ISLAMABAD: The Federal Constitutional Court has held that Section 7E of the Income Tax Ordinance, 2001, was effectively illusory and confiscatory because it imposed tax on immovable property that does not generate income and, in some situations, cannot generate income at all.
In detailed reasons issued on Tuesday, Chief Justice Aminuddin Khan said the practical effect of such a levy could force an owner of a non-income-producing asset to sell that asset in order to pay the tax. The ruling came the same day parliament was debating the Finance Bill 2026, which includes proposals related to implementation of the court’s May 7 short order declaring Section 7E ultra vires.
Section 7E had been introduced through the Finance Act 2022 and authorised the charging of tax on deemed income linked to assets and properties. The court held that the provision did not meet constitutional standards and fell outside the legislative competence of the federal legislature.
Chief Justice Aminuddin Khan, who headed the two-member bench, also found that the levy operated in a discriminatory way because it granted exemptions to certain classes of persons while exposing similarly placed taxpayers to unequal treatment. The court said that although the legislature may classify persons or properties for taxation, any such classification must meet the standard of reasonableness. It added that exemptions granted without a clear principle, or classifications that are arbitrary, artificial or discriminatory in effect, cannot survive constitutional scrutiny.
Questions over fiscal burden
The judgement said the tax also raised broader concerns about excessive fiscal burden and duplication. Referring to taxation of both the source of acquisition and the asset itself without regard to income generation, Chief Justice Aminuddin Khan observed that such a structure creates serious concerns over economic redundancy.
The detailed reasons were issued in petitions brought by taxpayers against rulings of the Sindh High Court and the Lahore High Court, as well as orders of the Federal Board of Revenue and the Commissioner Inland Revenue. The judgement noted that after the 18th Amendment, similar disputes have become more frequent because of overlapping claims of fiscal authority by the federation and the provinces.
According to the court, this has often compelled taxpayers to enter lengthy and unnecessary litigation and has exposed them to the possibility of double taxation on similar subject matter. The judgement said this situation places a disproportionate financial burden on taxpayers and also creates avoidable pressure on the constitutional jurisdiction of the superior courts through a growing number of constitutional petitions. It added that such an approach is inconsistent with fiscal certainty, fairness and orderly tax administration.
Property rights and bench objection
The court also held that Section 7E violated Article 23 of the Constitution, which guarantees every citizen the right to acquire, hold and dispose of property.
Before concluding, the FCC addressed an objection to the composition of the bench. The objection argued, with reference to the Supreme Court Rules, 1980, that the matter should have been heard by at least a three-member bench and that a two-member bench was procedurally improper.
Rejecting that argument, the court said the objection lacked substance. It explained that after the FCC’s establishment, it had adopted the Supreme Court Rules, 1980, and modified Order XI through a notification issued in December 2025. The judgement said bench formation is the exclusive prerogative of the chief justice as master of the roster, and in the absence of any express constitutional or statutory requirement for a larger bench in this matter, a two-member bench could not be considered incompetent.
