Sec 7E of Income Tax: Levy of tax on deemed income unconstitutional, FCC told

Save Saved Follow us --> ISLAMABAD: The Federal Constitutional Court (FCC) was informed that the levy of tax on deemed income under Section 7E of the Income Tax Ordinance, 2001, is unconstitutional and liable to be struck down.

A two-member bench, headed by Chief Justice Amin-ud-Din Khan, on Wednesday heard appeals arising from judgments of the Sindh, Lahore, Peshawar, and Islamabad High Courts concerning the validity of the tax imposed through the Finance Act, 2022.

Under Section 7E, immovable properties owned by a taxpayer (excluding the first property), if not rented out, or self-owned business premises, or self-owned agricultural land, are deemed to generate rental income equal to 20% of their FBR value. This “deemed rent” is then taxed at the rate of 5%, effectively resulting in an annual tax of approximately 1% of the property’s FBR (capital) value.

Raashid Anwer, representing taxpayers, contended that the levy is, in essence, a tax on the capital value of assets and thus falls outside the legislative competence of the federation. He submitted that the core issue before the Court was whether the tax could be sustained under Entry 50 of the Fourth Schedule to the 1973 Constitution— which relates to “taxes on the capital value of the assets, not including taxes on immovable property” — or under Entry 47, which pertains to “taxes on income other than agricultural income.” He submitted that the impugned levy could not be justified under either Entryand, therefore, was unconstitutional.

Anwer further argued that the tax could not fall under Entry 50 because, after the 18thAmendment, Entry 50, which previously read as “Taxes on the capital value of the assets, not including taxes on capital gains on immovable property,” had been amended to delete the words “capital gains on.”

He contended that this amendment reflected a clear constitutional intent to exclude immovable property from the federation’s taxing powers in respect of capital value. In support of this position, reliance was placed on FBR Circular No. 3 of 2012, which, according to the counsel, acknowledged that the federation lacked the authority to impose a tax on the capital value of immovable property. He maintained that Section 7E, in the pith and substance, amounts to such a tax and is therefore ultra vires the Constitution.

Anwer further argued that the levy could not be sustained under Entry 47, as it seeks to tax properties that generate no actual income. He pointed out that rented properties and other income-generating assets are excluded from the ambit of Section 7E, thereby underscoring that the provision targets assets that do not yield income.

Relying on the Supreme Court’s judgment in the Elahi Cotton case, he submitted that while the Court had upheld the constitutionality of turnover tax, it had done so in the context of Entry 52 of the Fourth Schedule, and not Entry 47. He emphasized that the judgment does not support the proposition that anything may be arbitrarily deemed to be income. Rather, it permits deeming provisions only where there exists an underlying economic activity.