The Federal Constitutional Court (FCC) on Thursday declared Section 7E of the Income Tax Ordinance, 2001, declaring it unconstitutional, struck it down, and dismissed appeals filed by the Federal Board of Revenue (FBR) seeking its restoration.

The court stated that the provision “shall be deemed not to have been part of the Income Tax Ordinance from day one.” It further ruled that all actions taken by FBR under Section 7E are also unlawful. The court noted that Section 7E had imposed tax on certain properties, including plots not under active use.

Under Section 7E of the Income Tax Ordinance, any immovable property owned by a taxpayer—other than the first property—was treated as if it generated rental income if it was not rented out. This applied to properties that were self-occupied, used for business, or agricultural land owned by the taxpayer.

The law assumed a national rental income equal to 20% of the property’s FBR-assessed value. This deemed income was then taxed at 5%, which effectively amounted to an annual tax of about 1% of the property’s FBR (capital) value.

After hearing arguments, the court held, “We are persuaded to hold that Section 7E of the Income Tax Ordinance, 2001, is ultra vires the Constitution, and is accordingly struck down, being void ab initio”.

The judgment added that “all actions, proceedings, and notices initiated or taken by the FBR/CIR under Section 7E are declared to be without lawful authority and are hereby set aside”.

FCC Chief Justice Aminud-Din Khan, in the short order, noted that the provision introduced through the Finance Act 2022 had been challenged before multiple high courts across the country on constitutional grounds.

The ruling comes after conflicting decisions from across the country. The Peshawar High Court (PHC) and the Balochistan High Court had already declared the provision unconstitutional and struck it down; the Islamabad High Court (IHC) had partially read it down and declared subsection (2) as unconstitutional.

A Lahore High Court (LHC) judgment upholding the provision was later reversed by a division bench, while the Sindh High Court (SHC) had dismissed similar petitions.

As a result, appeals by taxpayers were allowed, while petitions filed by the Federal Board of Revenue and the Commissioner of Inland Revenue were dismissed. All related proceedings have been disposed of accordingly.

The court had reserved its judgment on April 30 before issuing the short order.