1986 PLP 343 (PTD)

NASIR ASLAM ZAHID, J.‑‑The petitioners a partnership concern: and it is averred by the petitioner that they are carrying on the business of acquiring properties, raising constructions on plots alto dealing in the purchase and sale of real states and snaking profits out of the difference of purchase and sale of such properties. It is further averred that such properties are held by the petitioner as stock in trade of trader or manufacturer. According to the petitioner, dealing with the immovable properties is the normal business activity of the petitioner and they hold a deal with such properties as a trader and not ab owner thereof. During the course of their business, it is averred, the petitioner acquired the property in question situated in Defence Housing society, Karachi and after completing the building, it was sold to a buyer and in this process profit was earned by the petitioner firm. According to the petition the profit earned from the sale of this property was shown in the accounts of the petitioner as a gain through commercial asset and it was included in the total income of the registered firm in the income‑tax return for the assessment year 1977‑

78. However, before the income‑tax return was filed, the petitioner was served with a notice from the Excise and Taxation Officer concerned under section 16(2) of the West Pakistan Finance Act, 1963 calling upon the petitioner to file a return under capital gains within the time specified. The return was filed by the petitioner but it was pleaded that petitioner was a trading registered firm dealing in constructions and sales of houses and the property sold was not capital but a produce 'or good‑in‑trade and gains from it were not capital gains but profits or revenue gains from adventure in the nature of trade are not liable to Provincial Capital Gains Tax. By order, dated 26‑5‑1977, the Excise and Taxation Officer, respondent No. 2 herein, did not accept the contention of the petitioner observing as follows: ‑ "Section 16 of Sind Finance Act, 1973 is quite clear that capital gains tax is levied on gains derived from the sale/exchange a17d transfer of immovable property. Since in this case there is a clear sale and the sale‑deed is registered under the Registration. Act, 1, therefore, reject this contention of the assessee and proceed for assessment of capital gains tax under the legal provision of law." The Excise and Taxation Officer proceeded to pass the order, dated 26‑5‑1977 determining the sale value as Rs.3,50,000 instead of Rs.3,10,000 shown as sale consideration in sale‑deed. The petitioner filed an appeal before the Director of Excise and Taxation, Karachi, who held that capital gains tax was leviable on the transaction. The order of the special Director Collector Excise and Taxation, Karachi is dated 25‑7‑1977. The capital gains tax has been recovered from the petitioner according to the Learned counsel for petitioner. In this constitutional petition a declaration is claimed that the imposition/levy collection of capital gain tax of the respondent on the business transaction of the petitioner in respect of the property in question is unlawful and for refund of the capital gains tax recovered from the petitioner. We have heard Sir. Abdul Razzak Siddiqui, learned counsel for the petitioner and Mr. R Sattar Shaikh, Additional Advocate General for the respondent.

2. Capital gains tax was introduced by the West Pakistan Finance Act IX of 1963. Section 16 of West Pakistan Finance Act, 1963 provides that a capital gains tax shall be levied on any profits or gains arising from the sale exchange or transfer of immovable property effected after the 30th day of June, 1963 within the urban areas specified by the Government under section 3 of the West Pakistan Urban Immovable Property Tax Act, 1958. The tax is leviable according to the VII Schedule to the Act. According to the learned counsel for the petitioner, income‑tax is leviable under the Income tax Act on profits and gains from immovable properties and as such on the same gain/profit tax could not be levied by the provincial Legislation. It was in the alternative argued that the gain in the instant case was not the capital gain but a revenue income from sale of property as it was the business of the petitioner to deal in sale and purchase of property and as such capital gains tax could not be levied.

3. Section 2(4‑A) of the Income‑tax Act, 1922 defined capital assets as meaning property of any kind held by an assessee whether or not connected with his business, profession or vocation, but does not include for the purpose of capital gains, any immovable property. Section 6 of the Income‑tax Act provides the various heads of income profits and gains which are chargeable to income‑tax and these heads include 'capital gains'. Under section 12‑B of the Income‑tax Act a tax is payable by an assessee under the head 'capital gains in 'respect of any profits or gains arising from the sale, exchange or transfer of a capital asset and such profits and gains are deemed to be income of the previous year in which the sale, exchange or transfer took place. As already observed, under section 2(4‑A) for the purposes of capital gains, immovable property is not treated as a capital asset and as such under section 6 read with section 12‑B of the Income‑tax, an assessee is not chargeable to income‑tax in respect of capital gains arising from sale, exchange or transfer, of an immovable property. The contention of the learned counsel for the petitioner that income‑tax as well as provincial tax is chargeable on capital gains on immovable property, therefore, is not correct. In so far as the capital gains arising from sale, exchange or transfer of immovable properties are concerned, the same are not chargeable to income‑tax but they are chargeable to tax under the provincial capital gains tax levied by the Finance Act of 1963. The other contention of the learned counsel for the petitioner that the gain/profit from the sale of the property in question cannot be treated as a capital gains, is also not correct. Under section 16 of the West Pakistan Finance Act a capital gains tax is leviable on any profits or gains arising from the sale, exchange or transfer of immovable property. In the instant case the petitioner earned a profit on the sale 8 of the property in question and as such the petitioner is liable to pay capital gains tax under the Provincial Act and as observed earlier the petitioner is not chargeable to income tax under the head 'Capital gains' of section 6 of the income‑tax Act, 1922.

4. We find no merit in this petition. Constitutional Petition No. D‑805 of 1977 is dismissed but with no order as to costs. M. Y. H. Petition dismissed.