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SHC declares exemption from CGT for shares held for more than a year SHC declares exemption from CGT for shares held for more than a year

Sindh High Court (SHC) has declared that the Capital Gain Tax (CGT) on sales of shares held for more than one year shall be exempted if acquired before June 30, 2014 and amendment in section 37A of the Income Tax Ordinance 2001 shall not be retrospectively applicable.

 

The SHC has issued a landmark judgement on Capital Gains Tax, wherein the court has held that in respect of shares held for more than a year, as on and up to June 30, 2014, the taxpayer acquired a vested right by reason of proviso, such that section 37A did not apply at all to any capital gains on the disposal of such shares, regardless of the date of disposal.

 

The petition number 4199 of 2015 was filed on behalf certain individuals who had challenged the increase in holding period to claim exemption beyond one year. The section 37A deals with the capital gains on disposal of securities. The court has held that assets held for more than one year prior to the amendment in section 37A of the Income Tax Ordinance relating to extension in holding period shall not have any effect to their claim of exemption. As amended by Finance Act 2015, the exemption in holding period of securities for the purpose of taxation shall not be applicable to securities which were held on or before June 30, 2014 and period of one year shall be applicable.

 

In its judgement, SHC also ordered refund or adjustment of tax collected from those taxpayers, who retained shares over one year to avail tax exemption on capital gain on disposal of securities in stock exchange.

 

The SHC further observed that during the period July 2014 to June 2015 the rates applied for period less than 12 months, the law was inoperative and could not apply for capital gain tax.

 

According to the SHC judgement, Sr. No 4 of the Table 2014 was, in law, inoperative during the period July 1, 2014 till June 30, 2015 on account of its inconsistency with the words "held for a period of less than a year" that continued to appear in subsection (1) during that time. It follows that no tax in terms of section 37A could be levied on capital gains made on shares that were disposed off during the aforesaid period and had been held for 12 months or more. It is emphasised that this conclusion is quite independent of the earlier point, in relation to vested rights. Capital gains on shares in respect of which a vested right had accrued by reason of the proviso were put beyond and outside the very scope of section 37A. The conclusion now arrived at was on account of a contradiction and anomaly in the statute.

 

The anomaly was removed by the Finance Act, 2015 when the aforesaid words were omitted. So, something needs to be said of the Table 2015, since it does refer in its third column, to the Tax Year 2015. Now, the Table 2015 applied (as did the omission of the words from subsection (1) with effect from 01.07.2015 ie, for the Tax Year 2016. As has been noted above, the respondents (FBR, Chief Commissioner RTO-III Karachi and others) stance is that section 37A and the Table apply as on the date of the disposal of shares, and not otherwise. It necessarily follows from this that the Table 2015 applied only in relation to the Tax Year 2016, ie, in respect of its fourth column. This was so because it applied to disposals on or after 01.07.2015. This meant that the reference to the Tax Year 2015 in its third column did not have substantive effect. In particular, this column could not be given any retrospective effect especially in terms of Sr. No 2 (which was otherwise the same as Sr. No 4 of the Table 2014).

 

In light of the foregoing analysis and discussion, these petitions are disposed off in terms of the following declarations and orders right by reason of the proviso, such that section 37A did not apply at all to any capital gains on the disposal of such shares, regardless of the date of disposal, SHC said.

 

SHC has declared that during the period 01.07.2014 till 30.6.2015, Sr. No, 4 of the Table 2014 (ie, the table in Division VII as it stood during this period) was, in law, inoperative and did not and could not apply, and hence any capital gains made on the disposal of shares at any time during this period could not be brought to tax, if such shares had been held for a period of 12 months or more as on the date of disposal.

 

It is declared that any tax levied, paid or collected in any manner whatsoever in respect of any capital gains to which either) sub-paras (a) or (b) apply was unlawful and is liable to be, and hereby is declared to be such, quashed and set aside with the result that the taxpayer shall be entitled to a suitable refund/adjustment in respect of any such tax as has, been paid or collected, it said.

 

The FBR is restrained from levying or collecting in any manner whatsoever any tax on capital gains to which either sub-paras (a) or (b) apply, under any applicable provision of the 2001 Ordinance (including but not limited to section 100B read with the Eighth Schedule), judgement added.

 

The above referred sub-para (a) of para 12 of judgement talks about the section 37A did not apply at all to any capital gains on the disposal of such shares, regardless of the date of disposal.

 

The sub-para (b) of para 12 of judgement is related to the capital gains made on the disposal of shares at any time during this period could not be brought to tax, if such shares had been held for a period of 12 months or more as on the date of disposal.

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