FCC sets aside Income Tax Ordinance section enabling taxation on ‘deemed income’ from assets and property

ISLAMABAD: The Federal Constitutional Court (FCC) on Thursday set aside Section 7E of the Income Tax Ordinance (ITO) 2001 as ultra vires the Constitution, which had empowered tax authorities to levy tax on “deemed income” from assets and properties. Having a significant impact on the Federal Board of Revenue’s (FBR) property taxation, Section 7E was introduced through the Finance Act, 2022, for the tax year 2023. It provided for taxation on deemed or notional income arising from ownership of certain immovable properties, subject to specified exemptions relating to personal residences, agricultural land, and other exempt categories recognised under the statutory framework. The Finance Act 2022 had imposed tax on the “deemed income” of taxpayers holding immovable property worth over Rs25 million. The provision taxed such property at five per cent of its FBR-defined fair market value, subject to a 20 per cent tax rate, resulting in an effective annual tax of one per cent on the capital value of undeveloped or non-rented properties. “Having heard the learned counsel for the parties at considerable length and upon due deliberation, we are persuaded to hold that Section 7E of ITO, 2001, is ultra vires the Constitution and is accordingly struck down, being void ab initio,” said a short order announced in an open court by a two-judge FCC bench consisting of FCC Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi. The detailed reasons will be recorded separately, the judgment said. The FCC, however, converted the civil petitions filed by a number of taxpayers against the judgments of the Sindh High Court (SHC) and the Lahore High Court (LHC) into appeals and allowed them. However, the civil petitions filed by the FBR and the Commissioner Inland Revenue (CIR) against the judgments of the Peshawar High Court (PHC) and the Balochistan High Court (BHC) were dismissed. Consequently, all actions, proceedings, and notices initiated or taken by the FBR under Section 7E were de