ISLAMABAD: The Federal Constitutional Court (FCC) held that Section 7E of the Income Tax Ordinance (ITO), 2001, is, in pith and substance, a tax on the capital value of immovable property.
“The characterisation of the levy as one on ‘deemed income’ is merely illusory and does not withstand constitutional scrutiny. The provision, therefore, falls outside the legislative competence of the Federal Legislature,” said the 92-page judgment authored by Chief Justice Amin-ud-Din Khan.
It further said that, consequently, any proceedings, actions, assessments, demands, or notices initiated or taken pursuant thereto shall stand annulled, being without lawful authority and jurisdiction. The respondents are restrained from giving effect to the impugned provision in any manner whatsoever.
A two-member bench passed a short order on the matter on May 7, 2026 and announced its detailed reasons on Tuesday.
The judgment declared that Section 7E of the Ordinance is ultra vires to the Constitution, and is, therefore, void ab initio and of no legal effect.
The Court observed that Section 7E results in a form of economic duplication of taxation, inasmuch as immovable properties are ordinarily acquired from income which has already been subjected to tax, or from sources duly explained and taxed under the law. Imposing an additional tax merely on ownership of such already-acquired assets effectively results in a second layer of taxation on the same economic base.
It noted that although the doctrine of double taxation per se is not constitutionally prohibited in absolute terms, fiscal measures must nevertheless adhere to principles of fairness, rational nexus, and non-arbitrariness.
The judgment said that where a levy is structured in a manner that taxes both the source of acquisition and thereafter the asset itself without reference to income generation, it raises legitimate concerns regarding excessive fiscal burden and economic redundancy.
The Court observed that, subsequent to the Eighteenth Constitutional Amendment, disputes of the present nature have assumed increased frequency, primarily owing to overlapping assertions of fiscal authority by the Federation and the Provinces. The consequence, in several such cases, is that the taxpayer is compelled to engage in unnecessary and protracted litigation, often being exposed to the risk of double taxation in respect of the same subject matter.
The judgment maintained that this state of affairs not only places an undue and disproportionate financial burden upon the taxpayer, but also results in avoidable strain upon the constitutional jurisdiction of the superior courts, manifested through a proliferation of constitution petitions. Such a course is neither conducive to fiscal certainty nor consistent with the principles of fairness and orderly tax administration.
It stated that controversies of this nature ought, as far as practicable, to be resolved through institutional coordination, structured consultation, and a clear demarcation of legislative and taxing competence between the Federation and the Provinces, rather than being left to adversarial determination in constitutional proceedings at the cost of the taxpayer.
The judgment noted that section 7E, insofar as it imposes tax on immovable property irrespective of income generation, raises substantial constitutional questions under Articles 23, 24, and 25 of the Constitution.
The combined effect of its operation may, in certain circumstances, amount to indirect deprivation of property, discriminatory treatment amongst similarly placed taxpayers, and economically duplicative taxation, thereby necessitating strict constitutional scrutiny, it added.
Section 7E was introduced through the Finance Act, 2022, for the 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.
Section 7E of the 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, ICAs 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.
Copyright Business Recorder, 2026