Property sale gain taxable only under Section 37(1A): IHC

ISLAMABAD: The Islamabad High Court declared that the gain arising from the disposal of immovable property is only taxable under Section 37(1A) of the Income Tax Ordinance, 2001, irrespective of whether the taxpayer is engaged in the business of buying and selling property/regardless of the taxpayer’s real estate activities.

Thus, any gain from the sale of immovable property earned by a person engaged in such business would be taxable as Income from Business, but where the person was not found to be engaged in such business as defined in Section 2(11), such gain would not be liable to tax.

This is a Reference Application filed under Section 133 (1) of the Income Tax Ordinance, 2001, against the Order dated 11-5-2022(“Impugned Order”) passed by the learned Appellate Tribunal Inland Revenue, Islamabad (“Tribunal”).

The brief facts, as per the Memo of the Application, are that the Applicant [Abdul Majeed Chaudhry] is an individual who duly filed his income tax returns for the tax year 2015. The Applicant was selected for audit for the tax year 2015 under Section 214C of the Income Tax Ordinance, 2001, on February 2, 2017. During audit proceedings, it was observed by the Respondent No. 2 [Assistant/Deputy Commis-sioner Inland] that the Applicant has declared Capital Gain of Rs. 20,185,900/-in his wealth statement filed on 30-6-2015 along with income tax return for the tax year 2015.

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The department issued notice under Section 111(1)(b) read with 122(9) of the Income Tax Ordinance, 2001. The Respondent No. 2 passed an order treating the gain on sale of immovable properties as Business Income under Section 18 of the Income Tax Ordinance, 2001, instead of Capital Gain under Section 37(1A) of the Income Tax Ordinance, 2001.

The Tribunal vide the Impugned Order upheld the taxation of gain on sale of immovable properties as business income under Section 18 of the Income Tax Ordinance, 2001, instead of Capital Gain under Section 37(1A) of the Income Tax Ordinance, 2001.

The learned counsel for the Applicant submitted that the Applicant is an individual who was previously employed with Multi Professional Cooperative Housing Society but was admittedly no longer employed with them in the tax year in question. Further, that in his individual capacity, he was not engaged in the business of real estate. In answer to a

query of the Court, he explained that the income declared in the Applicant’s returns as derived from business was from the sale of fruits, trees, crops, and cattle on 507 kanals of land. He argued that the Tribunal has erred in treating the capital gains derived by the Applicant, which are taxable under Section 37(1A) of the Income Tax Ordinance, 2001, as income taxable under Section 18 of the Income Tax Ordinance, 2001.

Thus, Section 37(1A) leaves no room for a determination to be made whether disposal of immovable property constitutes “business as defined in Section 2(11) or not. This is because, regardless of whether the disposal constitutes business or not, the provision of Section 37(1A) will prevail over Section 18, as it is trite law that specific law prevails over general law. Section 18, which deals with Income from Business in general, cannot be applied in the case of the disposal of immovable property in view of the specific provision of law in the form of Section 37(1A), catering to gains arising therefrom.

The fora below have failed to appreciate the change in law. As such, reliance upon the Fancy Foundation (Supra) was indeed misconceived.

Insofar as the Explanation added to clause (b) of sub-section (1) of Section 18 by way of the Finance Act, 2021, is concerned, whereby it has been clarified that income derived by cooperative societies from the sale of inter alia immovable property is and has always been chargeable to tax under the provisions of the Income Tax Ordinance, 2001, the same has no application in the instant case as the Applicant is admittedly not a cooperative society, IHC order added.

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