ISLAMABAD: The Federal Constitutional Court (FCC) on Thursday declared Section 7E of the Income Tax Ordinance, 2001 unconstitutional, struck down the provision and dismissed appeals filed by the Federal Board of Revenue (FBR) seeking its restoration.
The court ruled that the provision “shall be deemed not to have been part of the Income Tax Ordinance from day one.” It further declared that all actions taken by the FBR under Section 7E were also unlawful.
The court observed that Section 7E had imposed tax on certain immovable properties, including plots that were not under active use.
Under Section 7E of the Income Tax Ordinance, any immovable property owned by a taxpayer — other than the first property — was treated as though it generated rental income if it was not rented out. The provision applied to self-occupied properties, properties used for business purposes and agricultural land owned by the taxpayer.
The law presumed a notional rental income equal to 20 per cent of the property’s FBR-assessed value. This deemed income was then taxed at five per cent, effectively resulting in an annual tax of around one per cent of the property’s FBR capital value.
After hearing arguments, the court stated: “We are persuaded to hold that Section 7E of the Income Tax Ordinance, 2001, is ultra vires the Constitution, and is accordingly struck down, being void ab initio.”
The judgment further stated that “all actions, proceedings, and notices initiated or taken by the FBR/CIR under Section 7E are declared to be without lawful authority and are hereby set aside.”
FCC Chief Justice Amin-ud-Din Khan, in the short order, noted that the provision introduced through the Finance Act 2022 had been challenged before several high courts across the country on constitutional grounds.
The ruling came after conflicting judgments from different courts. The Peshawar High Court and the Balochistan High Court had already declared the provision unconstitutional and struck it down, while the Islamabad High Court had partially read it down and declared subsection (2) unconstitutional.
A judgment by the Lahore High Court upholding the provision was later overturned by a division bench, whereas the Sindh High Court had dismissed similar petitions.
As a result of the ruling, appeals filed by taxpayers were allowed, while petitions submitted by the Federal Board of Revenue and the Commissioner of Inland Revenue were dismissed. All related proceedings were disposed of accordingly.
The court had reserved its verdict on April 30 before issuing the short order on Thursday.