Section 7E tax on property declared unconstitutional by court

ISLAMABAD: The Federal Constitutional Court has declared the controversial Section 7E of the Income Tax Ordinance, 2001, unconstitutional and void in its entirety, while also ruling that all actions, notices, and proceedings initiated by the Federal Board of Revenue (FBR) and the Revenue Division under the provision are unlawful and ineffective.

A two-member bench comprising Chief Justice Amin-ud-Din Khan and Justice Ali Baqar Najafi heard the case on Thursday. The court issued a written order after announcing its short judgment.

During the hearing, the court was informed that Section 7E had been inserted into the Income Tax Ordinance through the Finance Act, 2022. However, conflicting judgments had been delivered by various high courts across the country regarding the provision.

The Peshawar High Court and Balochistan High Court had declared Section 7E unconstitutional and struck it down, while the Islamabad High Court had declared subsection 2 of the provision unconstitutional.

In contrast, the Sindh High Court and Lahore High Court had upheld the provision in certain rulings.

Taxpayers who challenged the law argued that it effectively imposed a tax on deemed income from property ownership despite the absence of actual income, thereby exceeding constitutional limits.

Appearing on behalf of the Revenue Division and the FBR, senior lawyer Hafiz Ehsan Ahmad Khokhar argued that Section 7E had been introduced under Parliament’s constitutional authority to broaden the tax net and that the concept of deemed income was a recognized principle in tax law.

He maintained that the provision fell within the scope of Article 77 of the Constitution and relevant legislative competence.

After hearing arguments from all sides, the court ruled that Section 7E, in its true nature and character, amounted to a tax on property ownership rather than actual income and therefore could not be sustained under the Constitution.

The judgment declared Section 7E unconstitutional, unauthorized and void, adding that all notices, proceedings and actions initiated by the FBR and other authorities under the provision would also stand terminated.

The court further observed that the legal uncertainty arising from conflicting judgments of various high courts had now been settled, while detailed reasons for the decision would be issued later.