Immovable properties: BHC declares Section 7E of ITO as ultra vires to constitution

ISLAMABAD: Balochistan High Court (BHC) has declared Section 7E (tax on deemed income basis) of the Income Tax Ordinance 2001 on immovable properties as ultra vires to the Constitution.

In this regard, the BHC has issued a detailed judgement on Friday to strike down section 7E of the Income Tax Ordinance 2001.

According to a judgement of the BHC, the instant petitions are allowed and the impugned provisions of section 7E of the Ordinance are declared to be ultra vires the Constitution; hence it is struck down and is declared to be void ab initio.

‘Defenders’ take ‘deemed income’ as tax on income, not on property

The petitioners had challenged the provision of section 7E of the Income Tax Ordinance, 2001 (Ordinance) inserted through the Finance Act, 2022, on the basis that it is ultra vires the constitution for being beyond the competence of the Federal Legislature, and for being discriminatory and confiscatory violating constitutional rights, hence liable to be struck down.

The BHC observed that the vires of the impugned provision was challenged before different High Courts; i.e., the High Court of Sindh, the Lahore High Court, Islamabad High Court, as well as, Peshawar High Court. The Sindh and Lahore High Courts upheld the vires of section 7E, whereas the Courts of Peshawar and Islamabad have struck down the law for being ultra vires.

The conclusion of the Supreme Court of Pakistan in Elahi Cotton case, though pertaining to of pre-Eighteenth Amendment period makes a very powerful finding and lays down the principle as to what extent an amount may be deemed and treated as income.

Though deemed income may be given widest possible meaning but it does not mean that Parliament can choose to tax as income an item which in no rational sense can be regarded as a citizen’s income.

The item taxed should rationally be capable of being considered as the income of a citizen. Impugned Section 7E of the Ordinance by no rational sense can be called an income and be subjected to Income Tax. There is neither an economic transaction nor any accrual/ arising of an amount which may be deemed as income.

In the case of impugned Section 7E there is no ‘Economic Transaction’ or event that can give rise to an amount that can be treated as income.

The deeming is based on mere ownership of immovable property with no economic transaction thereon. In the absence of any economic transaction, taxing immovable properties in the hands of owner through legal fiction of deeming is thus irrational even in the light of the Apex Court decision in the case of Elahi Cotton Mills.

The instant petitions are allowed and the impugned provisions of Section 7E of the Ordinance are declared to be ultra vires the Constitution; hence it is struck down and is declared to be void ab initio, BHC judgement added.

Copyright Business Recorder, 2024