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FCC sets aside Income Tax Ordinance section enabling taxation on ‘deemed income’ from assets and property

Pakistan's Federal Constitutional Court declared Section 7E of the Income Tax Ordinance ultra vires, voiding the tax on deemed income from property. The Lahore High Court separately ruled super tax cannot apply to capital gains from inherited property with a zero percent tax rate, setting aside a Rs114.7 million demand.

By Tertius News AI Desk 1 outlet · 2 articles Version 1 Coverage May 7–16, 2026 Published Aug 14

Lead

Pakistan's top courts have delivered two significant rulings on property taxation, potentially reshaping the country's fiscal landscape. On Thursday, the Federal Constitutional Court (FCC) struck down Section 7E of the Income Tax Ordinance 2001, a provision that empowered tax authorities to levy a tax on 'deemed income' from assets and properties. Separately, the Lahore High Court (LHC) ruled that a super tax under Section 4C cannot be imposed on capital gains from the sale of inherited property when the gain itself is taxed at zero percent, setting aside a Rs114.7 million demand.

Coverage Comparison

Both rulings were reported by Dawn, Pakistan's most respected English-language daily, which covered them in two separate reports. The first report detailed the FCC's decision, which was announced by a two-judge bench comprising FCC Chief Justice Aminuddin Khan and Justice Ali Baqar Najafi. The second report covered the LHC's judgment, delivered by a bench of Justice Jawad Hassan and Justice Sardar Akbar Ali, in an income tax reference filed by Khairullah Khan.

While Dawn's reports are the only source available for this story, they provide detailed and comprehensive coverage of both cases. The FCC ruling, which impacts the Federal Board of Revenue's (FBR) property taxation, was described as having 'significant impact' on the authority's ability to tax property. The LHC ruling, meanwhile, addressed the interaction between the super tax and existing exemptions under the Income Tax Ordinance.

Key Claims

The FCC declared Section 7E of the Income Tax Ordinance 2001 ultra vires the Constitution and struck it down as void ab initio. The section, introduced through the Finance Act 2022 for tax year 2023, provided for taxation on deemed or notional income arising from ownership of certain immovable properties.
The FCC converted civil petitions filed by taxpayers against judgments of the Sindh and Lahore High Courts into appeals and allowed them. Petitions filed by the FBR and Commissioner Inland Revenue against judgments of the Peshawar and Balochistan High Courts were dismissed.
All actions, proceedings, and notices initiated by the FBR under Section 7E were declared without lawful authority and set aside.
The LHC ruled that super tax under Section 4C cannot be applied to capital gains from inherited property where the gain carries a zero percent tax rate, as per Section 37(1A) of the Income Tax Ordinance.
The LHC set aside a super tax demand of Rs114.7 million raised against Khairullah Khan, who declared an income of over Rs1.14 billion from the sale of ancestral property held since 1980.
The court observed that where no income tax is payable on capital gains, no super tax can be levied, and noted that administrative circulars cannot override the law.

Perspectives

The FCC's decision reflects a strong judicial stance on constitutional limitations of taxation. In its short order, the court said, 'Having heard the learned counsel for the parties at considerable length and upon due deliberation, we are persuaded to hold that Section 7E of ITO, 2001, is ultra vires the Constitution and is accordingly struck down, being void ab initio.' This indicates that the court found the provision in conflict with the Constitution, although detailed reasons will be recorded separately.

The LHC's judgment, on the other hand, emphasized strict interpretation of fiscal statutes. According to the report, 'The judges observed that where no income tax is payable on capital gains, no super tax can be levied either.' The court dismissed the FBR's claim that wealth should override tax exemptions, providing relief to individual taxpayers not engaged in property dealing.

These rulings come at a time when the Pakistani government has been seeking to broaden its tax base and increase revenue. The FCC's invalidation of Section 7E removes a tool designed to tax wealthy property owners, while the LHC's decision clarifies that super tax cannot be used to circumvent existing exemptions. Both decisions may prompt the government to consider alternative fiscal measures.

The FBR defended the super tax levy in the LHC case, arguing that Section 4C is an independent provision applicable to all high-income earners. However, the court's ruling suggests that such levies must be applied in harmony with the rest of the tax code.

As these judgments are implemented, property owners and tax authorities will need to adjust to the new legal landscape. The rulings also highlight the ongoing judicial oversight of tax legislation, which balances the need for revenue with constitutional protections for taxpayers.

How this outlet told it

Dawn as of May 16, 2026, 3:31 AM UTC

Framing: Legal ruling on super tax — Informative

Facts Included:

Lahore High Court ruled that super tax cannot be imposed on capital gains from inherited immovable property with zero percent tax rate
Court set aside Rs114.7 million super tax demand
Judgement stated that fiscal statutes must be interpreted strictly
No tax can be imposed through implication or administrative interpretation

Read the source article →

Dawn as of May 7, 2026, 4:45 PM UTC

Framing: Constitutional ruling on tax provision — Informative

Facts Included:

Federal Constitutional Court declared Section 7E of Income Tax Ordinance ultra vires
Section 7E empowered tax authorities to levy tax on deemed income from assets and properties
Court struck down the provision as void ab initio

Read the source article →

What was claimed, and who backed it

Each row is one claim, attributed to the outlet whose wording states it most clearly. Confidence rates how directly the source text states the claim — explicit and unhedged rates high; hedged, pieced-together, or internally inconsistent statements rate lower. It does not measure whether the claim is true. Status counts the distinct outlets we found asserting it — so a single-source claim can still show high confidence, and a multi-source claim can show medium. Every one of those outlets is named beside the status, so you can check the count against the list. For claims extracted before we began storing that list, the row says so: it names the outlet the claim is quoted from and states that we have not recorded which outlets backed it. Outlets wrote at different times, so a figure that evolves — a casualty count, for example — can legitimately differ between rows; check the "as of" time next to each claim's source.

Claim	Confidence	Status
ClaimThe Lahore High Court ruled that a super tax under Section 4C of the Income Tax Ordinance of 2001 cannot be imposed on capital gains arising from the sale of inherited immovable property where the gain itself carries a zero percent tax rate.	ConfidenceHigh	StatusSingle-source via Dawn as of May 16, 2026, 3:31 AM UTC
ClaimThe court set aside an Rs114.7 million super tax demand raised over the sale of ancestral property held since 1980.	ConfidenceHigh	StatusSingle-source via Dawn as of May 16, 2026, 3:31 AM UTC
ClaimFiscal statutes must be interpreted strictly, and no tax can be imposed through implication or administrative interpretation.	ConfidenceHigh	StatusSingle-source via Dawn as of May 16, 2026, 3:31 AM UTC
ClaimThe Federal Constitutional Court declared Section 7E of the Income Tax Ordinance ultra vires, as it empowered tax authorities to levy tax on deemed income from assets and properties.	ConfidenceHigh	StatusSingle-source via Dawn as of May 7, 2026, 4:45 PM UTC
ClaimSection 7E was introduced through the Finance Act, 2022, for the tax year 2023, and provided for taxation on deemed or notional income arising from ownership of certain immovable properties.	ConfidenceHigh	StatusSingle-source via Dawn as of May 7, 2026, 4:45 PM UTC
ClaimThe FCC struck down Section 7E, being void ab initio, and all actions, proceedings, and notices initiated or taken by the FBR under this section were declared to be without lawful authority and set aside.	ConfidenceHigh	StatusSingle-source via Dawn as of May 7, 2026, 4:45 PM UTC

Transparency & Audit Trail

1 outlet · 2 articles consulted: Dawn 6 claims extracted Version 1 Written 2026-08-14