Mr. Haroon Haider Bhatti. Vs Commissioner Inland Revenue, LTO, Islamabad.

 

APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I, ISLAMABAD

ITA No.31/IB/2026

MA(Stay) No.149/IB/2026

(Tax Year, 2023)

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Mr. Haroon Haider Bhatti; H. No.121, Block G, Street 12, DHA Phase-6, Lahore.  NTN:3540416430383		Appellant
	Vs
Commissioner Inland Revenue, LTO, Islamabad.		Respondent

 

Appellant By:                                         Mr. Zahid Shafiq, Advocate

Respondent BY:                                     Mr. Naveed Hassan, DR

 

Date of Hearing:                                    10.02.2026

Date of Order:                                       10.02.2026

ORDER

M. M. AKRAM (Judicial Member): In pursuance of the order dated 02.12.2025 passed by the Hon’ble Islamabad High Court, the appellant has filed the present appeal against the impugned Order No. 90/2024 dated November 22, 2024, passed by the learned Commissioner Inland Revenue (Appeals-1), Islamabad, relevant to the tax year 2023. The appellant has assailed the impugned order on various grounds set forth in the memorandum of appeal.

2.      Briefly stated, the facts emerging from the record are that the appellant is an individual taxpayer who filed his return of income for the tax year 2023 on 31.10.2023, declaring a total income of Rs. 13,500,000/. The said return was deemed to be an assessment order under section 120(1)(b) of the Income Tax Ordinance, 2001 (“the Ordinance”). Subsequently, upon examination, the deemed assessment was considered erroneous insofar as it was prejudicial to the interest of revenue on the ground that the appellant had disposed of two motor vehicles and the alleged capital gain amounting to Rs. 7,880,000/- arising therefrom was not offered to tax in the return of income, though disclosed in the wealth statement.

3.      Consequently, proceedings under section 122(5A) read with section 122(9) of the Ordinance were initiated by the Additional Commissioner Inland Revenue (Addl. CIR) through notice dated 04.01.2024. The notice reflected the view that any income not falling under any specific head is chargeable under the head “Income from Other Sources” in terms of section 39(1) of the Ordinance. In response, the appellant submitted that the gain on disposal of the vehicles had been inadvertently interchanged in the Wealth Reconciliation Statement, whereby the gain of Rs. 300,000/- pertaining to the Vitara was mistakenly entered against the Prado, and the gain of Rs. 7,500,000/- relating to the Prado was mistakenly entered against the Vitara. It was contended that this clerical error did not affect the overall computation of income. The appellant further submitted that both vehicles were movable assets held for personal use and, therefore, did not fall within the definition of “capital asset” under section 37(5) of the Ordinance. Consequently, any gain arising from their disposal was not chargeable to tax and was rightly not offered in the return of income. The Addl. CIR, however, found the explanation unsatisfactory and passed an amended assessment order under section 122(5A) of the Ordinance on June 14, 2024, treating the gain as taxable under section 39(1) of the Ordinance.

4.      Being aggrieved, the appellant preferred an appeal before the learned CIR(A), who vide order dated November 22, 2024, upheld the treatment accorded by the assessing officer. The appellant thereafter filed a reference application before the Hon’ble High Court, which, vide order dated 02.12.2025, directed the appellant to file an appeal before the Tribunal in view of the amendments made in the Ordinance. Accordingly, the present appeal has been instituted before this Tribunal.

5.      The case was finally heard on 10.02.2026. The learned Authorized Representative (AR) for the appellant reiterated the submissions advanced in the grounds of appeal. Conversely, the learned Departmental Representative (DR) supported the impugned orders and contended that the same suffer from no legal infirmity.

6.      We have heard the learned representatives of the parties, perused the record, and carefully considered the relevant provisions of the Ordinance. The controversy requiring adjudication is:

Whether the gain arising from the sale of motor vehicles by the appellant is liable to be taxed under the specific charging provision of section 37 of the Ordinance, or whether the same can be brought to tax under section 39 of the Ordinance?

7.      Under the scheme of the Ordinance, section 37 is the specific charging provision dealing with capital gains and provides that any gain arising on the disposal of a capital asset shall be chargeable to tax under the head “Capital Gains.” However, subsection (5) of section 37 defines the expression “capital asset” and expressly excludes certain categories of property from its ambit. In particular, it excludes:

i.       any stock-in-trade, consumable stores, or raw materials held for business purposes,

ii.      any depreciable asset or asset in respect of which amortization deduction has been allowed, and

iii.     any movable property (other than jewellery) held for personal use by the taxpayer. (Emphasis supplied)

Motor vehicles, when held for personal and non-business use, clearly fall within the category of movable property for personal use and are therefore expressly excluded from the definition of “capital asset.” Once an asset falls outside the statutory definition of “capital asset,” the charging provision contained in section 37(1) does not apply, and no capital gain can be subjected to tax under that head.

8.      Section 39, on the other hand, is also a specific charging provision directed at a defined stream of income. It operates as a residual mechanism intended to bring to tax income which is otherwise chargeable but does not fall under any of the specific heads of income enumerated in section 11 of the Ordinance. The provision of section 39 empowers the Commissioner to treat certain amounts as income, inter alia, where the taxpayer fails to offer a satisfactory explanation regarding the nature and source of any sum, investment, expenditure, or asset, or where the explanation so offered is found to be unsatisfactory. Thus, section 39 is designed primarily to address inter alia unexplained or unaccounted amounts such as unexplained bank credits, benami investments, or unverifiable assets. It is not intended to override, substitute, or circumvent a specific charging provision enacted by the legislature.

9.      The distinction between sections 37 and 39 of the Ordinance is fundamental and embedded in the legislative structure of the Ordinance. Where the source of income is known, identifiable, and traceable, such as the sale of shares, immovable property, or other capital assets, the gain must be assessed under the specific head of “Capital Gains.” Even if such income is concealed or improperly declared, its intrinsic legal character does not change; concealment may attract penal consequences, but does not authorize the Revenue to alter the statutory head of income. Section 39, being a residual provision, applies only where income is otherwise chargeable to tax but cannot properly be classified under any specific head of income. It is a provision of last resort and does not empower the Revenue to reclassify a receipt which already falls within, or has been expressly excluded from, a defined statutory head. Accordingly, once it is established that the transaction in question relates to the sale of motor vehicles, the character of the receipt stands determined. If the vehicles qualify as “capital assets,” section 37 governs the matter; if they are excluded under section 37(5), the receipt falls outside the charge of capital gains altogether. In neither situation can section 39 be invoked merely to neutralize a statutory exclusion.

10.    It is a settled principle of statutory interpretation that where a special provision deals with a particular subject matter, it prevails over a general or residuary provision. Section 37 is a specific charging provision governing capital gains, whereas Section 39 is general and residuary in nature. Therefore, if a receipt is capable of being examined under section 37, it must be tested exclusively within that framework. The Revenue cannot bypass the statutory scheme by resorting to section 39. In CIT, Zone-A, Lahore v. Sohaib Nisar (PTCL 2001 CL 405), it was held that in the presence of a specific provision of law applicable to the situation, the Assessing Officer could not resort to any other provision of law. Similar principles were affirmed in CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [(2005) 273 ITR 1 (SC)] and in East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49 (SC), wherein it was held that income falling under a specific head must be assessed under that head and not under a residual category. Given the analogous legislative structure of the Income Tax Ordinance, 2001, where income is distributed across distinct heads and “Income from Other Sources” operates residually, the above reasoning is fully applicable.

11.    In the present case, the transaction in question is admittedly the sale of motor vehicles. The nature and source of the receipt have been fully explained and disclosed in the wealth statement, and there is no allegation of unexplained investment, benami ownership, or unaccounted asset. The dispute is confined solely to the issue of taxability. The vehicles were movable properties held for personal use, and there is no material on record to suggest that they were held as stock-in-trade, treated as depreciable business assets, or employed in any commercial activity. In terms of section 37(5), movable property held for personal use (other than jewellery) is expressly excluded from the definition of “capital asset.” Consequently, no capital gain arises within the meaning of section 37(1), and the receipt falls outside the charging provision. Once a receipt is statutorily excluded from the ambit of a charging provision, it cannot be artificially subjected to tax by invoking a residual provision. Section 39 does not create an independent charging mechanism to tax receipts which the legislature has consciously excluded from taxation; it merely addresses unexplained or unclassified income.

12.    In view of the statutory scheme of the Ordinance, principles of interpretation, and judicial precedents, we hold that:

i.       The gain arising from the sale of vehicles, if any, falls within the domain of Section 37 of the Ordinance.

ii.      However, by virtue of Section 37(5), movable property held for personal use (other than jewellery) is excluded from the definition of “capital asset.”

iii.     Accordingly, the gain on disposal of such vehicles is not chargeable to tax under Section 37.

iv.     Section 39, being a residual provision applicable only to income otherwise chargeable but not classifiable under a specific head of income, cannot be invoked in the present circumstances.

The addition made by the Additional Commissioner under Section 122(5A) read with Section 39(1), and confirmed by the learned CIR(A), is therefore unsustainable in law. Accordingly, the impugned orders passed by the lower authorities are annulled, and the appeal is allowed. The stay application is also disposed of. 

	-SD--Sd/- -SD- (M. M. AKRAM) JUDICIAL MEMBER
-SD- (SHARIF UD DIN KHILJI) MEMBER