ISLAMABAD: The Islamabad High Court has ruled that gains from the sale of immovable property are taxable only under Section 37(1A) of the Income Tax Ordinance, 2001, holding that this provision prevails over general business income provisions.
The court decided that even if a person is engaged in property-related activities, the specific provision governing capital gains on immovable property would apply. It added that where an individual is not engaged in real estate business as defined under the law, such gains would not fall under business income.
The ruling came in a reference application filed against an order of the Appellate Tribunal Inland Revenue, which had treated proceeds from property sales as business income under Section 18 instead of capital gains under Section 37(1A).
The case involved an individual taxpayer who had declared capital gains of Rs20.18 million in tax year 2015 and was later selected for audit. Tax authorities reclassified the declared gains as business income and issued notices, a position that was upheld by the tribunal.
During proceedings, the taxpayer argued that he was not engaged in the business of buying and selling property and that his declared business income related to agricultural activities, including sale of crops, trees and livestock on land holdings.
The court observed that Section 37(1A) specifically governs taxation of gains from disposal of immovable property and therefore takes precedence over Section 18, which deals with business income in general. It stated that the application of the specific provision does not depend on whether the transaction constitutes a business activity.
The judgement also noted that amendments introduced through the Finance Act, 2021, regarding taxation of cooperative societies on property transactions were not applicable in this case, as the taxpayer was an individual and not a cooperative entity.
The high court concluded that the lower forums had failed to correctly interpret the legal framework and set aside the tribunal’s classification, reinforcing that taxation of property gains must follow the specific provisions laid out in Section 37(1A).
