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Petitioner: KHAIRULLAH KHAN VS Respondent: APPELLATE TRIBUNAL INLAND REVENUE Honorable Justice Jawad Hassan Ch. Naeem ul Haq
CITATION: 2026 PTD 1005 CASE: 2026L6026 TITLE: KHAIRULLAH KHAN VS APPELLATE TRIBUNAL INLAND REVENUE Honorable Justice Jawad Hassan Ch. Naeem ul Haq COURT: LAHORE-HIGH-COURT-LAHORE YEAR: 2026 JOURNAL: PTD ============================================================
305 2026 P T D 1005 [Lahore High Court (Rawalpindi Bench)] Before Jawad Hassan and Sardar Akbar Ali, JJ KHAIRULLAH KHAN Versus APPELLATE TRIBUNAL INLAND REVENUE and others Income Tax Reference No.06 of 2026, decided on 30th April, 2026. (a) Interpretation of statutes--- ----Fiscal statutes---Tax statutes---Strict construction---It is an established principle of fiscal jurisprudence that a taxing statute is to be construed strictly and no tax can be imposed by implication, intendment or equitable consideration unless the charging provision clearly and unambiguously brings the subject within the tax net---Where the legislature, in its wisdom, has consciously carved out a particular category of income and has accorded to it a distinct statutory treatment, such legislative intent cannot be defeated through expansive interpretation of another charging provision. (b) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 37(1) & 37(1A) & First Sched., Part I, Div. VIII---Capital gains---Disposal of immovable property situated in Pakistan---Special statutory regime---Non obstante clause---Effect---Careful and harmonious reading of Ss. 37(1) & 37(1A) demonstrates that legislature consciously created two distinct statutory regimes for taxation of capital gains: S. 37(1) lays down general rule governing taxation of capital assets, whereas S. 37(1A) carves out a special and self-contained mechanism specifically relating to gains arising from disposal of immovable property situated in Pakistan---Expression "Subject to this Ordinance" in S. 37(1) indicates that the provision is neither absolute nor independent, and its operation remains subordinate to other provisions of the Ordinance---S. 37(1A), by commencing with non obstante clause "Notwithstanding anything contained in subsection (1)", manifests legislative intention that taxation of gains arising from disposal of immovable property in Pakistan is not governed by ordinary mechanism in S. 37(1), but is regulated exclusively by special regime introduced through S. 37(1A) and linked directly with Div. VIII of Part I of the First Sched. (c) Income Tax Ordinance (XLIX of 2001)--- ----S. 37(1A) & First Sched., Part I, Div. VIII---Capital gains on immovable property---Prescribed rate of 0%---Legal effect---Charge, computation and rate are inseparably connected---Phrase "shall be chargeable to tax ... at the rates specified in Division VIII of Part I of the First Schedule" is of immense interpretative importance, as legislature did not merely refer to the First Sched. for procedural guidance but statutorily incorporated prescribed rates as an integral component of charging mechanism itself---Where Schedule prescribes a rate of 0%, legal consequence is not merely reduction of tax liability but recognition by legislature that, though transaction may notionally fall within the head "Capital Gains", no tax is intended to be recovered therefrom---Tax at 0% is materially different from ordinary taxable income, because legislature has consciously decided that incidence of tax shall not arise despite existence of gain---Once applicable rate is prescribed as 0%, charging mechanism becomes exhausted at NIL liability, and in absence of express statutory language such gains cannot subsequently be subjected to an additional levy through interpretative expansion of another provision. (d) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 37(1), 37(1A) & 4C & First Sched., Part I, Div. VIII---Special provision overriding general provision---Fiscal statutes---Strict construction---S. 37(1A) is a special provision dealing exclusively with disposal of immovable property situated in Pakistan, whereas S. 37(1) governs capital gains generally, therefore, to the extent covered by S.37(1A), operation of S. 37(1) stands displaced---No tax can be imposed by inference or intendment---If legislature intended that gains subjected to 0% taxation under Div. VIII should nevertheless remain exposed to additional levies or enhanced taxation, it was incumbent upon legislature to expressly so provide---Absence of such language clearly indicates legislative intent to confer complete fiscal concession in respect of specified gains. (e) Income Tax Ordinance (XLIX of 2001)--- ----S. 4C---Super tax on high earning persons---Nature and scope---Additional levy on income otherwise chargeable---Not an independent charge on every transfer/sale of immovable property---S. 4C imposes super tax on income of every person and S. 4C(2) defines income for purposes of that section, including profit on debt, dividend, capital gains, brokerage and commission, taxable income under S. 9 excluding clause (i) amounts, imputable income and income computed under specified Schedules---Present controversy was not a routine tax assessment dispute but whether super tax under S. 4C could lawfully be imposed where alleged capital gain arose from sale of inherited immovable property and gain chargeable to tax was NIL/zero---Taxpayer was a private individual, not engaged in business, trade, commercial activity or organized property dealing, and impugned demand arose solely from disposal of inherited property---Held: Section 4C is merely an additional levy on income otherwise chargeable under the Ordinance and does not create an independent charge on every transfer or sale of immovable property---Its applicability is dependent upon existence of taxable income under the Ordinance. M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026 (FCCP). rel. (f) Constitution of Pakistan--- ----Art. 175F---Income Tax Ordinance (XLIX of 2001), S. 4C---Federal Constitutional Court---Binding effect of pronouncement---Super tax---Capital gains on immovable property or securities where no tax is payable---Holding period---Inherited property---Federal Constitutional Court of Pakistan, while upholding constitutional validity of S. 4C of the Income Tax Ordinance, simultaneously carved out an exception that super tax is an additional tax on income and, if a certain class of income is exempt from tax under the Ordinance, super tax shall also not be payable in respect of such income---Where no tax is payable on capital gains arising on disposal of immovable property or securities either for being held beyond a certain period, or being inherited, or otherwise exempted under the Ordinance, no super tax shall be payable on such capital gains---Such pronouncement directly governed the controversy in hand and was binding upon High Court by virtue of Art.175F of the Constitution. M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026 (FCCP) rel . (g) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 4C, 37(1A), 41 & 53 & First Sched., Part I, Div. VIII---Super tax---Underlying income not taxable---NIL/0% treatment---Agricultural character---Income outside federal income-tax charge---Effect---Principle emerging from Federal Constitutional Court judgment is that S. 4C depends upon taxability of underlying income---Where no tax is payable on underlying capital gain, whether due to exemption, NIL/0% treatment, agricultural character or because it otherwise falls outside federal income-tax charge, super tax cannot be imposed---Fiscal liability cannot be extended by implication or administrative interpretation and charging provision must be clear, express and unambiguous---Federal Constitutional Court did not limit exception to income formally exempted under S. 53 read with Second Sched.---Words "held beyond a certain period" directly refer to holding-period table in Div. VIII, Part I of the First Sched., including Serial No. 7 prescribing zero tax for open plots held for more than six years. M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026 (FCCP) rel. (h) Income Tax Ordinance (XLIX of 2001) - ----Ss. 4C, 9 & 10 & First Sched., Part I, Div. VIII---Super tax---Zero-rated capital gains---Economic and legal effect of 0% rate---Exemption---Total income and taxable income distinguished---Economic and legal effect of a 0% rate is indistinguishable from an exemption---When a statutory provision prescribes a rate of tax at 0%, the result is that no tax is levied, no liability is created and no payment is due---Ordinance itself draws a distinction between "total income" under S. 10, which includes income regardless of taxability, and "taxable income" under S. 9, which is total income reduced by exempt income and deductible allowances---Capital gain in question, being zero-rated under Div. VIII, entered computational process only to be assigned a NIL tax value---To subject it to super tax would impose fiscal burden on income on which Ordinance itself imposes no burden---Super tax, being a tax on income, cannot override Ordinance's own determination that income in question carries no tax liability. M/s Pakistan Television Corporation v. Commissioner Inland Revenue and others 2017 SCMR 1136 and Anwar Yahya and 3 others v. Federation of Pakistan through Secretary and 4 others 2017 PTD 1069 rel. (i) Income Tax Ordinance (XLIX of 2001)--- ----S. 4C---Super tax---Inclusion of "capital gains" in S. 4C(2)(i)---General applicability subject to binding exception---Tribunal's reasoning flawed---Tribunal had observed that capital gains taxed at 0% were not exempt but were technically part of taxable income subjected to a concessional rate and accordingly fell within ambit of S.4C(2)(i)---Held: Such reasoning was flawed: firstly, it ignored express exception carved out by Federal Constitutional Court in para. 92 of its judgment titled M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026, which was binding on Tribunal and High Court alike; secondly, if accepted, it would lead to absurd result that taxpayer who made a gain on which Ordinance itself levied NIL tax would nonetheless be subject to super tax at 10%, exposing income to fiscal burden specifically excluded by legislature through rate structure---S. 4C(2)(i) applies to capital gains generally, but exception established by Federal Constitutional Court operates as limitation upon that generality in respect of gains on which Ordinance levies no tax---The specific must prevail over the general and binding constitutional interpretation must prevail over administrative practice. M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026 (FCCP) rel. (j) Income Tax Ordinance (XLIX of 2001)--- ----S. 4C---Super tax---Zero-rated capital gains---FBR circular---Legal status---Administrative instrument cannot override statute or binding constitutional pronouncement---Revenue relied upon FBR Circular No.15 of 2022-23---Held: Circular issued by Federal Board of Revenue is an administrative instrument of interpretive guidance---Such a Circular cannot amend the Ordinance, override a statutory rate structure or prevail over binding constitutional pronouncement of Federal Constitutional Court in its judgment titled M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026---To the extent said circular suggested that zero-rated capital gains were subject to super tax, it was inconsistent with exception recognized by Federal Constitutional Court and was of no legal effect for that purpose. M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026 (FCCP) rel. (k) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 4C, 37(1A) & 133 & First Sched., Part I, Divs. IIB & VIII---Super tax on high earning persons---Capital gains from ancestral immovable property---Open plots held for more than six years---Zero-rated gain---No super tax payable---Applicant, an individual, declared income under the head "capital gains" arising from sale of ancestral property for Tax Year 2024, whereafter the Assessing Officer created demand of super tax under S. 4C of the Income Tax Ordinance against him and the Appellate Tribunal Inland Revenue dismissed his appeal---Questions before High Court were whether super tax under S. 4C could extend to capital gains which were treated as zero income under S.37(1A) and taxed at 0% under Div. VIII, Part I of the First Sched.; and whether capital gains from immovable property held for more than six years, deemed non-taxable and reduced to zero, could nevertheless be included in the super tax base---Held: Capital gain arising to the applicant from sale of ancestral immovable property/open plots held since 1980, being a holding period of more than six years, was subject to rate of tax of 0% under Serial No. 7 of Div. VIII, Part I of the First Sched., thus no income tax under general charging provision of S. 4 was payable in respect thereof---Consequently, demand of super tax raised under S. 4C and confirmed by the Tribunal was without lawful authority and liable to be set aside---Reference application was decided in favour of applicant and against department. M/s D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others C.A. No.1243/2020 and connected matters, decided on 27.01.2026 (FCCP); Messrs Allama Iqbal Open University v. Commissioner Inland Revenue, Withholding Tax Zone, Regional Tax Office, Islamabad 2026 SCMR 141; Pakistan Stock Exchange Limited v. Commissioner Inland Revenue Zone-VI, Karachi 2026 SCMR 373 and Anwar Yahya and 3 others v. Federation of Pakistan through Secretary and 4 others 2017 PTD 1069 rel. Ch. Naeem ul Haq, Advocate Supreme Court with Ch. Imran ul Haq, Syed Muhammad Imran Haider and Kashif Pervez for Applicant. Malik Itaat Hussain Awan and Barrister Talha Ilyas Sheikh with Yousaf Khan, S.O. IR (Hqrs), RTO, Rawalpindi. Muhammad Irshad, Assistant Advocate General. Date of hearing: 30th April, 2026. JUDGMENT JAWAD HASSAN, J.--- This reference application in terms of Section 133 of the Income Tax Ordinance, 2001 (hereinafter referred to as Ordinance ) has arisen out of order dated 16.06.2025 (the impugned order ) whereby the Appellate Tribunal Inland Revenue, Division Bench-I, Islamabad (hereinafter referred to as Tribunal ) proceeded to dismiss the appeal (I.T.A. No.127/IB/2025 (Tax Year 2024) filed by the applicant. 2. Briefly stated the appellant declared income of Rs.1,147,258,220/- for Tax Year 2024, under the head capital gains arising from the sale of ancestral property and the return was deemed to have been finalized under Section 120(1) of the Ordinance . Subsequently, the Assessing Officer formed the view that the appellant was liable to pay Super Tax under Section 4C of the Ordinance which he failed. Accordingly, a show-cause notice dated 28.01.2025 was issued followed by a reminder dated 17.02.2025; however, no compliance was made. Consequently, the department passed order dated 28.02.2025, creating demand of Super Tax amounting to Rs.114,715,822/- on the basis of available record. Being aggrieved, the appellant filed the appeal before the Tribunal which was dismissed through the impugned order . 3. Learned counsel for the applicant submits that the applicant is not a company rather an individual, merely holding immovable ancestral property and the controversy in hand pertains to levy of super tax on alleged capital gains arising from such immovable ancestral property, which is otherwise exempt under the law. He further submits that the Applicant does not earn any taxable income as envisaged under the Ordinance ; therefore, in the absence of taxable income, the very foundation for the imposition of super tax ceases to exist. He further submits that the legislature, in its wisdom, has prescribed a specific rate of 0% on certain capital gains through a special charging regime under Section 37(1A) of the Ordinance thereby granting a substantive benefit to the taxpayer, however, the levy of Super Tax under Section 4C of the Ordinance on such income amounts to indirectly taxing which has expressly been subjected to a NIL rate, hence is prima facie contrary to law and legislative intent. 4. On the other side, learned counsel for the Respondent submits that the impugned order has been passed strictly in accordance with law and does not require any interference by this Court. He further submitted that Section 4C of the Ordinance is an independent and self-contained charging provision, which is attracted on the basis of the quantum of income and applies to high-income persons irrespective of the nature or source of such income. The capital gains declared by the applicant, though subjected to tax at the rate of 0%, nonetheless constitute part of the taxable income as declared in the return and, therefore, squarely fall within the ambit of Section 4C of the Ordinance ; consequently, the levy of Super Tax through the impugned order has been lawfully and correctly made. 5. We have heard the arguments of learned counsel for the parties and perused the record. 6. It is pertinent to note that the instant reference application was filed on 06.04.2026 wherein multiple questions of law were raised by the applicant however, upon preliminary hearing on the said date, the Court issued notices to the respondents and framed the following questions of law: i.
Whether the levy of Super Tax under Section 4C of the Income Tax Ordinance, 2001 can extend to capital gains which are expressly treated as zero income under Section 37(1A) and taxed at 0% under Division VIII, Part I of the First Schedule? ii.
Whether capital gains from immoveable property held for more than six years, deemed non-taxable and reduced to zero under Section 37(1A), can nonetheless be included on the base of Super Tax under Section 4C? 7. Subsequently, during the pendency of the instant reference application, the applicant filed C.M. No.02 of 2026 seeking suspension of the impugned orders, whereby recovery of the disputed amount had been initiated against him. The Court after hearing the learned counsel for the parties passed following order on 13.04.2026 which reads as under: 8. In view of above, subject to deposit of 10% of the claimed amount and furnishing surety equivalent to the rest of amount with the Deputy Registrar (Judicial) of this Court within seven days, the operation of impugned orders 16.06.2025 and 28.02.2025 shall remain suspended till the decision of this reference application . 8. Thereafter, the applicant filed another application bearing C.M. No.04 of 2026 seeking modification of the aforesaid order dated 13.04.2026, inter alia , on the ground that 10% of the claimed amount had already been deposited with the respondent department prior to the passing of the said order; however, this fact could not be brought to the notice of the Court at the relevant time. The Court, upon consideration of the submissions advanced and in the light of the law laid down by the Supreme Court of Pakistan in the cases of Messrs Allama Iqbal Open University v. Commissioner Inland Revenue, Withholding Tax Zone, Regional Tax Office, Islamabad (2026 SCMR 141) and Pakistan Stock Exchange Limited v. Commissioner Inland Revenue Zone-VI, Karachi (2026 SCMR 373), modified the earlier order by dispensing with the condition of furnishing surety, while maintaining the suspension of impugned orders with the following observation: We are mindful of the fact that the principles enunciated in aforesaid judgments are binding on this Court under Article 189 of the Constitution. As in the case of Messrs Allama Iqbal Open University supra, it has been held that liability must strictly fall within the scope of the statutory provision in force at the relevant time, and retrospective application of provisions is impermissible. Likewise, in the case of Pakistan Stock Exchange supra, it was reiterated that once a taxpayer demonstrates that his case squarely falls within the exemption clause, the benefit thereof cannot be denied. As the applicant has already deposited certain amount, mentioned above, prior to passing of order dated 13.04.2026, this shall be taken into consideration for compliance of the condition of deposit thus no more deposit and surety is required in terms of judgments cited in Messrs Allama Iqbal Open University and Pakistan Stock Exchange supra . 9. In the impugned judgment the Tribunal
has observed that capital gains declared by a taxpayer from the sale of immovable property constitute taxable income within the meaning of the Ordinance and therefore, fall squarely within the charging ambit of Section 4C relating to Super Tax. It has further been held that once an amount is recognized and chargeable as income under the Ordinance , the same cannot be excluded from the levy of Super Tax merely on the basis of a strained or artificial interpretation. This Court in the case of Service Global Footwear Limited and another v. Federation of Pakistan and others (2023 PTD 112) has upheld the constitutional validity of Section 4C of the Ordinance but declared the first proviso to Division IIB of Part I of the First Schedule to the Ordinance as discriminatory in nature and ultra vires the Constitution however, the levy of super tax was scaled down from 10% to 4% through the said judgment. This judgment was thereafter assailed both by the taxpayers and the Federal Board of Revenue through separate appeals and jointly decided by learned Division Bench through a consolidated judgment reported as Service Global Footwear Limited and another v. Federation of Pakistan and others (2024 PTD 1271) whereby the appeals filed by the Federal Board of Revenue were dismissed while that of the taxpayers were accepted to the extent that the findings of the learned Single Bench regarding retrospective applicability of Section 4C were set aside . 10. It is an established principle of fiscal jurisprudence that a taxing statute is to be construed strictly and no tax can be imposed by implication, intendment or equitable consideration unless the charging provision clearly and unambiguously brings the subject within the tax net. Where the legislature, in its wisdom, has consciously carved out a particular category of income and has accorded to it a distinct statutory treatment, such legislative intent cannot be defeated through expansive interpretation of another charging provision. 11. The first pivotal questions requiring determination are, whether the levy of Super Tax under Section 4C of the Ordinance
can be extended to capital gains which the legislature has expressly treated as zero income under Section 37(1A) of the Ordinance and subjected to tax at the rate of 0% under Division VIII, Part I of the First Schedule and whether capital gains arising from immoveable property held for more than six years which stand reduced to NIL and rendered non-taxable under Section 37(1A), can nonetheless be included on the basis of Super Tax under Section 4C of the Ordinance . Section 37 of the Ordinance reads as under: 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 subsection (1), gain arising on disposal of immovable property situated in Pakistan, to a person in a tax year shall be chargeable to tax under the head capital gains at the rates specified in Division VIII of Part I of the First Schedule. 12. A careful and harmonious reading of Sections 37(1) and 37(1A) of the Ordinance
demonstrates that the legislature has consciously created two distinct statutory regimes for taxation of capital gains. The former lays down the general rule governing taxation of capital assets whereas the latter carves out a special and self-contained mechanism specifically relating to gains arising from disposal of immovable property situated in Pakistan. Section 37(1) of the Ordinance begins with the expression Subject to this Ordinance , which is of considerable legal significance. The use of the words subject to indicates that the provision is neither absolute nor independent rather its operation remains subordinate to other provisions of the Ordinance . Thus, the general charge created under Section 37(1) of the Ordinance is controlled, limited and regulated…
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