Prepared By:

Nadeem Butt (FCA)

Chartered Accountant
• Financial Advisor DAWAT -E- ISLAMI
• Chairman LTBA Tax Academy (2018-19 & 2017-18)
•Member LCCI Finance, Taxation & Sales Tax Committee (2017-18)
• Vice Chairman LTBA Tax Academy (2016-17)
• Member (special invitees) Taxation Committee LCCI (2012-13)
• Audit & Tax Advisor of All Pakistan Cottage Industry & Small
Traders Association
• Conducted Income Tax Special audit for CBR (now FBR)
• Professional Author & Teacher of Taxation

Taj Arcade, 3rd Floor, Office # 06, Opposite Services Hospital, 73-Main Jail Road, Lahore – Pakistan
Ph: +92-42-35408635-36, 35408638 Fax: +92-42-35408641 Mob: 0333 / 0301-4245240
E-mail: nbco2007 @ yahoo / gmail / hotmail.com website: nbandco.com
Notes on INCOME TAX Capital Gains for the tax year 2019

Topic covered
Section Rule (for CA & ICMAP students)
37 Capital assets
Procedure to determine capital gain
13F &
37A Gains on sale of securities
13H
100B Loss u/s 37 & 37A
11, 50,
Geographical source of capital gains & their
51 &
taxability
101
Capital gain exempt from tax
Treatment of bonus shares
Dividend in kind
Disposal
Definition
A gain arising on the disposal of a capital asset by a person in a tax year, (except
exempt gain) shall be chargeable to tax under the head capital gains.

Important notes
1. Shares business shall be treated as capital gain & not as business
income.
2. In addition to above, the common examples of the capital assets are
shares, paintings, sculpture, drawing or other work of art; jewellery, a
rare manuscript, folio or book; a postage stamp or first day cover, a coin
or medallion; or an antique, Modarabha Certificates, Participation Term
Certificates, Term Finance Certificates, Musharika Certificates, PTC
Vouchers, Patent and copyrights, Leasehold rights, Partner share in the
firm or AOP, mining rights, right to subscribe for the shares, contractual
rights of a purchaser to obtain title to an immovable property etc.
Taxation of capital assets is split into two categories as:
Part 1: Capital assets u/s 37. Part 2: Capital assets u/s 37A.
Capital assets under part 1
SR. PARTICULARS EXPLANATION
1. CAPITAL ASSETS CA means property of any kind held by a person, whether or not connected with a business, but
U/S 37(1) & (2) does not include the following:
1. Any stock-in-trade, consumable stores or raw materials held for the purpose of business;
2. Any depreciable & intangible property; or
3. Any movable property [(excluding the capital assets defined in section 38(5)] held for
personal use by the person or any member of the person’s family dependent on the person.

EXAMPLES OF
Share of partner / member in a firm or AOP, mining rights, industrial licences and import /
CAPITAL ASSETS
export licenses acquired for consideration, tenancy rights, or leasehold rights , foreign currency,
rights to subscribe for shares, the contractual rights of a purchaser to obtain title to an
immoveable property, a license to manufacture certain products or render any services (known
as franchise), goodwill for which payment has been made but excluding self generated goodwill.
2. CAPITAL ASSETS Immovable property
U/S 37(3)
3. CAPITAL ASSETS 1. A painting, sculpture, drawing or other work of art; 4. A postage stamp or first day cover;
U/S 38(5)
2. A (gold or silver) coin or medallion; or; 5. Jewellery
3. A rare manuscript, folio or book; 6. An antique. Example - 1
4. EXEMPT CAPITAL
i. Any distribution received by a taxpayer from a collective investment scheme registered by
GAINS UNDER
the SECP including NIT or a Mutual Fund out of the CG’s of the said Schemes.
PART 1 OF 2ND
SCHEDULE U/C ii. Any gain on transfer of a capital asset, being a membership right held by a member of an
existing stock exchange, for acquisition of shares and trading or clearing rights acquired by
(103)
such member in new corporatization stock exchange in the course of corporatization of an
(110B) existing stock exchange.
(114) iii. Any income from sale of shares of an industrial undertaking set up within the meaning of
the EPZ Authority Ordinance.
 Capital assets under part 2
SR. PARTICULARS EXPLANATION

1. CAPITAL Under this section capital assets are termed as securities. Securities include the
ASSETS U/S following:
37A 1. Shares of a public company,
2. Voucher of Pakistan Telecommunication Corporation,
3. Modarba Certificate,
4. An instrument of redeemable capital: defined in the CO, 1984 includes
(a) finance obtained on the basis of PTC,
(b) musharika certificate,
(c) TFC, or
(d) any other security or obligation not based on interest, other than ordinary
share of a Company,
representing an instrument or a certificate specified denomination, called the
face value or nominal value, evidencing investment of the holder in the capital
of the company on terms & conditions of the agreement for the issue of such
instrument or certificate or such other certificate or instrument as the FG may,
by notification in the official Gazette, specify for the purpose.
5. For the purpose of this section, “debt securities” means;
a. Corporate debt securities such as TFC’s, Sukuk Certificates (Sharia
Compliant Bonds), registered bonds, commercial paper, PTC’s and all
kinds of debt instruments issued by any Pakistani or foreign Company or
corporation registered in Pakistan; and
 Capital assets under part 2
SR. PARTICULARS EXPLANATION
(b) Govt. Debt Securities such as treasury bills (T-bills), Federal
Investment Bonds (FIB’s), Pakistan Investment Bonds (PIB’s), Foreign
Currency Bonds, Govt. papers, Municipal Bonds, infrastructure Bonds
and all kinds of debt instruments issued by foreign Govt., Provincial
Govt, local authorities and other statutory bodies.”
1. Derivative products: Derivative products means a financial product
which derives its value from the underlying or other asset, may be
traded on a stock exchange of Pakistan & includes
(a) deliverable future contracts,
(b) cash settled future contracts,
(c) contracts of rights & options.
Public company u/s 2(47) means
1. A Company listed in Pakistan at the year end; or
2. A Company in which 50% or more shares are held by the FG or PG or
a foreign Government or a foreign company wholly owned by a foreign
Government or
3. A unit Trust.
Example – 2
Procedure to determine capital gain on capital assets under part 1
SR. PARTICULARS EXPLANATION

1. PROCEDURE TO
The gain arising on the disposal of a capital asset by a person shall be computed
DETERMINE
in accordance with the following formula:
CAPITAL GAIN: [U/S
37(2), (3) AND (4)] Consideration received by the person on disposal
(Higher of FMV or actual amount received) xxx
Less: cost of the asset [consist of the following u/s 76(2)]
Consideration given for the asset
Incidental expenditure incurred in acquiring and disposing off the asset xxx
Any expenditure incurred to alter or improve the asset xxx
Balance shall be the capital gain or loss xxx
2. EXPENDITURE No amount shall be included in the cost of a CA for any expenditure incurred
DEDUCTIBLE by a person that is or may be deducted under another provisions of the
UNDER ANOTHER Ordinance or that is referred as inadmissible u/s 21. [U/s 38(4)]
PROVISION OF THE
ITO, 2001 OR
INADMISSIBLE
3. HOLDING PERIOD Gain Where a CA (other than immovable property) has been held by a person
MORE THAN ONE for more than one year (other than capital assets defined in section
YEAR (CAPITAL 37A) the amount of gain arising on disposal of the asset shall be taken as
ASSETS OTHER 3/4th while the balance 1/4th shall automatically be excluded from the
THAN U/S 37A) taxable capital gain.

Loss However if there is capital loss under this section the same shall be
fully recognized without the application of said exemption. [U/s 37(3)]
4. CAPITAL GAIN The exemption of 25% on disposal of capital assets is not available to Immoveable
ON DISPOSAL OF property.
IMMOVABLE
PROPERTY [U/S Gain arising on the disposal of immoveable property, by a person in a tax year, shall
37(3)] be chargeable to tax in that year under the head CG at the rates specified below:
S. No. Holding period Rate of
tax
(1) (2) (3)
A. For immovable property allotted to persons mentioned in sub-section (4)
of section 236C.
1. Immovable property held irrespective of the holding 0%
period.
B. For immovable property acquired on or after July 1, 2016 other than
those mentioned against S. No. 1
2. Where holding period of immovable property is up to one 10%
year.
3. Where holding period of immovable property is more than 7.5%
one year but less than two years.
4. Where holding period of immovable property is more than 5%
two years but less than three years.
5. Where holding period of immovable property is more than 0%
three years.
C. For immovable property acquired before July 1, 2016, other than those
mentioned against S. No. 1
6. Where holding period of immovable property is up to 5%
three year.
7. Where holding period of immovable property is more than 0%
three years.
 Where the CA’s becomes the property of the person under a gift from a
5. NON-
relative, bequest, will, by succession, inheritance, devolution, distribution
RECOGNITION
of assets on dissolution of an AOP, or distribution of assets on liquidation
RULE
of a company the FMV of the asset on the date of its transfer or acquisition
shall be treated to be the cost of the asset at the time of its disposal. [U/s
37(4A)]

However no gain or loss shall be recognized at the original dates when the
capital asset becomes the property of the person under a gift, bequest & will etc.
[U/s 79] Example – 3, 4 & 5
Capital losses shall be set off against the capital gains only during the same tax
6. LOSS U/S 37
year & where such loss is not so set off then the balance loss shall be c/f for
adjustment against CG up to 6 succeeding tax years. If capital gain is exempt
from tax then loss from such asset shall have no treatment under capital gain.
[U/s 38 (1) and (2)]

No loss shall be recognized on disposal of assets mentioned below: [U/s

38(5)]

i. A painting, sculpture, drawing or other work of v. A coin;

art; vi. A Medallion; and
ii. Jewellery; vii. An antique.
iii. A rare manuscript, folio or book;
iv. A postage stamp or first day cover;
Procedure to determine capital gain on capital assets under part 2

SR. PARTICULARS EXPLANATION

1. GAIN SALE • Capital gain on disposal of securities (other than exempt from tax)
OF shall be treated under NTR as SBI from 01-07-2010. Tax shall be
SECURITIES: charged on capital gain on disposal of capital assets acquired for a
[U/S (37A)] period which is less than 4 years at rates given in the book.
• The gain arising on the disposal of a security by a person
shall be computed in accordance with the following formula:
• Gain = (Consideration received by the person on disposal of the
security) – (Cost of acquisition of the security)
• Gain from capital assets which are held for four years or more
shall not be taxable & this section shall also not apply on gain on
disposal of securities by a banking company or an insurance company.

2. RATE OF
TAX As per rates given at page 238 of the Book.

Example – 6, 7, 8, 9 & 10
 Capital gain on disposal of securities (other than exempt from tax) shall be treated under
3. GAIN ON NTR as SBI from 01 July 2010. Tax shall be charged on capital gain on disposal of capital
SALE OF assets acquired for a period which is less than 4 years at following rates.
SECURITIES
The gain arising on the disposal of a security by a person shall be computed in
[U/S 37A, accordance with the following formula:
RULE 13A—
13N] Gain = (Consideration received by the person on disposal of the security) – (Cost of
acquisition of the security)

• Gain from capital assets under this section shall not apply on gain on disposal of
securities by a banking company or an insurance company.

• Securities held for a period upto a maximum of 182 days and for a period upto a
maximum of 365 days shall be taken as held for 6 months and 1 year respectively.

• Capital gain arising on the disposal of any security shall be computed on the basis
of FIFO inventory accounting method. However, FIFO method shall not apply in respect
of sale of shares purchased on the same trading day. In that case gain or loss shall be
computed by applying the average method.
 TAXATION (Part I of first Schedule Proviso to Division VII)
4. OF GAIN
ON DEBT Capital gain arising from disposal of ‘securities’ shall be treated as a
SECURITIE separate block of income. For rate purposes this income is split into two
S FOR
categories, namely, debt securities and all other securities.
COMPANIES
Tax on gain on disposal of debt securities shall be 29% for companies
and for small companies 24% for the tax year 2019.
Tax rates on capital gain in special cases are as under:
Provided further that a mutual fund or a collective investment scheme
or a REIT scheme shall deduct Capital Gains Tax at the rates as
specified below, on the disposal of their units are as under:—

• 10% in case of stock fund [12.5% if dividend receipts of the fund are
less than capital gains].

Definition of stock Fund:- Section 2(61A) “Stock Fund” means a

collective investment scheme or a mutual fund where the investible funds
are invested by way of equity shares in companies, to the extent more
than 70% of the investment.
• 10% in case of any other fund [25% for a company].

Provided further that no capital gains tax shall be deducted, if the

holding period of the security is more than 4 years.
5. COST OF SR. PARTICULARS COST OF ACQUISITION
ACQUISITION
[RULE 13L(D)]
1. Purchase of shares The market price of the security paid by
the investor.
2. Right shares Discounted price at which the right
shares are issued.
3. Acquisition through Market price of the security at which the
bequest or inheritance deceased person and or would have
paid to purchase such security.
4. Bonus shares Market price of bonus shares
immediately following the bonus shares
which the investor would have paid to
purchases such shares.
5. Initial public offering (IPO) Actual price paid to the issuer.
 CG on disposal of listed securities & tax thereon, subject to section 37A, shall be computed,
6. SPECIAL
determined, collected & deposited in accordance with the rules laid down in the 8th Schedule.
PROVISION
RELATING TO The above provisions shall not apply on the following:-
CAPITAL a. mutual fund, a modaraba;
GAIN TAX
b. banking company, a non-banking finance company & an insurance company subject to
[U/S 100B]
tax under the Fourth Schedule;
c. foreign institutional investor being a person registered with NCCPL as a foreign
institutional investor; and
d. any other person or class of persons notified by the Board.
Capital loss u/s 37A shall be set off against the gain from any other security chargeable to tax
7. LOSS U/S
during the year; It shall not be c/f as it is treated as a SBI. [U/s 37A(5)]
37A
 Capital loss adjustment as mentioned above shall not be admissible in the following cases,
8. CAPITAL namely
LOSS
ADJUSTMENT Wash Sale Where capital loss realized on disposal of a specific security by an investor is
DISALLOWED preceded or followed in one month’s period by purchase of the same security by the same
[U/S 13F] investor, thus maintaining his portfolio.

Cross Trade Where coordinated reshuffle of securities between two related accounts of
the same investor or between two related brokerage houses is undertaken and securities
accumulating unrealized losses are sold to related accounts to artificially realize capital losses
in one account without actually selling the securities to an outsider.

Tax Swap sale Where the investor having realized loss on a particular security does not
repurchase the same security but chooses another similar security in the same sector, thus,
not only minimizing or eliminating altogether liability on account of tax on capital gain, but also
maintaining the portfolio broadly at the same risk return profile.

• There shall be no tax if the securities are held for more than one year;
• This section shall not apply to a banking company or an insurance company;
• The holding period shall reckon from the date of acquisition to the date of disposal;
• Gain under this section shall be treated as a separate block of income.

9. PAYMENT OF
Every investor other than individual shall e-file statement of advance tax on capital gain
TAX ON
on the capital gain on the prescribed format within 21 days after the end of each
CAPITAL
quarter with the tax authority.
GAIN [RULE
13H]
The liability to pay the due tax on capital gain shall lie on the investor who held the
securities during the period for which tax on capital gain is to be paid.
 Explanation of section 37 & 38

Is asset is a capital asset?

No:
Although gain shall not taxable Yes:
under capital gains but may be If chargeable to tax
taxable as BI or IFOS

No:
Yes:
The same may be exempt
If it is an asset mentioned
from tax under 2nd Schedule or
under section 38(5)
otherwise

Yes:
No loss will be recognized only
gain will be chargeable to tax
by taking 25% exemption on
capital gain where applicable.
No:
Gain and loss both will be
recognized by taking 25%
exemption on capital gain
where applicable.
 Explanation of section 37A

Where asset is a CA is a security

as defined in section 37A(3).

No:
Yes:
It may be chargeable to tax under
It is chargeable to tax under SBI
section 37 as given above

Treatment of losses:
Non applicability of section
Loss shall be set off only against
37A:
the gain of the person from any
a. Securities held for equal / more
other securities chargeable to tax
than 4 years
under this section & no loss shall
b. Banking & insurance companies
be c/f to the subsequent tax year.
Pakistan source & Foreign source capital gain
GEOGRAPHICAL SOURCE OF
RECEIVED BY TAXABILITY
CAPITAL GAIN

Pakistan source capital

gain [Section 101]:  Taxable [Section 11(5) and (6)]

Gain arising on the disposal  In case of non resident the terms

Resident / Non-resident individual
of shares in a resident
company shall be PSI.
a. Resident Individual
b. Short term resident
[For all foreign source income]
Foreign source capital
gain:
Capital gain other than
above.
c. Returning expatriate
[Citizen of coming back in ]
[For all foreign source income]
Non-resident individual
& conditions of double taxation
treaty agreement are also relevant
for Pakistan source income.
Taxable [Section 11(6)]
[Section 50]
An individual shall be exempt in
respect of his foreign-source income
which is not brought / received in if he
is resident only by reason of his
employment and he is present in for
not exceeding 3 years.
[Section 51]
If an individual citizen of (returning
expatriate) is resident in the current tax
year but was non-resident in the 4
preceding tax years, his foreign-source
income shall be exempt in current tax
year and in the following tax year.
Not taxable [Section 11(6)]
 Bonus shares
SR. PARTICULARS EXPLANATION

1. TREATMENT Under the CO, 1984 a company may issue the following three ways to issue
OF BONUS the share:
SHARES 1. Shares issued for cash
2. Shares issued for other than cash
3. Issue of shares without any consideration (Bonus shares)

The taxation of bonus shares of listed companies are covered under the head
income from other sources u/s 39 and to be taxed @ 5% under section 236M
on market price on the first day end price on closure of books. However the
Board has reserved the right to prescribe the taxation on bonus shares from
unlisted and Private Ltd. Companies.

2. CAPITAL GAIN Due to deletion of exemption clause 103B, from Part I of Second Schedule to
ON SALE OF the ITO, 2001 the shares representing dividend in specie (i.e. face value of
DIVIDEND IN dividend in kind) shall be taxed as dividend; and on disposal now computation
SPECIE OR of capital gain shall be made in normal way as per section 37 or 37A, as the
DIVIDEND IN case may be.
KIND)
 Disposal
Sr. Particulars Explanation

The legislature intentionally used the word of disposal and

1. DEFINITION OF DISPOSAL
it had not used the words of “gain on sale”. The reason to
use the term is that the term disposition is wider
connotation than sale. It includes exchange,
relinquishment and extinguishments in addition to sale.
This is evident from the explanation of disposal given
in u/s 75 of the Ordinance.

Sales Ordinary sale involving transfer of assets in lieu of any

2. SCOPE consideration.
OF WORD Disposition In relation to a property means disposition made by deed
DISPOSAL or will and also made by or under a decree or under
orders of court Tribunal or Authority.
Exchange Where transferee does not bring cash but something else
in exchange.
Relinquishment Firm purchases right to manufacture a certain brand and
of goods, on dissolution one partner relinquishes the right
to that license for a consideration.
Extinguishments of a Say three partners of a firm hold right in goodwill. Two
right partners on dissolution surrendered their right in favor of
third Partner
 SPECIAL POINTS

S R. HEADINGS EXPLANATION
1. 25% exemption not in section 37A & 37(2) but only in 37(1) & 38(5).
2. Inter adjustment of loss or gain u/s 37 with gain u/s 37A & vice versa is
not allowable.
3. Gain / loss u/s 37 is covered under NTR whereas gain / loss u/s 37A is
covered under NTR as SBI & available for tax credit purposes.

4. No gain or loss recognized u/s 79.

6. Only public Limited companies are covered u/s 37A whereas private &
unlisted public companies are covered u/s 37.

7. Capital gain for securities sold equal to 1 & 2 years.

8. Capital gain on sale of leasehold right.

9. Adjustment of capital gain u/s 37 & 37A along-with their computations
set off & c/f limitations.

10. Bonus shares to discuss with dividend in specie sold above & less than
face value.
ICAP Past Papers Numerical Reference:
Capital Gains
 Q. No. 3 (iii) & (iv) Autumn 2013
 Q. No. 5 (a) Autumn 2012
 Q. No. 6 (b) Spring 2010
 Q. No. 3 (a) Autumn 2007