Immovable property: Treating market value as income is beyond competence of FL: LHC

ISLAMABAD: The Lahore High Court (LHC) ordered to treat the market value of immovable property as income under Entry 47 is beyond the competence of the Federal Legislature, hence is declared ultra vires.

The judgment, authored by Justice Shahid Jamil Khan examined the Federal Legislature’s competence to levy income tax on immoveable property, invoking fiction of law by using the phrase, “A person shall be treated to have derived, as income chargeable to tax,” on capital assets owned by a resident person. This presumption is enforced by inserting Section 7E in Chapter II, captioned “Charge of Tax”, of Income Tax Ordinance, 2001 through Finance Act, 2022.

The LHC further held that the provisions of Section 7E are read down to save the taxation on the Capital Value of Assets, which is within the competence of Federal Legislature under Entry 50. It also said that Entry 50 for taxing capital value of assets requires that the assets should be valued as a whole and taxed inseparably.

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The judgment said that the curative legislation is expected to bring the provisions, of Section 7E, within the spirit of taxing capital value of assets, and to harmonise it with other provisions of the Ordinance of 2001.

Exclusion of persons under clauses (i), (iii) and (iv) of Section 7E(2)(d), is discriminatory, offending Article 25, therefore, are declared ultra vires. However, the legislature is expected to remove the pointed out expropriatory and confiscatory aspects in the provisions of Section 7E.

It said that for avoiding the discriminatory and confiscatory aspect in the charging provision, the orthodox way is that it should be levied indiscriminately to all subjects falling within the mischief of charging provision. However, the exclusion be placed under the exempting provisions, which presuppose the taxation, but exempt whom they choose, for extending benefit to a class or persons, to alleviate hardship and confiscatory aspect and for achieving any policy or administrative goal.

Such exemption, if granted through subordinate legislation is placed before the Parliament for approval. It is a salutary rule of interpretation that exemption is not a right and in case of two interpretations, one favouring the chargeability is to be adopted by courts.Petitioners, being taxpayers, have claimed the taxation under Section 7E as ultra vires of the Federal Legislature’s field of competence, listed in Entries 50 and 47 of the Fourth Schedule to the Constitution.

They submitted that immovable property has completely been ousted from Federal Legislature’s competence to tax, therefore, taxation of income envisaged in Entry 47, cannot be deemed for immovable property.

They explained that all aspects of taxing immovable property have been entrusted to Provincial Legislatures after the 18th Amendment in the Constitution. The emphasis was that excluding phrase in Entry 50 is not of the taxes on immovable property, which are already in the provincial legislature’s competence but is of immovable property as a component of capital assets.

They had contended that legal fiction is employed, by inserting Section 7E, to overcome the impediment in the Constitution, which is not permissible.

Copyright Business Recorder, 2023