ISLAMABAD:
The Federal Constitutional Court (FCC) on Thursday declared Section 7E of the Income Tax Ordinance, 2001 unconstitutional, struck it down and dismissed appeals filed by the Federal Board of Revenue (FBR) seeking its reinstatement.
The court said the provision “shall be deemed not to be part of the Income Tax Ordinance from day one.” It further held that all actions taken by FBR under Section 7E were also illegal. The court noted that Section 7E had imposed a tax on certain properties, including parcels not actively used.
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 not let out. This applied to properties occupied by self-employed persons, used for commercial purposes or agricultural land owned by the taxpayer.
The law assumed a national rental income equal to 20% of the FBR assessed value of the property. This deemed income was then taxed at 5%, which effectively amounted to an annual tax of approximately 1% of the FBR (capital) value of the property.
After hearing the arguments, the court said: “We are persuaded to hold that Section 7E of the Income Tax Ordinance, 2001 is ultra vires the Constitution, and is therefore invalidated, being void ab initio.”
The judgment added that “all actions, proceedings and notices initiated or taken by the FBR/CIR under Section 7E are declared without legal authority and are hereby set aside.”
FCC Chief Justice Aminud-Din Khan was quick to note that the provision introduced by the Finance Act 2022 had been challenged in several high courts across the country on constitutional grounds.
The move follows conflicting decisions across the country. The Peshawar High Court (PHC) and the Balochistan High Court had already declared the provision unconstitutional and struck it down; the Islamabad High Court (IHC) had partially read it and declared subsection (2) unconstitutional.
A judgment of the Lahore High Court (LHC) upholding this provision was later set aside by a division bench, while the Sindh High Court (SHC) had dismissed similar petitions.
As a result, the taxpayers’ appeals were allowed, while petitions filed by the Federal Board of Revenue and the Commissioner of Inland Revenue were denied. All related procedures have been resolved accordingly.
The court had reserved judgment on April 30 before issuing the short-term order.
