KHAIRULLAH KHAN Versus APPELLATE TRIBUNAL INLAND REVENUE

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 by other specific provisions enacted within the same statutory framework. The subsection provides that any gain arising on disposal of a capital asset shall ordinarily be chargeable to tax under the head Capital Gains , except where such gain is expressly exempt from tax under the Ordinance . The legislative intent behind Section 37(1) of the Ordinance is therefore to establish a general charging provision applicable to all forms of capital assets unless the statute itself provides a different treatment. In fiscal interpretation, such a provision is regarded as the parent or umbrella clause which governs the field generally, but remains subject to specific exclusions, exceptions and special regimes subsequently enacted by the legislature. It is in this context that Section 37(1A) of the Ordinance assumes decisive importance. The subsection commences with the non obstante clause Notwithstanding anything contained in subsection (1) . The use of such non obstante expression is a well-recognized legislative device employed to give overriding effect to a provision over any conflicting or inconsistent provision contained elsewhere in the statute. By incorporating this clause, the legislature unmistakably manifested its intention that the taxation of gains arising from disposal of immovable property situated in Pakistan shall not be governed by the ordinary mechanism provided under Section 37(1) of the Ordinance but shall instead be regulated exclusively by the special regime introduced through Section 37(1A) of the Ordinance . The overriding nature of Section ibid therefore excludes the applicability of the general principles embodied in Section 37(1) of the Ordinance to the extent of immovable property gains. The legislature, in its wisdom, intentionally detached such gains from the general capital gains framework and subjected them to a distinct mode of taxation linked directly with Division VIII of Part I of the First Schedule. The phrase shall be chargeable to tax at the rates specified in Division VIII of Part I of the First Schedule is also of immense interpretative importance. The legislature has not merely referred to the First Schedule for procedural guidance; rather, it has statutorily incorporated the prescribed rates as an integral component of the charging mechanism itself. Consequently, the charge, computation and rate of tax in respect of such gains are inseparably connected with the rates provided in the Schedule. Furthermore, where the Schedule prescribes a rate of 0%, the legal consequence is not merely reduction of tax liability but recognition by the legislature that, though the transaction may notionally fall within the head Capital Gains , no tax is intended to be recovered therefrom. A tax at 0% is materially different from ordinary taxable income because the legislature has consciously decided that the incidence of tax shall not arise despite the existence of a gain. Such legislative treatment creates a special category of income enjoying statutory immunity from further fiscal burden unless expressly withdrawn. The expression chargeable to tax occurring in Section 37(1A) of the Ordinance must therefore be read harmoniously with the rate structure prescribed in Division VIII. A charging provision cannot operate independently of the prescribed rate because in taxation law the charge and rate together constitute the machinery of levy. Once the applicable rate is prescribed as 0%, the charging mechanism becomes exhausted at NIL liability. In absence of express statutory language, such gains cannot subsequently be subjected to an additional levy through interpretative expansion of another provision.

13. Another important principle of interpretation applicable here is that a special provision overrides a general provision. Section 37(1A) of the Ordinance is a special provision dealing exclusively with disposal of immovable property situated in Pakistan, whereas Section 37(1) of the Ordinance governs capital gains generally. Therefore, to the extent covered by Section 37(1A) of the Ordinance , the operation of Section 37(1) of the Ordinance stands displaced. Moreover, fiscal statutes must be interpreted strictly. No tax can be imposed by inference or intendment. If the legislature intended that gains subjected to 0% taxation under Division VIII should nevertheless remain exposed to additional levies or enhanced taxation, it was incumbent upon the legislature to expressly so provide. The absence of such language clearly indicates legislative intent to confer complete fiscal concession in respect of the specified gains.

14. The cumulative effect of Sections 37(1) and 37(1A) of the Ordinance is that while capital gains generally remain taxable under the ordinary regime, gains arising from disposal of immovable property situated in Pakistan are governed by a special statutory framework having overriding effect and such gains are taxable strictly in accordance with the rates prescribed in Division VIII of Part I of the First Schedule, including situations where the prescribed rate is 0%.

15. Coming to Section 4C of the Ordinance it reads as follows:

4C. Super tax on high earning persons.--- (1) A super tax shall be imposed for tax year 2022 and onwards at the rates specified in Division IIB of Part I of the First Schedule, on income of every person:

Provided that this section shall not apply to a banking company for tax year 2022.

(2) For the purposes of this section, income shall be the sum of the following:

(i) profit on debt, dividend, capital gains, brokerage and commission;

(ii) taxable income (other than brought forward depreciation and brought forward business losses) under section 9 of the Ordinance, excluding amounts specified in clause (i);

(iii) imputable income as defined in clause (28A) of section 2 excluding amounts specified in clause (i); and

(iv) income computed, other than brought forward depreciation, brought forward amortization and brought forward business losses under Fourth, Fifth and Seventh Schedules.

(3)------------------------------

(4) ------------------------------

(5) ------------------------------

(6) ------------------------------

16. It is evident from the plain reading of Section 4C (1) of the Ordinance that it imposes Super Tax for tax year 2022 and onwards at rates specified in Division IIB of Part I of the First Schedule, on "income of every person." Section 4C(2) of the Ordinance defines "income" for the purposes of that section as the sum of: (i) profit on debt, dividend, capital gains, brokerage and commission; (ii) taxable income under Section 9 excluding amounts specified in clause (i); (iii) imputable income as defined in clause 28A of Section 2; and (iv) income computed under the Fourth, Fifth, Seventh and Eighth Schedules. It is evident from the record that the controversy involved in the present reference application is not a routine tax assessment dispute rather the core question is whether Super Tax under Section 4C of the Ordinance can lawfully be imposed where the alleged capital gain arises from the sale of inherited immovable property and the gain chargeable to tax is NIL/zero. The taxpayer is a private individual and not engaged in any business, trade, commercial activity, or organized property dealing. The impugned demand arises solely from disposal of inherited property and not from any corporate earning or commercial transaction. As stated earlier, Section 4C of the Ordinance 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 the existence of taxable income under the Ordinance . The legislature has already provided a specific regime governing capital gains on immovable property under section 37(1A) read with the First Schedule, which must be applied strictly in accordance with its terms. Where the statute treats the gain as NIL, applies a 0% rate, or otherwise keeps it outside the charging provision, the Respondents cannot indirectly impose Super Tax under section 4C of the Ordinance , as a supplementary levy cannot survive in the absence of a valid principal tax base. Recently, the Federal Constitutional Court of Pakistan (the FCCP ), in its landmark judgment dated 27.01.2026 in C.A.No.1243/2020 and connected matters titled M/s. D.G. Khan Cement Company Limited and others v. Federation of Pakistan and others while upholding the constitutional validity of Section 4C of the Ordinance , simultaneously carved out a significant exception therein. Paragraph 92 of the said judgment reads as follows:

"It is, however, clarified and held that super tax is an additional tax on income drawing its legislative sanction from Entry 47 of Part I of the Federal Legislative List of the Constitution. The necessary corollary to the above is that if a certain class of income is exempt from tax under the law regulating it i.e. the Ordinance, super tax shall also not be payable in respect of such income. For instance, 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 is inherited or is otherwise exempted under the Ordinance, no super tax shall be payable either on such capital gains on disposal of immovable property or securities. Likewise, the same principal shall apply to any capital gain on disposal of agricultural property, which even otherwise cannot be subjected to any tax on income arising therefrom either by usage or by disposal."

17. The above said pronouncement of the FCCP is directly on the point and governs the controversy in hand which is binding upon this Court by virtue of Article 175F of the Constitution of Islamic Republic of Pakistan, 1973 (the Constitution ). In above stated judgment it has held that where no tax is payable on capital gains arising from disposal of immovable property or securities, either because the asset is held beyond the prescribed period, is inherited, or is otherwise exempt under the Ordinance , no Super Tax shall be payable on such capital gains. The same principle was expressly applied to agricultural property, as capital gain on disposal of agricultural property cannot be subjected to any tax on income arising therefrom either by usage or by disposal.

18. Needless to observe that the scheme of Ordinance also supports the position regarding agricultural property. While section 37(1A) of the Ordinance governs gains arising from disposal of immovable property, Section 41 of the Ordinance separately treats agricultural income as exempt. Thus, where income arising from the use or disposal of agricultural land falls outside the federal income tax regime under the constitutional and statutory framework, Section 4C of the Ordinance cannot be invoked by implication to impose Super Tax. This view also stands affirmed in above said judgment wherein it was held that capital gain arising from disposal of agricultural property is not chargeable to tax on income. The principle emerging from the aforesaid judgment is that section 4C of the Ordinance is dependent upon the taxability of the underlying income. Where no tax is payable on the underlying capital gain, whether due to exemption, NIL/0% treatment, agricultural character, or because it otherwise falls outside the federal income tax charge, Super Tax cannot be imposed. Fiscal liability cannot be extended by implication or administrative interpretation, and the charging provision must be clear, express, and unambiguous. This judgment does not limit the exception to the income formally exempted under Section 53 read with the Second Schedule to the Ordinance . The FCCP employed the language "where no tax is payable on capital gains arising on disposal of immovable property or securities either for being held beyond a certain period", which is precisely the statutory mechanism operative in the present case. The phrase "held beyond a certain period" is a direct and express reference to the holding period table in Division VIII, Part I of the First Schedule, including Serial No. 7 thereof, which prescribes zero tax for open plots held for more than six years. The FCCP thus explicitly contemplated and addressed the present fact-pattern, and held that no Super Tax would be payable in such a case. The 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. The Ordinance itself draws a clear distinction between "total income" under Section 10 of the Ordinance , which includes income regardless of its taxability and "taxable income" under Section 9 of the Ordinance , which is total income reduced by exempt income and deductible allowances. Exempt income, while it forms part of total income, is ring-fenced and excluded from the charge. The capital gain in question, being zero-rated under Division VIII, has the identical practical consequence: the income enters the computational process only to be assigned a NIL tax value. To subject it to Super Tax would be to impose a fiscal burden on income on which the Ordinance itself imposes no burden, which is contrary to the fundamental principle that Super Tax, being a tax on income, cannot override the Ordinance's own determination that the income in question carries no tax liability. The principle that charging provisions must be construed strictly and in favour of the taxpayer where ambiguity exists is well settled. The Supreme Court of Pakistan in the case of M/s Pakistan Television Corporation v. Commissioner Inland Revenue and others (2017 SCMR 1136) has held that It is trite law that fiscal statutes, particularly those provisions which create tax liability, must be interpreted strictly, and any doubt arising therefrom must be resolved in favour of the taxpayer . Reliance is also placed upon the case of Anwar Yahya and 3 others v. Federation of Pakistan through Secretary and 4 others (2017 PTD 1069), wherein the learned Division Bench of the Sindh High Court comprising Mr. Justice Munib Akhtar (now Hon ble Judge of the Supreme Court of Pakistan) and Mr. Justice Muhammad Karim Khan Agha (now Hon ble Judge of the Federal Constitutional Court of Pakistan) categorically held that a charging provision in a fiscal statute must be construed strictly and literally and no tax can be imposed in the absence of clear, express and unambiguous legislative intent. It was further held that where two interpretations of a taxing statute are reasonably possible, the one favouring the taxpayer must prevail and in case of inconsistency between the charging section and the Schedule, the charging section shall prevail and that no tax liability can be created through ambiguity, doubtful implication, or administrative interpretation beyond the statutory language. In this scenario Section 4C of the Ordinance does not contain an express provision bringing zero-rated capital gains within the Super Tax base. The inclusion of "capital gains" in Section 4C(2)(i) of the Ordinance refers to capital gains as a category of income generally and cannot, without more, be read as overriding the specific rate structure in Division VIII which renders the gains in question NIL. There is no exclusion clause in Division VIII or elsewhere that removes zero-rated gains from the protection established by the FCCP judgment. In the absence of express legislative intent to subject NIL-value income to Super Tax, the benefit of the doubt must incur to the applicant.

19. The Tribunal in the impugned order observed that capital gains taxed at 0% are not exempt but are technically part of taxable income subjected to a concessional rate, and that accordingly they fall within the ambit of Section 4C(2)(i) of the Ordinance . In our humble view, this reasoning is flawed in two material respects. First, it ignores the express exception carved out by the FCCP in paragraph 92 of its judgment, which is binding on the Tribunal and on this Court alike. The FCCP which upheld the general validity of Section 4C of the Ordinance , simultaneously made clear that where no tax is payable on capital gains from disposal of immovable property by reason of the holding period, no Super Tax is payable either. Second, the Tribunal reasoning, if accepted, would lead to the absurd result that a taxpayer who has made a gain on which the Ordinance itself levies NIL tax is nonetheless subject to Super Tax at 10%, a result that would expose income to fiscal burden specifically excluded by the legislature through the rate structure. This cannot be the correct interpretation of a fiscal statute.

20. This Court also consider it necessary to address the Tribunal reliance upon Section 4C(2)(i) of the Ordinance , which lists "capital gains" as a specific category of income for Super Tax purposes. This inclusion is undoubtedly broad and would, as a general matter, bring capital gains within the Super Tax base. However, the FCCP judgment itself recognized this general applicability while simultaneously carving out the exception for capital gains on which no tax is payable by reason of the holding period or otherwise under the Ordinance. These two propositions are not in conflict; Section 4C(2)(i) of the Ordinance applies to capital gains generally, but the exception established by the FCCP operates as a limitation upon that generality in respect of gains on which the Ordinance levies no tax. The specific must prevail over the general and the binding constitutional interpretation must prevail over administrative practice.

21. It evinces from the impugned order that the applicant has also placed reliance on earlier decisions of the Tribunal wherein it has been observed that exempt capital gains cannot constitute the basis for Super Tax under Section 4C of the Ordinance . Thus, the Tribunal departure from this consistent line of authorities in the impugned order , without providing compelling reasons and without engaging with the binding pronouncement of the FCCP , constitutes a legal error warranting interference by this Court. Pertinently, the Revenue's reliance upon FBR Circular No.15 of 2022-23 is also misplaced. A circular issued by the Federal Board of Revenue is an administrative instrument of interpretive guidance. It cannot amend the Ordinance , override a statutory rate structure, or prevail over a binding constitutional pronouncement of the FCCP . To the extent the said Circular suggests that zero-rated capital gains are subject to Super Tax, it is inconsistent with the exception recognized in the FCCP and is of no legal effect for that purpose.

22. For the foregoing reasons, we hold and declare that the capital gain arising to the applicant from the sale of ancestral immovable property (open plots) held since 1980, being a holding period of more than six years, is subject to a rate of tax of 0% under Serial No.7 of Division VIII, Part I of the First Schedule to the Ordinance and thus no income tax under the general charging provision of Section 4 of the Ordinance is payable in respect thereof in view of the binding pronouncement of the FCCP . Consequently, the demand of super tax raised against the applicant by the Assessing Officer vide order dated 28.02.2025 under Section 4C of the Ordinance and confirmed by the Tribunal in the impugned order , is without lawful authority and is accordingly set aside as it is contrary to the binding constitutional pronouncement of the FCCP under Article 189 of the Constitution which states that any decision of the Federal Constitutional Court and the Supreme Court that decides a question of law or is based upon or enunciates a principle of law, is binding on all the courts in Pakistan including the High Courts. Hence, this Court, while placing reliance upon the judgments of the Federal Constitutional Court of Pakistan and the Supreme Court of Pakistan in the cases of M/s. D.G. Khan Cement case , Messrs Allama Iqbal Open University , Pakistan Stock Exchange and Anwar Yahya case supra, has reached to the conclusion that the capital gain arising to the applicant from the sale of ancestral immovable property falls within Serial No. 7 of Division VIII, Part I of the First Schedule to the Ordinance , carrying a tax rate of 0%; therefore, no Super Tax under section 4C of the Ordinance is attracted and applicable to the case of the applicant. This Reference Application is therefore decided in favour of the Applicant and against the Respondents department.

23. Office shall send a copy of this order under seal of the Court to the Tribunal as per Section 133(8) of the Ordinance .

MWA/K-10/L Reference answered.