The Supreme Court of Pakistan (SC) has granted interim relief to petitioners seeking exemption on Section 7E (tax on deemed income basis) of the Income Tax Ordinance, 2001 till February 19, 2024.

As per the order, a copy of which is available with Business Recorder, in the petition filed against the Federation of Pakistan, petitioners have challenged the tax on “deemed income” (“impugned tax”) inserted in the Income Tax Ordinance 2001 (“Ordinance”) through Finance Act, 2022.

The petitioners “contended that the said tax is unconstitutional, inter alia, on the following grounds: a) That the Federal legislature lacks competence in the matter as the ambit of the said tax falls outside the scope of entries 47 and 50 of the Federal legislative list.

“b) That the impugned tax is discriminatory and violative of Article 25 of the Constitution inasmuch as Section 7E(2)(d) of the Ordinance is concerned whereby certain categories of persons have been excluded without any lawful justification or intelligible differentia,” read the SC order.

As per the court’s order, the petitioners have further contended that “the tax has been imposed on absolutely “nothingness” as there is no economic activity, no receipt and no income in the real terms and fails to meet the requirements of “income” laid down in the judgment of this Court passed in the case of Messrs Elahi Cotton Mills Ltd and others v. Federation of Pakistan through Secretary M/ o Finance, Islamabad and 6 others (PLD 1997 SC 582).”

The order read that the “learned counsel for the petitioners has referred to the budget speech for the financial year 2022-2023 of the then Finance Minister, Mr. Miftah Ismail, wherein under the head “tax on Deemed Rental Income”, he stated as follows:

“The major part of the wealth of rich people is parked in the real estate sector in Pakistan. This is a double faceted menace. It leads to the accumulation of unproductive assets and raises the prices of housing for the poor and lower-income groups.

“We intend to correct this imbalance. Therefore, all persons who have more than one immovable property exceeding Rs.25 million situated in Pakistan shall be deemed to have received rent equal to 5% of the fair market value of the immovable property and shall pay tax at the rate of 1% of the fair market value of the said property. However, one house of each individual will be excluded.”

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In this background, the petitioner submitted that “the real intention behind the imposition of impugned tax was to impose restriction and to discourage unproductive use of money by investing the same in real estate. However, this objective has been achieved through unconstitutional means in the shape of impugned tax.”

As per the court order, no one has tendered an appearance on behalf of the office of the Attorney General. The SC has ordered to issue fresh notice to the learned Attorney General under Order XXVII-A, CPC.

As per the court order, the Supreme Court “pointed out that the instant matter has arisen out of the decision of the Sindh High Court whereas similar matters are pending before the Lahore High Court, Islamabad High Court and the High Court of Balochistan.

“It would be appropriate that we have the benefit of the decisions from the said High Courts on the said questions.

“We, therefore, expect that the said High Court will decide the instant matters pending before them expeditiously. A copy of this order be dispatched to the Registrars of the aforementioned High Courts. To come up on 19th February 2024. If the matters are decided by the respective High Courts till then, this case will be taken up on day-to-day basis,” read the order.

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Subsequently, the apex court said the interim relief granted on 22.03.2023 “may continue till the next date of hearing.”

“It is further clarified that the interim relief may continue in the next financial year. It is also pointed out that there will be no further adjournment on the next date of hearing,” read the court order.