The Islamabad High Court (IHC) has ruled that gains arising from the disposal of immovable property are taxable only under Section 37(1A) of the Income Tax Ordinance, 2001, regardless of whether the taxpayer is engaged in real estate business activities.
The court clarified that while gains from property sales by individuals engaged in real estate business may be treated as business income under Section 18, such classification does not apply universally. Where a taxpayer is not engaged in the business of buying and selling property as defined under Section 2(11), the gains from disposal of immovable assets fall outside the scope of business income taxation.
The ruling came in a reference application filed under Section 133(1) against an order passed by the Appellate Tribunal Inland Revenue, Islamabad, which had previously upheld the classification of property sale gains as business income.
In the case, the taxpayer, Abdul Majeed Chaudhry, had declared capital gains of Rs20.185 million in his return for tax year 2015. During audit proceedings initiated under Section 214C, the tax authorities reclassified these gains as business income under Section 18, issuing notices under Sections 111(1)(b) and 122(9) of the Ordinance. The Tribunal supported the department’s stance, which was later challenged before the IHC.
The High Court emphasized the principle that specific legal provisions prevail over general ones. It held that Section 37(1A), which specifically governs gains from immovable property, overrides the general provisions of Section 18 dealing with business income.
The court also noted that amendments introduced through the Finance Act, 2021 regarding cooperative societies were not applicable to the case, as the taxpayer was not a cooperative entity. The decision underscores the importance of correctly classifying income under tax law and provides clarity on the treatment of property-related gains in Pakistan.