Mr. Khairullah Khan Vs Deputy Commissioner Inland Revenue, Zone-Cantt., RTO, Rawalpindi.

 

APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I,

ISLAMABAD

ITA No.127/IB/2025

MA(Stay) No. 628/IB/2025

(Tax Year, 2024)

******

Mr. Khairullah Khan; House No. F-151, Street No.07, Phase-II, Officers Colony, Wah Cantt, Taxila, Rawalpindi. NTN: 3740686300799		Appellant
	Vs
Deputy Commissioner Inland Revenue, Zone-Cantt., RTO, Rawalpindi.		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