FCC urged to declare Sec 7E of IT law ultra vires of Constitution

ISLAMABAD: The Federal Constitutional Court (FCC) was asked to declare Section 7E of the Income Tax Ordinance, 2001, ultra vires of the Constitution, and Entry 50 as confiscatory and discriminatory. A two-member bench, headed by Chief Justice Amin-ud-Din Khan and comprising Justice Ali Baqar Najafi, on Tuesday heard the appeals about Section 7E of the Income Tax Ordinance, 2001. The constitutional tax matters were transferred from various High Courts to the FCC, which has been established in pursuance of the 27thConstitutional Amendment. Section 7E, introduced through the Finance Act 2022, imposes a tax on deemed income computed at five percent of the fair market value of immovable property held by a resident person, effectively treating mere ownership of property as a taxable income-generating activity. Barrister Jahanzeb Awan, representing the taxpayers, highlighted the constitutional challenge to Section 7E of the ITO, 2001. He opened his arguments by taking the Court through the taxation scheme of the erstwhile Income Tax Ordinance 1979 and the introduction and salient features of the presumptive tax regime in Pakistan. He explained that Sections 80C, 80CC, and 80D of the erstwhile 1979 Ordinance, which were challenged in M/s Elahi Cotton Mills Ltd. vs Federation of Pakistan (PLD 1997 SC 582) case, were on a different footing than Section 7E. He further argued that these provisions were upheld based on Entry 47 read with Entry 52 of the Federal Legislative List, adding that Elahi Cotton did not support the Department’s case. He submitted that Elahi Cotton Mills validated the presumptive tax regime only to the extent that there existed an underlying transaction or actual receipt of an amount, and that the deeming device upheld in that case was tested exclusively to that extent. He stated that Section 7E, by contrast, imposes tax based on bare ownership of property without any underlying transaction or receipt whatsoever, and therefore falls outside the scope of what Elahi Cotton Mills permits. Awan submitted that the tax is in pith and substance a tax on immovable property which falls within the legislative competence of the Province in terms of Entry No 50 of the Federal Legislative List; 4thSchedule to the Constitution. Awan further submitted that the Supreme Court, in the case of Pakistan State Oil Company Ltd vs Commissioner Inland Revenue (2018 SCMR 896), held that income tax cannot be permitted to exceed actual income, as that would render the levy confiscatory in nature and constitutionally impermissible. Awan also assisted the Bench by surveying the conflicting judgments of the High Courts on Section 7E; the Sindh and Lahore High Courts had upheld the provision, while the Islamabad, Peshawar, and Balochistan High Courts struck it down, walking the Court through the respective reasoning and conclusions on which the deemed rental income was either upheld or struck down by each court. Awan submitted that without any underlying income, the taxpayers would be compelled to discharge the liability by the sale of the immovable property, which makes it confiscatory. Awan concluded by submitting that the Court may be pleased to declare Section 7E as ultra vires the Constitution and Entry No 50 as confiscatory and discriminatory. Copyright Business Recorder, 2026

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