Islamabad: The Islamabad High Court (IHC) has ruled that gains arising from the sale of immovable property are to be taxed under the capital gains provisions of the Income Tax Ordinance, 2001, rather than being treated as business income.
In its judgement, the court held that Section 37(1A), which specifically governs taxation of capital gains on immovable property, takes precedence over the general provisions relating to business income under Section 18. It observed that even where a taxpayer is engaged in property-related activities, the specific provision would apply for taxation of such gains.
The ruling came in a reference application challenging an order of the Appellate Tribunal Inland Revenue, which had classified proceeds from the sale of property as business income. The tribunal’s decision had upheld the tax authorities’ position that the gains should be taxed under Section 18.
The case involved an individual taxpayer who had declared capital gains amounting to PKR 20.18 million for the tax year 2015. The taxpayer’s accounts were later selected for audit, following which tax authorities reclassified the gains as business income and issued notices accordingly.
During the proceedings, the taxpayer argued that he was not engaged in the business of buying and selling property. He maintained that his declared business income related to agricultural activities, including the sale of crops, trees, and livestock on his land holdings.
The IHC noted that Section 37(1A) is a specific provision dealing exclusively with gains from the disposal of immovable property and, therefore, overrides general provisions applicable to business income. The court further stated that the applicability of this section does not depend on whether the transaction constitutes a business activity.
The judgement also clarified that amendments introduced through the Finance Act, 2021, concerning taxation of cooperative societies on property transactions were not relevant in this case, as the taxpayer was an individual.
Setting aside the tribunal’s decision, the high court concluded that the lower forums had misinterpreted the legal framework and reaffirmed that gains from the sale of immovable property must be taxed in accordance with Section 37(1A) of the Income Tax Ordinance.
Samra Zulfiqar, a real estate analyst at Zameen.com, is passionate about finding projects that offer buyers the best returns. Her keen insights spotlight the market’s most promising opportunities.
