The Federal Constitutional Court (FCC) has ruled Section 7E of the Income Tax Ordinance, 2001, unconstitutional and void in its entirety. This decision also renders all notices, actions, and proceedings initiated by the Federal Board of Revenue (FBR) and the Revenue Division under this provision ineffective and unlawful.
A two-member bench, consisting of Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi, heard the case on Thursday and subsequently issued a written order following a brief oral judgment. Section 7E was introduced through the Finance Act, 2022, as part of an effort to broaden the tax base. It deemed a fixed percentage, typically 5%, of the fair market value of certain immovable properties as taxable income for resident individuals, regardless of whether any actual income was generated from the property. This measure aimed to include idle or under-declared real estate assets within the tax net.
The provision faced multiple legal challenges across the country, with arguments citing lack of legislative authority, double taxation, discrimination, and infringement of fundamental rights. The Peshawar High Court (PHC) and Balochistan High Court (BHC) had declared Section 7E unconstitutional and struck it down, while the Islamabad High Court (IHC) invalidated subsection 2 of the provision. Conversely, the Sindh High Court (SHC) and Lahore High Court (LHC) had upheld the provision in certain rulings.
In appeals filed by taxpayers, it was contended that Section 7E imposed a tax on deemed income from property ownership without any actual earnings, thus exceeding constitutional limits. During the hearing, it was noted that the provision had been inserted into the Income Tax Ordinance via the Finance Act, 2022, but conflicting judgments from various high courts had created legal uncertainty.
Senior counsel Hafiz Ehsan Ahmad Khokhar, representing the Revenue Division and FBR, argued that Section 7E was enacted under Parliament’s constitutional authority to expand the tax base and that the concept of deemed income is a recognized principle in tax law. He maintained that the provision complied with Article 77 of the Constitution and relevant legislative powers.
After considering all arguments, the court concluded that Section 7E essentially imposed a tax on property ownership rather than actual income, which is not permissible under the Constitution. Consequently, the court declared the provision unconstitutional, unauthorized, and void. It also ruled that all notices and actions taken by the FBR and other authorities under this section are terminated.
The court further noted that the conflicting judgments of various high courts had caused legal uncertainty, which has now been resolved. Detailed reasons for the judgment will be provided in due course. The verdict had been reserved on April 30 before the issuance of this short order.
