ISLAMABAD:
The Federal Constitutional Court (FCC) on Thursday declared Section 7E of the Income Tax Ordinance, 2001, unconstitutional, striking it down and dismissing appeals filed by the Federal Board of Revenue (FBR) seeking its restoration.
The court stated that the provision “shall be deemed not to have been part of the Income Tax Ordinance from day one.” It further held that all actions taken by FBR under Section 7E are also illegal. The court noted that section 7E had imposed a tax on certain properties, including land that was not in 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 if it generated rental income if it was not let out. This applied to properties that were freehold, used for business or agricultural land owned by the taxpayer.
The law assumed a national rental income equal to 20% of the property’s FBR-applied value. This estimated income was then taxed at 5%, which effectively amounted to an annual tax of approx. 1% of the property’s FBR (capital value).
After hearing arguments, the court held: “We are persuaded to hold that Section 7E of the Income Tax Ordinance, 2001 is ultra vires the Constitution, and is therefore struck down, being void ab initio”.
The judgment added that “all acts, proceedings and notifications initiated or made by the FBR/CIR under Section 7E are declared to be without lawful authority and are hereby set aside”.
FCC Chief Justice Aminud-Din Khan noted in the brief order that the provision introduced through the 2022 Finance Act had been challenged in several high courts across the country on constitutional grounds.
The ruling comes after conflicting decisions from across the country. The Peshawar High Court (PHC) and Balochistan High Court had already declared the provision unconstitutional and struck it down; The Islamabad High Court (IHC) had partially read it down and declared sub-section (2) unconstitutional.
A Lahore High Court (LHC) judgment upholding the provision was later overturned by a division bench, while the Sindh High Court (SHC) had dismissed similar petitions.
As a result, appeals by the taxpayers were allowed, while petitions filed by the Federal Board of Revenue and the Commissioner of Inland Revenue were dismissed. All related cases have been decided accordingly.
The court had reserved its judgment on April 30 before issuing the short order.
