• Declares Section 7E of Income Tax Ordinance unconstitutional
• Taxpayers’ appeals against LHC, SHC judgements allowed
• FBR’s petitions against PHC, BHC verdicts dismissed

ISLAMABAD: The Federal Constitutional Court (FCC) on Thursday struck down Section 7E of the Income Tax Ordinance (ITO), 2001, declaring unconstitutional a law that allowed the Federal Board of Revenue (FBR) to tax property owners on “deemed income”, even if they were not actually earning from such properties.

Having significant implications for FBR’s property taxation regime, 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 Finance Act 2022 had imposed tax on the “deemed income” of taxpayers holding immovable property worth over Rs25 million. The provision taxed property at five per cent of its FBR-defined fair market value, with a 20pc tax rate, resulting in an effective 1pc annual tax 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 open court by a two-judge bench comprising FCC Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi.

The detailed reasons will be recorded separately, the judgement said. The FCC also converted into appeals and allowed the civil petitions filed by a number of taxpayers against the judgements of the Sindh High Court (SHC) and the Lahore High Court (LHC).

However, the civil petitions filed by the Federal Board of Revenue (FBR) and the Commissioner Inland Revenue (CIR) against the judgements 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 declared without lawful authority and set aside, the short order explained.

The insertion of Section 7E in the ITO was challenged before all provincial high courts, including the Islamabad High Court (IHC), on constitutional grounds.

The PHC and BHC had declared the impugned provision ultra vires the Constitution and struck it down. However, the IHC did not invalidate the provision in its entirety and instead read it down to declare subsection (2) ultra vires the Constitution.

Against the judgement of the single judge of the IHC, intra-court appeals (ICAs) were pending before a division bench of the IHC, in addition to two writ petitions, which were requisitioned through an April 6, 2026, order in light of Article 175E(5) of the Constitution after the 27th Constitutional Amendment and subsequently transferred to the FCC.

Meanwhile, a single judge of the LHC had allowed the writ petitions, but the judgement was later reversed by a division bench in intra-court appeals, which allowed the appeals and dismissed the petitions. The SHC had similarly dismissed the constitutional petitions. Consequently, the taxpayers challenged the judgements of the LHC and SHC, whereas the federal government, FBR and CIR challenged the judgements rendered by the Peshawar, Balochistan and Islamabad high courts.

The petitions challenged the provision on the ground that it imposed tax on deemed income irrespective of actual accrual or receipt of income.

Counsel for the petitioners argued during the hearing 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.

The petitions contended that the provision created artificial income without realisation and violated Article 25 of the Constitution by introducing arbitrary classifications among taxpayers.

On the other hand, the federation defended Section 7E as a valid fiscal measure intended to broaden the tax base and address un-taxed economic capacity. It argued that deemed income was a recognised legal fiction in taxation jurisprudence and fell within parliament’s constitutional authority to levy taxes on income.

Published in Dawn, May 8th, 2026