Few provisions in the Income Tax Ordinance generated as much litigation as Section 7E, the deemed income tax on immovable property. That litigation has now ended, and what remains is a genuinely interesting problem in tax procedure.
The Federal Constitutional Court, consolidating appeals that had produced conflicting outcomes across the Lahore, Sindh, Peshawar, Balochistan, and Islamabad High Courts, struck down Section 7E in its entirety, holding it ultra vires the Constitution and void ab initio. The reasoning is worth understanding on its own terms. The Court held that Section 7E, in pith and substance, was a tax on the capital value of immovable property, not a genuine tax on income. Describing the levy as taxing deemed rental income was, in the Court's words, merely illusory and did not withstand constitutional scrutiny. Since capital value taxation on immovable property falls within provincial legislative competence rather than federal, the Federal Legislature never had authority to enact the provision at all. Every notice, assessment, and demand issued under Section 7E was declared void, not merely suspended, a distinction with real consequences for what follows.
In the same proceeding, the Court reached a different conclusion on Super Tax under Section 4C, upholding its constitutional validity as a genuine tax on income falling squarely within federal competence. But it added an important qualification. Super Tax cannot be levied where the underlying income is otherwise exempt under the Ordinance, meaning gains from property held beyond the prescribed holding period, inherited assets, or other exempt categories fall outside its reach even where Section 4C would otherwise apply. Two provisions inserted through the same Finance Act, tested under the same constitutional lens, produced opposite outcomes based on what each was, in substance, actually taxing.
The practical difficulty is what has followed. Because Section 7E was declared void from inception rather than merely repealed going forward, every taxpayer who paid under it has a clear legal right to a refund. Yet no policy level mechanism for processing these claims has been notified, leaving practitioners to write directly to FBR's leadership seeking a defined procedure rather than a case by case scramble. A right established by the Constitution's highest interpretive authority is, in practice, only as real as the administrative machinery built to honour it. For anyone advising clients who paid under Section 7E across multiple tax years, the position is straightforward in principle, unclear in execution. The entitlement to a refund is settled law. The mechanism to receive it is not, and until FBR notifies one, every claim risks being treated as a novel request rather than the routine consequence of a judgment it already is.
Muhammad Rehan Sarwar
Advocate High Court,
The Nomologists Law Firm
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