Constitutional Court issues detailed verdict on declaring Section 7E tax on immovable property void

The Federal Constitutional Court has issued a detailed 92-page judgment declaring Section 7E of the Income Tax Ordinance null and void, ruling that the federal government cannot impose income tax on the mere ownership of immovable property in the absence of actual income.

The detailed verdict, authored by Chief Justice Aminuddin Khan, was released weeks after the Constitutional Court announced its short order on May 7 striking down the controversial provision.

The court held that Section 7E effectively imposed a tax on ownership of immovable property rather than on income derived from it, making it inconsistent with constitutional principles governing taxation.

According to the judgment, the Constitution permits taxation of income, but ownership of immovable property by itself cannot be treated as taxable income.

The court observed that under Section 7E, property owners were required to pay tax equivalent to 5% of the value of immovable property regardless of whether the property generated any income.

"Only ownership of immovable property cannot be considered taxable income," the court ruled.

The judgment stated that a person who earns rental income from a property can be taxed on that income, but imposing tax on a vacant plot solely on the basis of its value amounts to taxing a notional or fictitious income.

The court cited the example of a property owner receiving rent from a house and another person owning a vacant plot. While tax on actual rental income falls within the scope of income taxation, Section 7E imposed tax on the owner of a vacant property based solely on its assessed value.

The Constitutional Court held that Parliament can legislate only in matters falling within the legislative competence of the federation.

According to the judgment, the Constitution authorises Parliament and the federal government to impose taxes on income and certain movable assets but does not empower them to levy taxes on the value or ownership of immovable property.

The court ruled that taxation relating to immovable property falls within the jurisdiction of provincial legislatures.

"The imposition of direct or indirect tax on immovable property does not come under the jurisdiction of Parliament," the judgment stated.

The court further observed that the purpose of Section 7E appeared not to be revenue generation but rather discouraging ownership of immovable property.

According to the verdict, such a measure could not be lawfully introduced through a finance bill under the constitutional framework.

The judgment held that the Constitution guarantees every citizen the right to acquire, hold and dispose of property in accordance with the law.

The court found that imposing a 5% tax on property ownership without any corresponding income infringed constitutional protections relating to property rights.

"The collection of five percent tax on property without earning income is against constitutional rights," the court ruled.

The bench further held that tax can only be imposed on actual earned income and not on hypothetical or presumed income.

The court reiterated that any law enacted in violation of fundamental rights or beyond the lawmaking authority granted by the Constitution would be void.

The Constitutional Court also criticised the exemptions provided under Section 7E(2), describing them as constitutionally questionable.

The provision had granted exemptions to certain categories, including martyrs of the armed forces, individuals injured in service, families of deceased personnel, ex-servicemen and serving government officers in relation to allotted land.

The court held that no concrete rationale had been provided to justify extending exemptions to specific classes of individuals while excluding others.

According to the judgment, such preferential treatment violated constitutional principles of equality.

"The concession given to a specific class in sub-clause (2) of Section 7E is against the Constitution," the court ruled.

While discussing broader constitutional principles, the court observed that taxes may be imposed for any public purpose and that the burden of taxation is collectively borne by society.

However, it clarified that tax collection is not dependent on whether an individual taxpayer directly benefits from a particular public expenditure.

The court said its role was to examine the constitutional validity of taxation measures rather than assess their policy objectives.

The judgment also noted that Parliament possesses the authority to enact retrospective legislation in certain circumstances, but financial and taxation laws generally cannot be applied retrospectively.

The court also addressed issues relating to bench constitution and judicial procedure.

The judgment held that the formation of benches falls within the exclusive authority of the Chief Justice and that, where no legal impediment exists, even a two-member bench of the Constitutional Court is competent to hear and decide cases.

The ruling is expected to have significant implications for federal taxation policy and the taxation of immovable property, as it clarifies the constitutional boundaries between federal and provincial taxing powers.

The Constitutional Court had declared Section 7E of the Income Tax Ordinance void through its short order on May 7, with the detailed reasons now formally released.

Reporter: Amanat Gishkori