APPELLATE TRIBUNAL INLAND
REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.127/IB/2025
MA(Stay) No. 628/IB/2025
(Tax
Year, 2024)
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Mr. Khairullah Khan;
House No. F-151, Street No.07, Phase-II, Officers Colony, Wah Cantt, Taxila,
Rawalpindi. NTN: 3740686300799 |
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Appellant |
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Vs |
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Deputy Commissioner
Inland Revenue, Zone-Cantt., RTO, Rawalpindi. |
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Respondent |
Appellant By: Mr.
Aamir Javed, FCA
Mr.
Shariq Tanveer, Advocate
Respondent BY: Mr.
Naeem Hassan, DR
Date of Hearing: 16.06.2025
Date of Order: 16.06.2025
ORDER
M. M.
AKRAM (Judicial Member): The appellant has
preferred the present appeal to challenge the order dated July 30, 2024, issued
by the Deputy Commissioner Inland Revenue (DCIR), Zone-Cantt, Range-I, Regional
Tax Office (RTO), Rawalpindi, under Section 4C of the Income Tax Ordinance,
2001 (“the Ordinance”), pertaining to the tax year 2024. The appeal is
based on the grounds enumerated in the accompanying memorandum of appeal.
Additionally, a miscellaneous application seeking a stay of the impugned order
has been filed along with the appeal.
Facts of the case:
2. The
brief facts of the case are that the appellant declared income under the head
of capital gains arising from the sale of ancestral property amounting to Rs.
1,147,258,220 for the tax year 2024. The return was deemed to be finalized
under Section 120(1) of the Ordinance. However, the assessing officer held that
the appellant was liable to pay Super Tax under Section 4C of the Ordinance and
had failed to discharge this obligation. Accordingly, a notice dated January
28, 2025, was issued under Section 4C, requiring compliance by February 11,
2025. The contents of the said notice are duly reproduced in the impugned
order. A subsequent letter dated February 17, 2025, was also issued, directing
compliance by February 24, 2025, but no response was received from the
appellant. Due to the appellant’s failure to respond, the department proceeded
to issue the impugned order dated February 28, 2025, directing the recovery of
Super Tax amounting to Rs. 114,715,822 based on the available record.
3. Aggrieved
by the aforementioned order, the appellant has filed the instant appeal before
this Tribunal, contesting the order on the grounds set forth in the memorandum
of appeal.
Submissions of the parties:
4. The
matter was finally heard by this Tribunal on June 16, 2025. During the
proceedings, the appellant’s Authorized Representative (AR) argued that Super
Tax under Section 4C of the Ordinance applies only to “taxable income” as
defined under Section 9, not to “total income” under Section 10. The AR
emphasized that the law clearly links the chargeability of Super Tax to income
chargeable under Section 9, and if the legislature had intended to include
exempt income, it would have explicitly mentioned Section 10 and the term “total
income.” The capital gain in question arises from the sale of ancestral
agricultural property held for over six years. According to serial No. 7 of
Division VIII, Part I of the First Schedule to the Ordinance, such gains are
taxed at 0%, effectively rendering them exempt. The AR argued that since this
gain is not chargeable to tax, it does not qualify as “income” under Section
2(29) of the Ordinance, which defines income to include only amounts that are
actually taxable.
The appellant further
contended that both the legislative history and the Federal Board of Revenue
(FBR) Circular No. 15 of 2022-23 confirm the intention to exempt capital gains
on property held for extended periods. The 0% tax rate is a continuation of the
previous exemption regime and not a hidden form of taxation. It was also argued
that Section 4C has a specific, narrow scope and does not extend to exempt
income. Since the capital gain in question is not chargeable to tax, it does
not fall under any head of income for the purposes of Super Tax. In support of
this, the appellant cited the precedent set by this Tribunal in the case of M/s Eastern Textiles (Pvt.) Ltd (ITA
No.1649/KB/2021), where it was held that
similar exempt capital gains were not subject to Super Tax under Section 4B,
which has provisions parallel to Section 4C.
Additionally, the appellant
relied on the principle of interpretation established by the courts in M/s Kunjah Textile Mills Ltd.,
where it was held that if a tax provision can be reasonably interpreted in more
than one way, the interpretation most favorable to the taxpayer should be
adopted. Therefore, the 0% rate should be treated as an exemption, not as
income for tax purposes. Lastly, the principle of consistency in legal
interpretation was invoked. The AR argued that since the Tribunal has
previously held that such capital gains are exempt and not subject to Super
Tax, a consistent approach should be followed unless there is a material
difference, which there is not in this case.
5. On
the contrary, the learned Departmental Representative (DR) opposed the appeal,
arguing that Section 4C is a separate charging provision and applies to
high-income individuals or entities regardless of the source of income. The
gain in question, while taxed at 0%, still forms part of taxable income
declared and thus falls within the purview of Section 4C.
FINDINGS
6. We have heard
the parties at length and have also considered the verbal as well as written
arguments advanced by the learned AR for the appellant. The appellant taxpayer has
challenged the applicability of Super Tax under Section 4C of the Ordinance on
capital gains arising from the sale of immovable property held for more than
six years, primarily arguing that such gain is exempt due to the 0% tax rate
provided under serial No.7 of Division VIII, Part I of the First Schedule to
the Ordinance. Before adverting to the legal
controversies raised by the learned AR it is
imperative to first understand the broader scheme of the Ordinance, specifically
the legislative structure and conceptual distinction between “taxable income”
and “exempt
income”. These two terms, while interrelated,
carry distinct meanings and legal implications under the tax framework.
A. General Understanding of Income
1. Not All Receipts Are Income:
It
is fundamental that not every receipt or inflow of funds constitutes
"income" for tax purposes. For instance, capital contributions or
loans received by a person are not income, even though they increase the cash
position.
2. Nature of Income:
In
general parlance, income refers to money received either in return for services
rendered or from investment of capital. Income typically implies a periodic or recurring return
derived from a recognized and stable source such as employment, business, or
assets.
3. Capital vs. Revenue Receipts:
a) Capital receipts
are generally not
taxable unless the Ordinance specifically
declares them to be so. Examples include:
§ Proceeds
from the sale of personal property or capital assets.
§ Gifts
and inheritances (unless otherwise treated under tax laws).
b) Revenue receipts,
on the other hand, are ordinarily taxable
unless an express exemption is provided. This includes income from salaries,
business, and property.
4. Capital Receipts Deemed Income:
Certain
receipts, although capital in nature, are deemed as income through express
legal fiction in the Ordinance. For example:
a) Golden
handshake or severance payments.
b) Capital
gains on the sale of immovable property, securities, or valuable personal
assets such as jewellery or paintings.
5. Revenue Receipts Excluded from Tax:
Conversely,
some revenue receipts that would ordinarily be subject to tax are excluded by law,
such as:
a) Agricultural
income.
b) Income
of diplomatic staff or foreign government representatives.
c) Income
of certain exempt institutions like the State Bank of Pakistan, Shaukat Khanum
Hospital, or Indus Hospital.
B. Definition
of Income Under the Ordinance (Section 2(29))
The Ordinance expands upon
the conventional understanding of income and defines it comprehensively to
include:
1. Commonly Understood Income:
Any amount that falls within the traditional understanding of income.
2. Amounts Chargeable to Tax:
Any receipt explicitly made taxable under any provision of the Ordinance.
3. Amounts Subject to Final Tax:
Even those amounts which have been subjected to tax deduction or collection as
a final discharge of tax liability are treated as income.
4. Deemed Income: Any
amount that is treated
as income through legal fiction created by the
Ordinance.
5. Loss of Income:
Interestingly, even a loss
of income (such as unrealized loss or deductible
loss) is treated as part of income for certain computational purposes.
C. Classification:
Non-Income vs. Exempt Income vs. Income Taxable at 0%
The Ordinance identifies
three key categories of receipts, each with a distinct legal treatment:
Non-Income:
Receipts which are not
classified as income at all under the tax law
(e.g., loans, capital injections).
1. Exempt Income:
Income
which qualifies as
income but is explicitly exempted
from tax by virtue of Section
53 read with the Second Schedule
of the Ordinance. The exemption may be absolute or subject to conditions.
For instance, profit on certain investments or foreign-sourced income in
specific cases may be exempt.
2. Income Taxable at 0%:
This
refers to income
which is taxable, but the applicable tax rate is 0%.
It remains a part of the taxable framework and can have implications for other
provisions (such as determining thresholds, filing requirements, etc.).
D. Definition and Scope of Tax (Section
2(63))
The term “tax”
under the Ordinance encompasses:
·
Income tax levied under the
charging provisions.
·
Penalties, fees, and other
amounts payable under the Ordinance.
Thus, even though a person may not have any
tax liability in the traditional sense, they may still incur obligations under
this broader definition of “tax.”
E. Charging Provision (Section 4) – Tax on
Taxable Income
Section 4 of the Ordinance
serves as the charging
section, which imposes income tax only on "taxable income",
not on total income. This distinction is crucial.
·
The term "taxable income"
is defined in Section 9.
·
It specifically excludes any income that is exempt under the
Ordinance, including those provided in the Second
Schedule.
·
Therefore, exempt income is not subject to tax
and does not fall within the charge under Section 4.
F. Taxable Income vs. Total Income (Sections
9 and 10)
1.
Total Income (Section 10):
Total income includes two
blocks:
·
Block
A: Aggregate of income under all five heads:
o Salary
(Section 12)
o Income
from Property (Section 15)
o Business
Income (Section 18)
o Capital
Gains (Sections 37 & 37A)
o Income
from Other Sources (Section 39)
·
Block
B: Income which is exempt from tax,
but still recorded as part of the total income for disclosure and other
computational purposes.
2.
Taxable Income (Section 9):
Taxable income is calculated
by excluding the
exempt income from total income and
subtracting any deductible
allowances allowed under the Ordinance.
Taxable
Income = Total Income – Exempt Income – Deductible Allowances
·
However, the taxable income cannot be negative,
meaning losses or deductions cannot reduce taxable income below zero.
·
Exempt income, although a part of total
income, is ring-fenced and not subject to taxation.
G. Treatment
of Exempt Income (Section 53)
Exempt income under Section
53, supported by detailed entries in the Second Schedule, includes various
forms of income that are either permanently or conditionally relieved from tax.
These exemptions may apply based on:
·
Nature of the income.
·
Status of the recipient.
·
The purpose for which the
income is used.
·
Specific sectors or
institutions.
Such income, although part of total income, is
excluded when
computing the taxable income and hence, not
chargeable to tax.
Conclusion:
Based on the above statutory framework it is
clear that:
i. The
charging of
tax under the Ordinance is solely on taxable income,
not on total income.
ii. Exempt income does
not enter the computation of taxable income and cannot be taxed unless
expressly brought back into the tax net.
iii. Income
taxed at 0% is technically part of taxable income but results in no tax
payable.
iv. This
legislative design ensures that exemptions are not merely procedural
but are substantive in nature,
effectively removing such income from the scope of taxation.
7. We
now turn to the legal controversy that has arisen between the parties. Upon a
thorough examination of the relevant provisions of the Ordinance, particularly
with regard to the distinction between "taxable income" and
"exempt income," it is evident that the imposition of Super Tax under
Section 4C is governed by an independent charging provision, distinct from the
general charging provision contained in Section 4. Section 4C levies a separate
charge on the “income” of persons whose income exceeds a specified threshold,
and its applicability is not confined to “taxable income” as defined under
Section 9 of the Ordinance. In this context, the arguments advanced by the
taxpayer are found to be misconceived, both in fact and law, for the following
reasons:
7.1 Capital Gain is Taxable
under Section 37 — Not Exempt
The taxpayer's foundational argument that capital gain on the sale of
property (open plots) held for more than six years is "exempt" is
flawed. Section 37 of the Ordinance governs the taxation of capital gains on
the disposal of capital assets, including immovable property. The provision
clearly subjects such gains to tax. The relevant provision of section 37
is reproduced below:
“37. Capital gains.—
(1) Subject to this Ordinance, a gain arising on the disposal of a capital
asset by a person in a tax year, other than a gain that is exempt from tax
under this Ordinance, shall be chargeable to tax in that year under the head
“Capital Gains”.
(1A) Notwithstanding anything contained in
sub-section (1), gain arising on disposal of immovable property
situated in Pakistan, to a person in a tax year shall be chargeable to
tax under the head capital gains at the rates specified in Division
VIII of Part I of the First Schedule.” (Emphasis supplied)
While it is true that Serial
No. 7 of Division VIII provides a 0% tax rate for capital gains on open plots
held for more than six years, a 0% rate does not imply exemption. The
capital gain continues to fall within the charging provision (Section 37), is
computed as taxable income, and is subjected to a rate of tax, even though that
rate is currently 0%.
This distinction is
critical. The Income Tax Ordinance treats “exempt income” and “taxable
income taxed at 0%” differently as discussed above. Exempt income is not
included in taxable income at all and is separately reported, whereas
income taxed at 0% is included in taxable income and subjected to computation
under the applicable heads.
Therefore, the capital gain in this case is not exempt. It is chargeable
under Section 37 and is only taxed at 0% due to the applicable rate in the
First Schedule to the Ordinance. Being chargeable under a substantive
provision, it forms part of “taxable income” and is subject to super tax
under Section 4C.
7.2 For Ease of Reference
S.4C is reproduced below as follows:
“4C. Super
tax on high earning persons. ― (1) A super tax shall be imposed for tax
year 2022 and onwards at the rates specified in Division IIB of Part I of the
First Schedule, on income of every person:
Provided
that this section shall not apply to a banking company for tax year 2022.
(2) For the
purposes of this section, “income” shall be the sum of the following: —
(i) profit on debt, dividend, capital
gains, brokerage and commission;
(ii)
taxable income (other than brought forward depreciation and brought forward
business losses) under section 9 of the Ordinance, excluding amounts specified
in clause (i);………….
……………………”
(emphasis supplied)
The
capital gain under discussion though taxed at 0% falls squarely within Section
4C(2)(i), which includes “capital gains” as a specific category of income
subject to super tax. The provision does not qualify or exclude capital gains
based on the applicable rate. Hence, the mere fact that the applicable tax rate
is zero percent does not derogate from its classification as income chargeable
to tax. It continues to form part of total and taxable income and thereby
qualifies as income for the purposes of any surcharge or additional fiscal
levy.
This
interpretation has found judicial endorsement in comparative jurisprudence. In CIT
v. Williamson Financial Services Ltd, (2008) 297 ITR 17 (SC), the
Supreme Court of India stated that:
“There
is a vital difference between income not chargeable to tax and not includible
in the total income … and income which forms part of total income, but which is
made tax‑free…”
Thus,
we are satisfied that the capital gain realized by the
appellant from the disposal of immovable property held for over six years is not exempt income under
the Ordinance. It is income
chargeable to tax, albeit at a 0% rate under Section 37, and it
falls squarely within the scope of “income” under Section 4C(2)(i). It is therefore subject to the levy of super tax
in accordance with the rates prescribed under
Division IIB of Part I of
the First Schedule to the Ordinance.
7.3. Misinterpretation of “Income” and “Taxable Income”
The taxpayer relies on Section 2(29) of the Ordinance, which defines
"income" as amounts chargeable to tax. However, the capital gain in
question is indeed chargeable to tax under Section 37, the only reason the tax is not payable is
because the applicable rate is 0%. This does not render the gain
unchargeable, nor does it recharacterize it as exempt. Additionally, the
definition of “taxable income” under Section 9 of the Ordinance means the total
income of a person is reduced by certain allowable adjustments. The gain, being
computed and included under the head “Capital Gains,” clearly falls under total
income and then taxable income. The mere application of a 0% rate does not
disqualify it from being treated as income for purposes of computing super
tax. The taxpayer’s interpretation would lead to absurd results, where any
income subject to concessional or zero rates would escape the super tax net,
contrary to the intent and scheme of Section 4C.
7.4. Legislative Intent and Circular No. 15 of 2022-23
The taxpayer's reliance on legislative history and FBR Circular No. 15
of 2022-23 is misplaced. The Circular simply explains the rate structure,
including the application of 0% tax where the holding period exceeds the
prescribed threshold. It does not classify such gains as exempt, nor
does it suggest that they are excluded from total or taxable income. On the
contrary, the fact that such gains are subject to specific holding periods
and listed in the rate table confirms their taxable nature under
Section 37 and their inclusion in the base for purposes such as super tax. If
the legislature intended to exempt these gains entirely, it would have done so
by expressly stating such income is exempt under a specific clause of the
Second Schedule to the Ordinance, which it has not. This supports the
conclusion that the gain is taxable income, albeit taxed at 0%, and is
therefore subject to super tax.
7.5. Specific Language of Section 4C
Section 4C imposes a super tax on income exceeding the prescribed
thresholds, as calculated under the Ordinance. There is no exclusion clause
in Section 4C for income taxed at a 0% rate. The provision uses the language: “
there shall be imposed a super tax on income of every person.....”
which includes all forms of income unless specifically exempted by law. If the
legislature had intended to exclude 0%-rated income from the scope of super
tax, it would have clearly carved out such an exclusion within Section 4C or
through the Second Schedule. The absence of such language implies legislative
intent to include all taxable income, even if taxed at zero.
The taxpayer has placed
reliance on the decision in M/s
Eastern Textiles (Pvt.) Ltd. v. CIR Audit-III, CTO, Karachi
(ITA No. 1649/KB/2021), which pertained to the interpretation of Section 4B of
the Ordinance. We have carefully reviewed the said judgment. In that case, the
Tribunal, while adjudicating the taxpayer’s appeal, observed as follows:
"7.
As per our understanding, super tax is chargeable on capital gain only when the
holding period does not exceed five years. However, in cases where the holding
period exceeds five years—as in the present case where the immovable property
was purchased on 20.03.1992 and sold on 29.12.2016, as evidenced by the
documents produced before us—super tax is not applicable..."
It is evident that the Tribunal’s conclusion
in Eastern
Textiles was based on the specific factual
circumstances and the interpretation of Section 4B. However, it must be noted
that the Tribunal, in rendering that decision, was not adequately assisted in
relation to the broader legislative framework of the Ordinance, particularly
the statutory distinction and interplay between the concepts of “taxable
income” and “exempt income.” While these terms are interrelated, they are not
synonymous; each carries its own legal meaning and consequences within the
structure of the tax regime. Importantly, Section 4C represents a distinct and
independent charging provision, introduced with a broader legislative intent. Section 4C is designed to target high-income
individuals and entities, irrespective of whether the income in question is
subject to normal tax rates or enjoys concessional treatment. The scope of
Section 4C is thus more expansive and applies to the aggregate “income” of a
person, exceeding a specified threshold, without being confined to the narrower
definition of “taxable income” as contained in Section 9. Accordingly, judicial
precedents such as Eastern
Textiles must be applied with due regard to their
specific factual and legal contexts. They cannot be transposed wholesale to
other statutory provisions without carefully considering the nature of the
income involved, the language and intent of the relevant provision, and the
overall scheme and purpose of the legislation. In this regard, the principle
laid down in Eastern
Textiles cannot be directly extended to matters arising
under Section 4C, particularly where the income under consideration—such as
capital gains—is chargeable to tax under Section 37, and thus falls within the
ambit of income targeted by Section 4C.
7.6. Principle of Strict
Interpretation Does Not Override Clear Legislative Scheme.
The taxpayer places reliance
on the principle enunciated in the case of Kunjah Textile Mills Ltd.
(Civil Appeal No. 256 of 2011), wherein it was held:
“It
is a cardinal principle of taxing statutes that if more than one reasonable
interpretation is possible of the charging provision, then the one more
favourable to the putative taxpayer is to be adopted, i.e., the one that either
excludes the taxpayer from the charge altogether or, if applicable, results in
a reduced or mitigated liability.”
In this context, the contention advanced by
the learned counsel for the appellant that any ambiguity or conflict in the
provisions of a fiscal statute must be construed in favour of the subject is
well-founded. This principle finds affirmation in the authoritative judgment of
the Hon’ble Supreme Court in the case of M/s Pakistan Television Corporation v.
Commissioner Inland Revenue
(2017 SCMR 1136), wherein it was unequivocally observed that:
“It
is trite law that fiscal statutes, particularly those provisions which create
tax liability, must be interpreted strictly, and any doubt arising therefrom
must be resolved in favour of the taxpayer.”
Similarly, in the case of B.P. Biscuit Factory Ltd. v. Wealth Tax
Officer (1996 SCMR 1470), the Apex Court
underscored that when the statutory language is ambiguous and susceptible to
multiple interpretations, the benefit of the doubt must be extended to the
citizen. However, the courts have consistently drawn a clear distinction: where
the language of a fiscal statute is plain, precise, and unambiguous, there
exists no room for equity or judicial discretion. The interpretive focus must
remain confined to the text itself.
In light of this interpretive
framework, a plain reading of Section 4C of the Ordinance reveals no vagueness,
obscurity, or internal inconsistency. The provision explicitly brings specified
income within the tax net akin to the treatment under Section 37 and
subsequently applies a zero rate through the relevant Schedule, where
applicable. There is, therefore, no interpretational ambiguity warranting
resolution in favour of the taxpayer. It is a settled principle of statutory
construction that where the language employed by the legislature is clear and
unequivocal, the courts must adhere to its literal and ordinary meaning.
Judicial interpretation cannot be permitted to modify, supplement, or delete
any part of the statutory text under the pretext of construction. Any attempt
to deviate from the literal rule by structurally altering or inserting language
into a clear statutory provision would not only transgress established
interpretive boundaries but also risk undermining legislative intent.
The judiciary does not
possess legislative authority. Courts cannot recast or reconstruct statutory
provisions, nor can they add to or subtract from them unless explicitly
warranted by recognized interpretive doctrines. The intent of the legislature
must be honoured in both letter and spirit, and courts are under an obligation
to give full effect to the clear language employed therein. Judicial wisdom,
however well-intentioned, cannot supplant legislative will.
Section 4C, being a component
of a fiscal enactment, must thus be construed with strict adherence to its
textual clarity. In this regard, the Supreme Court in Star Textile Mills Ltd. v. Government of Sindh
(2002 SCMR 3561) reaffirmed the principle that tax statutes must be interpreted
strictly, with no scope for implication. It emphasized that “tax and equity are
strangers,” highlighting the inapplicability of equitable considerations in tax
interpretation.
Moreover, in Province of the Punjab v. Muhammad Aslam
(2004 SCMR 1649), while interpreting provisions of the West Pakistan Urban
Immovable Property Tax Act, 1958, a fiscal statute, the Supreme Court
reiterated that such statutes are to be construed strictly; that there is no
scope for presumption or intendment; and that the courts must rely solely on
the explicit language used by the legislature.
Most recently, in Allied Bank Limited v. Commissioner of Income
Tax (2023 SCMR 1166), the Supreme Court
reinforced this approach by holding:
“It
is well settled that the literal approach is to be adopted while interpreting
fiscal or taxing statutes, and the court cannot read into or impute something
when the provisions of a taxing statute are clear. While interpreting a taxing
statute, the Court must look to the words of the statute and interpret it in
light of what is clearly expressed therein; it cannot imply something which is
not expressed or import provisions in the statute so as to support any assumed
deficiency.”
Accordingly, capital gains constitute taxable
income, fall within the ambit of the charging provisions, and are consequently
liable to super tax under Section 4C of the Ordinance. There exists no
ambiguity or dual interpretation necessitating a resolution in favour of the
taxpayer.
7.7. Consistency
Principle Does Not Apply to Misconstrued or Incorrect Precedents
Finally, the taxpayer invokes the principle of consistency, arguing that
earlier decisions must be followed. However, consistency cannot be used to
perpetuate incorrect interpretations. Tax authorities and the Tribunal
are bound to apply the law as enacted, and any prior errors in application or
interpretation cannot create binding precedent contrary to the law. Each
case must be assessed on its own merits, and consistent application of
the law must be guided by the statute itself, not by flawed prior decisions.
8. Conclusion:
In light of the foregoing discussion, it is
hereby held that:
i. The
capital gain in question is chargeable to tax under Section 37 of the Income
Tax Ordinance, 2001;
ii. The
application of a 0% tax rate does not constitute an exemption from tax
liability;
iii. The
capital gain forms an integral part of taxable income and is therefore subject
to super tax under Section 4C;
iv. The
arguments advanced by the taxpayer are misconceived, devoid of legal merit, and
inconsistent with the overall framework and intent of the Ordinance.
Consequently, the imposition of super tax by
the assessing officer is found to be lawful and justified. The appeal filed by
the appellant is, therefore, dismissed for want of merit. Accordingly, the stay
application is also disposed of.
|
|
-SD- (M. M. AKRAM) JUDICIAL
MEMBER |
|
-SD- (MUHAMMAD NAEEM ASHRAF) MEMBER |
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