Section 37 of the Income Tax Ordinance, 2001 revealed the tax treatment of capital gain arises during a year of a person.
The Federal Board of Revenue (FBR) issued the Income Tax Ordinance, 2001 updated up to June 30, 2021. The Ordinance incorporated amendments brought through Finance Act, 2021.
Following is the text of Section 37 of Income Tax Ordinance, 2001:
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-sections (1) and (3) gain under sub-section (3A) by a person in a tax year, shall be chargeable to tax in that year under the head Capital Gains at the rates specified in Division VIII of Part I of the First Schedule.
(2) Subject to sub-sections (3) and (4), the gain arising on the disposal of a capital asset by a person shall be computed in accordance with the following formula, namely:–
A – B
where —
A is the consideration received by the person on disposal of the asset; and
B is the cost of the asset.
(3) Where a capital asset has been held by a person for more than one year, other than shares of public companies including the vouchers of Pakistan Telecommunication Corporation, modaraba certificates or any instrument of redeemable capital as defined in the Companies Act, 2017 (XIX of 2017), the amount of any gain arising on disposal of the asset shall be computed in accordance with the following formula, namely: —
A x ¾
where A is the amount of the gain determined under sub-section (2).
(3A) Notwithstanding anything contained in sub-section (3), the amount of any gain arising on disposal of an immovable property shall be computed in accordance with the formula specified in the Table below, namely:-
TABLE
Where the holding period of an immovable property does not exceed one year: A
Where the holding period of an immovable property exceeds one year but does not exceed two years: A x 3/4
Where the holding period of an immovable property exceeds two years but does not exceed three years: A x 1/2
Where the holding period of an immovable property exceeds three years but does not exceed four years: A x 1/4
Where the holding period of an immovable property exceeds four years: 0
where A is the amount of gain determined under sub-section (2).
(4) For the purposes of determining component B of the formula in sub-section (2), no amount shall be included in the cost of a capital asset for any expenditure incurred by a person –
(a) that is or may be deducted under another provision of this Chapter; or
(b) that is referred to in section 21.
(4A) Where the capital asset becomes the property of the person —
(a) under a gift from a relative as defined in sub section (5) of section 85, bequest or will;
(b) by succession, inheritance or devolution;
(c) a distribution of assets on dissolution of an association of persons; or
(d) on distribution of assets on liquidation of a company,
the fair market value of the asset, on the date of its transfer or acquisition by the person shall be treated to be the cost of the asset:
Provided that, if the capital asset acquired through gift is disposed of within two years of acquisition and the Commissioner is satisfied that such gift arrangement is a part of tax avoidance scheme, then the provisions of sub-section (3) of section 79 shall apply for the purpose of determining the cost of asset in the hands of recipient of the gift.
(5) In this section, “capital asset” means property of any kind held by a person, whether or not connected with a business, but does not include —
(a) any stock-in-trade, consumable stores or raw materials held for the purpose of business;
(b) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortisation deduction under section 24; or
(d) any movable property excluding capital assets specified in sub-section (5) of section 38 held for personal use by the person or any member of the person’s family dependent on the person.
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