As a natural corollary to preceding discussion, penal provisions under serial Nos.5 and 19 of the table in section 33 of the Act also stand attracted in your case.
4.In light of foregoing, you are called upon to show-cause as to why short paid sales tax amounting Rs.19,299,083/- along with default surcharge (to be calculated at the time of deposit under section 34(1)(a) as a consequence to illegal claim of inadmissible input tax may not be assessed and recovered from you under section 11E of the Sales Tax Act, 1990 due to contravention of sections 6(2), 7(1), 26(1) and 73(4) of the Sales Tax Act, 1990 read with relevant provisions of the Sales Tax Rules, 2006. You are also called upon to show cause as to why penalty under the above-mentioned serials of section 33 of the Act may not be imposed upon you for violation of aforementioned provisions of sales tax law.
3. In response, the appellant submitted the following written reply:
Please refer to your show-cause notice issued vide C. No. Unit-01/21135 dated 29.04.2025 under section 11E of the Sales Tax Act, 1990 proposing disallowance of input tax amounting to Rs.19,299,083/- on the ground that our aggregate supplies to unregistered persons during the tax period from February-2024 to May-2024 exceeded the thresholds of ten million rupees prescribed under section 73(4) of the Sales Tax Act, 1990 in which hearing date is fixed for today i.e. 03.06.2025.
In this behalf, we hereby submit the following response for your kind consideration:
1. Preliminary Submissions:
Our client is a registered person under the Sales Tax Act, 1990 and has consistently complied with the statutory obligations regarding registration, invoicing and return filing. All supplies made to unregistered persons have been duly declared, and further tax under 3(1A) has been paid in accordance with law.
2. Statutory Compliance Already Ensured Through Further Tax:
Section 3(1A) of the Act imposes a further tax of 3% on supplies made to unregistered persons. The objective, as acknowledged in the legislative history, is to discourage undocumented trade by creating a financial disincentive.
In our case, we have duly paid the additional tax of 3% on all such supplies, and such tax has been deposited in the government treasury. Accordingly, the legislative intent behind section 73(4) i.e., promoting documentation has already been served.
To now disallow input tax under section 73(4) in addition to paying further tax under section 3(1A) results in double penalization for the same class of transactions. This is neither contemplated by the statutory scheme nor supported by the principles of indirect taxation.
3. Cumulative Operation is Arbitrary and Disproportionate:
The combined operation of sections 3(1A) imposes an arbitrary and disproportionate burden on registered and compliant taxpayers, such as ourselves, who:
To penalize such taxpayers further by denying input tax adjustment which is a core feature of VAT systems globally results in:
4. Constitutional Violations:
It is respectfully submitted that the denial of input tax despite the collection of further tax infringes upon our fundamental rights guaranteed under the constitution, including:
In light of the above, we respectfully request the withdrawal of the Show-Cause Notice and seek the following relief:
4. The reply, so filed, by the taxpayer was found un-satisfactory and eventually the OIR finalized assessment order and ordered sales tax recovery of inadmissible input tax claimed at Rs.19,299,083/- along with default surcharge (to be calculated at the time of recovery) under section 34 and penalty at Rs.964,954/- (5% of amount of the tax involved) under section 33(5) of STA.
5.Aggrieved, the taxpayer filed appeal before the CIR(A) who vide order No.12 dated 21.01.2026 rejected the same and upheld the assessment order. Hence, the taxpayer has come up further in this second appeal before the tribunal in agitation against the orders passed by the learned authorities below. After examining the grounds of appeal and contentions of the learned AR for the appellant, submissions made by the learned AR may be summarized as under:
Conversely, the learned DR opposed the contentions and supported the impugned order for the reasons recorded therein.
6.Primarily, the learned AR argued that since the taxpayer has paid further tax under section 3(1A) having been made supplies to unregistered person therefore disallowance of input tax is arbitrary, discriminatory and amounts to double taxation. The argument is misconceived and legally untenable. Section 3(1A) is a charging provision mandating levy of further tax on supplies made to unregistered persons. Whereas section 73(4) is a restricted/disentitling provision which barred adjustment of input tax attributable to specific supplies beyond the prescribed threshold. Both the provisions operate distinctively and independently. Section 3(1A) governs output tax liability whereas section 73(4) deals with eligibility of input tax adjustment. Besides, payment of further tax does not create a statutory right to input tax adjustment where the law expressly disentitles such claim. The legislator has consciously retained both provisions and law does not permit one provision to nullify the other.
7.The plea of double taxation is also incorrect. Further tax under section 3(1A) is collected from the person as part of sale consideration whereas denial of input tax under section 73(4) is a consequence attached to the supplier conduct upon crossing the statutory threshold. Any fiscal consequence attached to different statutory provision cannot be equated with double jeopardy merely because it arises from same transaction. The cumulative operation of section 3(1A) and section 73(4) does not offend any constitutional or legal principle. We also do not find any violation of Articles 18 and 25 of the constitution hence, the argument in respect of discriminatory treatment is also without merit. As per section 73(4) once the threshold is crossed, the taxable supplies assume the character of 'such taxable supplies' rendering entire input tax attributable inadmissible. This interpretation is reinforced by STGO No.1 of 2020 dated 16.01.2020 which clarifies that the threshold supplies per buyer and once crossed 73(4) is triggered is full. Therefore, the plea of proportional partial disallowance only to the extent of amount exceeding the threshold is contrary to law. The learned AR also relied upon amendments made in section 73(4) made via Finance Act, 2025 however after examination we find the said amendment as prospective and not applicable to present case.
8.It is also of importance to highlight that similar preposition came up before the Hon'ble Lahore High Court (Multan Bench) in a case STR No.34/2023 titled as CIR v. M/s AN Textile Mills Limited where the Hon'ble court decided the reference application in favour of the department in the following terms:--
"6. At the outset, it appears that submission by the counsel suffers from self-contradiction. Appellate Tribunal recorded findings to the effect that supplier in this case, which is respondent, had paid further tax against the supplies made to persons not registered, who had not obtained registration number in terms of section 3 (1A) of Act, 1990. If recipients of supplies, who have had not obtained registration number, are treated as not registered persons for the purposes of further tax, how could they be treated as deemed registered person for the purposes of subsection (4) of Section 73 of the Act, 1990. It is axiomatic that on one hand respondent had paid further tax qua the supplies made to person, without obtained registration number, and on the other, benefit is claimed simultaneously qua the supplies to person not registered, but simply claim to be potentially registerable persons under section 2(25) of the Act, 1990.
Subsection (4) of section 73 of the Act, 1990 contemplates and extends specific/exclusive benefit to the registered person, upon allowing claim of input tax qua taxable supplies when made within the limits prescribed, which benefit, by any stretch of imagination, cannot be doled out to non-registered recipient by banking upon section 2(25) of the Act, 1990, which section cannot be construed contrary to the subject and context of sub-section (4) of section 73 of the Act, 1990. We have no ambiguity that in case of inconsistency between section 2(25) of the Act and subsection (4) of section 73 of the Act, 1990, latter provision of the law would prevail - definition clause starts with qualification that In this Act, unless there is anything repugnant in the subject or context . Subsection (4) of section 73 of the Act, 1990 cannot be rendered repugnant by extending preference to the definition/interpretation clause. Even otherwise proviso to section 2(25) of the Act, 1990 envisaged benefit for potentially registerable person and such benefit cannot be extended or claimed by the registered person. Subsection (4) of section 73 of the Act, 1990 is a special provision, dealing with specific situation and providing special concession/benefit, and effect thereof cannot be invalidated in the context of general provisions. Reference to section 8(1)(m) of the Act, 1990 by Appellate Tribunal is misplaced, which provision specifically deals with input goods, attributable to the supplies.
7. In view of the aforesaid, Appellate Tribunal misconstrued scope, extent and distinctiveness of subsection (4) of section 73 of the Act, 1990, which erred in law while extending unwarranted preference to section 2(25) of the Act, 1990 which construction and treatment constitute an illegality.
8. First and second questions are answered in negative. Reference Application is decided in favour of applicant department"
9.In the above judgment, the Hon'ble Court categorically held that subsection (4) of section 73 is a special provision dealing with specific situation and providing special concession/benefit, and effect thereof cannot be invalidated in the context of general provisions.
10.After examining the contentions of the learned representatives of rival parties, relevant provisions of law and judgment on the issue, we have come to conclusion that the assessing officer rightly disallowed input tax being inadmissible as admittedly the appellant crossed the threshold prescribed in section 73(4). The order of CIR(A) in confirming the disallowance of input tax does not suffer from legal infirmity hence, the same is accordingly upheld.
11.Consequently, the titled taxpayer's appeal is dismissed.
MQ/19/TAX(TRIB) Appeal dismissed.
Judges on this bench
- Zahid Sikandar42 judgments