FCC strikes down Section 7E of ITO as unconstitutional

ISLAMABAD: The Federal Constitutional Court (FCC) held that Section 7E of the Income Tax Ordinance (ITO), 2001, is ultra vires the Constitution, and is accordingly struck down, being void ab initio. A two-member bench, headed by Chief Justice Amin-ud-Din Khan and comprising Justice Ali Baqar Najafi, on Thursday announced short order of the judgment, which it had reserved on April 30 after hearing the arguments of taxpayers’ counsel, the Federal Board of Revenue (FBR), the Additional Attorney General, and senior counsel Hafiz Ahsaan Ahmad Khokhar, Advocate Supreme Court, appearing on behalf of the Secretary, Revenue Division. The FCC allowed the petitions of taxpayers against the judgments of the Sindh High Court and the Lahore High Court, but dismissed the civil petitions of the Federal Board of Revenue (FBR)/Commissioner Inland Revenue (CIR) against the judgments of the Peshawar High Court and the Balochistan High Court. READ MORE: FCC reserves verdict on pleas against Sec 7E of IT Ord 2001 Consequently, all actions, proceedings, and notices initiated or taken by the FBR/C. I. R under Section 7E were declared to be without lawful authority and set aside them. Section 7E was introduced through the Finance Act, 2022 for tax year 2023 and 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 Section 7E of ITO was challenged before all the High Courts of the country. The petitions challenged the provision on the ground that it imposed tax on deemed income irrespective of actual accrual or receipt of income. The Peshawar High Court and the Balochistan High Court declared the impugned provision to be ultra vires the Constitution and struck it down. The Islamabad High Court, while not invalidating the provision in its entirety, read it down and declared subsection (2) thereof to be ultra vires the Constitution. Against the judgment of the Single Judge of the Islamabad High Court, I. C. As were pending before the division bench of the Islamabad High Court and two writ petitions were also pending, which were requisitioned vide order dated 06. 04. 2026 in the light of Article 175E(5) of the Constitution and same were transferred to this Court. A single judge of the Lahore High Court had allowed the writ petitions; however, the said judgment was reversed in intra-court appeals by a Division Bench of the LHC, which allowed the appeals and dismissed the petitions. The Sindh High Court similarly dismissed the constitutional petitions. The provision was interpreted differently by various High Courts. Consequently, the taxpayers assailed the judgments of the Lahore High Court and the High Court of Sindh, whereas the Federal Government/Federal Board of Revenue/Commissioner Inland Revenue challenged the judgments rendered by the Peshawar, Balochistan and Islamabad High Courts before the Supreme Court of Pakistan. Following the establishment of the Federal Constitutional Court under the 27th Constitutional Amendment and the restructuring of constitutional jurisdiction, the matters were transferred to the Federal Constitutional Court for adjudication. The counsels for the petitioners argued that the provision effectively amounted to a property tax disguised as income tax, thereby exceeding Parliament’s legislative competence under Article 77 read with Entry 47 of the Federal Legislative List. It was further contended that the provision created artificial income without realization and violated Article 25 of the Constitution by introducing arbitrary classifications among taxpayers. The federation defended Section 7E as a valid fiscal measure intended to broaden the tax base and address untaxed economic capacity. The respondents argued that deemed income is a recognized legal fiction in taxation jurisprudence and falls within Parliament’s constitutional authority to levy taxes on income. On merits, Hafiz Ahsaan defended Section 7E as a valid exercise of Parliament’s fiscal powers under Article 77 read with Entry 47 of the Fourth Schedule. He argued that the doctrine of legal fiction permits taxation of deemed or notional income and that Section 7E taxed presumed economic benefit arising from ownership of certain high-value immovable assets rather than the property itself. He further submitted that taxation statutes enjoy wide latitude in classification under Article 25 and invoked the principle of judicial restraint in fiscal matters, arguing that courts should exercise caution before interfering in economic and taxation policy decisions made by Parliament. Hafiz Ahsaan also submitted that the Lahore High Court and Sindh High Court had correctly upheld the constitutional validity of Section 7E by distinguishing property taxation from deemed income taxation, whereas the Islamabad High Court, Balochistan High Court, and Peshawar High Court had not correctly appreciated the constitutional framework. Copyright Business Recorder, 2026

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