• Rules extra levy can’t be applied if primary capital gains tax is zero
• Notes that administrative circulars can’t override law; cites FCC ruling limiting scope of super tax
• Dismisses FBR claim that wealth overrides tax exemptions
RAWALPINDI: The Lahore High Court has ruled that a super tax under Section 4C of the Income Tax Ordinance of 2001 cannot be imposed on capital gains arising from the sale of inherited immovable property where the gain itself carries a zero percent tax rate.
A two-judge bench of Justice Jawad Hassan and Justice Sardar Akbar Ali announced the judgement in an income tax reference filed by Khairullah Khan against the Appellate Tribunal Inland Revenue and other tax authorities.
The court set aside an Rs114.7 million super tax demand raised over the sale of ancestral property held since 1980. The judges observed that where no income tax is payable on capital gains, no super tax can be levied either.
According to the judgement, Mr Khan declared an income of over 1.14 billion rupees for the 2024 tax year from the sale of ancestral property. The return was deemed finalised under the Income Tax Ordinance.
However, the assessing officer initiated proceedings under Section 4C and imposed the super tax through an order dated Feb 28, 2025. Mr Khan challenged the demand before the tribunal, which upheld the levy, prompting his high court appeal.
Counsel for the applicant argued that Mr Khan, a private individual not engaged in property dealing, profited solely from disposing of inherited immovable property. Under Section 37(1A), this carried a zero percent tax rate because the property was held for more than six years.
The counsel maintained that without taxable income, the basis for imposing a super tax ceased to exist, and taxing income already subjected to a nil rate amounted to indirectly taxing income that the legislature had expressly exempted.
FBR defended the levy, arguing that Section 4C is an independent provision applicable to all high-income individuals, regardless of income source. It contended zero-percent capital gains still formed part of taxable income, thus attracting the super tax.
The bench disagreed, holding that fiscal statutes must be interpreted strictly. “No tax could be imposed through implication or administrative interpretation,” the court observed.
The court noted Section 37(1A) created a special, overriding statutory regime governing immovable property gains. When the legislature consciously prescribes a zero percent tax rate, no tax liability arises despite a gain existing.
The judgement stated that a charging provision and the applicable rate together constituted the machinery of taxation, and once the prescribed rate was zero per cent, the charging mechanism stood exhausted at nil liability.
Referring to a judgement by the Federal Constitutional Court of Pakistan in the DG Khan Cement case, the bench noted the apex court had already clarified this issue.
The high court emphasised the constitutional court’s ruling: where no tax is payable on capital gains from immovable property due to the holding period or inheritance, no super tax is payable.
The judgement concluded that the economic and legal effect of a zero per cent rate is indistinguishable from an exemption. The bench rejected the revenue authorities’ reliance on an administrative circular, ruling it cannot override statutory provisions or binding constitutional pronouncements.
Allowing the application, the court declared the super-tax demand without lawful authority and officially set it aside.
Published in Dawn, May 16th, 2026
