ISLAMABAD: The Federal Constitutional Court (FCC) has reserved its verdict on a set of petitions challenging the constitutional validity of Section 7E of the Income Tax Ordinance, 2001, a provision that introduces taxation on deemed income derived from immovable property.
The pending ruling is expected to carry far-reaching constitutional implications, particularly regarding the interpretation of Article 189, Parliament’s legislative competence under Article 77, the doctrine of deemed income, and the scope of judicial restraint in taxation matters within Pakistan’s evolving constitutional structure.
A two-member FCC bench, headed by Chief Justice Amin-ud-Din Khan, heard appeals on Thursday stemming from divergent rulings issued by the Sindh, Lahore, Peshawar, and Islamabad High Courts on the legality of the tax introduced through the Finance Act, 2022.
During proceedings, counsel for the petitioners argued that Section 7E effectively imposes a tax on immovable property under the guise of income taxation, thereby exceeding Parliament’s constitutional authority. They maintained that the provision creates artificial or notional income without actual realization, violating established taxation principles. The petitioners also contended that the law breaches Article 25 of the Constitution by introducing discriminatory treatment among similarly placed taxpayers.
In response, the Federation defended Section 7E as a lawful fiscal measure, asserting that it falls within Parliament’s legislative domain under Article 77, read with Entry 47 of the Fourth Schedule. Government representatives argued that “deemed income” is a recognized legal concept in tax jurisprudence, aimed at capturing untaxed economic capacity and preventing tax avoidance. They emphasized that the provision taxes the economic benefit associated with ownership of certain immovable assets rather than the property itself.
Representing the Revenue Division, Hafiz Ahsaan Ahmad Khokhar argued that under Article 191 of the Constitution, read with the Supreme Court Rules, 2025, a two-member bench of the FCC is fully competent to adjudicate the matter. He stated that objections to the bench’s composition lack legal basis, as procedural arrangements fall within the Court’s constitutional autonomy.
He further submitted that while Article 189 generally renders Supreme Court judgments binding, the establishment of the Federal Constitutional Court under the restructured constitutional framework has reshaped the landscape of constitutional adjudication. According to him, pre-restructuring Supreme Court rulings now hold persuasive value rather than strict binding authority for the FCC, allowing it independent interpretative jurisdiction.
Khokhar also argued that the Lahore and Sindh High Courts had correctly upheld the constitutional validity of Section 7E by distinguishing between property tax and income tax through legal fiction. However, he criticized certain interpretations by the Islamabad, Balochistan, and Peshawar High Courts, stating they failed to properly apply constitutional principles and incorrectly equated deemed income taxation with direct property taxation.
The Federation maintained that Section 7E remains fully intra vires the Constitution and aligned with established principles of fiscal jurisprudence. The FCC’s reserved judgment is now awaited and is likely to set a key precedent for taxation of deemed income in Pakistan.
