Case Notes

FCC Strikes Down Section 7E: What the Deemed Income Ruling Means for Property-Holding Businesses in Karachi

Section 7E was one of the most litigated federal taxes of recent years: it charged tax on income that a property owner was simply deemed to earn, whether or not any rent or sale took place. High Courts across Pakistan reached opposite conclusions, and the Sindh High Court had upheld it. The Federal Constitutional Court has now settled the matter against the levy. For a Karachi company or family holding vacant plots or unlet commercial units, the question to put to the best tax lawyer in Karachi has changed from whether section 7E was valid to what can now be closed, defended or recovered. This note sets out what was decided, why, and what is still unresolved.

What section 7E did

Section 7E was inserted into the Income Tax Ordinance, 2001 by the Finance Act, 2022. Its text applied "For tax year 2022 and onwards". A resident person was treated as having derived income equal to five per cent of the fair market value of capital assets situated in Pakistan held on the last day of the tax year. That notional income was then taxed at the rate in Division VIIIC of Part I of the First Schedule, which the Balochistan High Court described as 20 per cent.

The section carried a list of exclusions. As reproduced in the Balochistan High Court's judgment, they included one capital asset owned by the resident person; self-owned business premises from which business was carried out by persons on the active taxpayers' list; self-owned agricultural land under cultivation (but not farmhouses); property from which income was already taxed; a capital asset in its first year of acquisition where advance tax under section 236K had been paid; assets below an aggregate value threshold; and certain categories of allottees and public bodies. Several exclusions fell away for persons not on the active taxpayers' list.

In practice, the people caught were owners of second homes, vacant plots and commercial property that was neither let out nor used for their own business, which describes a good deal of investment property held in Karachi.

How the High Courts divided

As recorded in the Federal Constitutional Court's judgment and in contemporaneous reports, the High Courts reached four different outcomes:

High Court	Outcome
Sindh	Constitutional petitions dismissed; the levy upheld as a tax on income within Entry 47 of the Federal Legislative List (reported as Hakimsons (Impex) (Private) Limited v. Federation of Pakistan, 2024 PTD 451)
Lahore	A single judge allowed the petitions; a Division Bench reversed and dismissed them
Islamabad	Provision read down, with subsection (2) held unconstitutional
Peshawar and Balochistan	Section 7E struck down as beyond Parliament's competence

The Sindh High Court had reasoned that deemed income is independent of any actual transaction and that "a degree of hardship to taxpayers is an inevitable incident of every taxation statute." The Balochistan High Court (C.P. No. 2058 of 2022, announced 31 May 2024) took the opposite view: taxes on immovable property are a provincial subject after the Eighteenth Amendment, and Entry 50 of the Federal Legislative List covers "Taxes on the capital value of the assets, not including taxes on immovable property."

Taxpayers appealed the Sindh and Lahore judgments; the FBR and Commissioners appealed the others. After the Twenty-Seventh Amendment created the Federal Constitutional Court, the matters went there, and pending Islamabad intra-court appeals were transferred under Article 175E(5) by an order of 6 April 2026. For how matters now move between the two apex courts, see our explainer on Supreme Court and FCC appeals.

The question before the Court

The challenges raised three issues: legislative competence, discrimination between taxpayers, and whether the levy was confiscatory. The central question was characterisation. Was section 7E, in substance, a tax on income, which Parliament may impose under Entry 47 of the Federal Legislative List even through a deeming fiction? Or was it a tax on the capital value of immovable property, which Entry 50 expressly excludes from the federal list?

The Federation argued that deemed income is a recognised legal fiction and that the measure legitimately broadened the tax base. Taxpayers argued that income which never arises is not income, and that labelling a property charge as income tax could not move it into the federal field.

What the Court decided

A two-member bench, Chief Justice Amin-ud-Din Khan and Justice Ali Baqar Najafi, heard the matters on 13 to 15 and 27 to 30 April 2026 and announced a short order on 7 May 2026. The operative points were:

• Section 7E "is ultra vires the Constitution, and is accordingly struck down, being void ab initio."
• Taxpayers' petitions against the Sindh and Lahore High Court judgments were converted into appeals and allowed.
• The FBR's and Commissioners' petitions against the Peshawar and Balochistan High Court judgments were dismissed.
• All actions, proceedings and notices initiated or taken by the FBR or the Commissioners under section 7E were declared to be without lawful authority and set aside.

Because the lead case, C.P.L.A. No. 1442-K of 2022, was a Karachi petition, the Sindh High Court's contrary view no longer stands.

The reasoning

The detailed reasons, written by the Chief Justice, were reported by Business Recorder on 17 June 2026. On that report, the reasoning runs as follows.

Substance over label. The Court held that section 7E is, "in pith and substance, a tax on the capital value of immovable property." The "deemed income" description was "merely illusory and does not withstand constitutional scrutiny." A levy on capital value of immovable property falls outside the legislative competence of the Federal Legislature, so the provision was void from the outset.

Economic duplication. Property is usually bought out of income that has already been taxed. Taxing its mere ownership adds "a second layer of taxation on the same economic base." The Court accepted that double taxation "per se is not constitutionally prohibited in absolute terms", but said fiscal measures must satisfy fairness, rational nexus and non-arbitrariness.

Fundamental rights. The Court said the provision raised substantial questions under Articles 23, 24 and 25 of the Constitution, because its combined effect could amount to indirect deprivation of property, discriminatory treatment of similarly placed taxpayers and duplicative taxation.

Federal-provincial friction. The Court observed that overlapping fiscal claims since the Eighteenth Amendment are pushing taxpayers into prolonged litigation, and called for institutional coordination and a clear demarcation of taxing competence.

The decisive ground is legislative competence. The rights-based observations strengthen the conclusion but are expressed more cautiously, so they should not be read as a free-standing ruling that every property-linked tax is unconstitutional.

What it changes for Karachi businesses

• Pending section 7E notices and demands fall away. Any show-cause notice, assessment, demand or recovery step resting on section 7E lacks lawful authority under the short order. Reply in writing citing the order rather than ignoring the notice; our show-cause notice guide explains how to respond.
• Pending appeals should be disposed of. Where a 7E addition is before the Commissioner (Appeals), the Appellate Tribunal or the High Court on a tax reference, ask for the matter to be decided in line with the judgment.
• Tax already paid needs a decision now. Tax paid with returns, or under protest, is the difficult category. The Ordinance's refund machinery is in section 170, which has its own time limits. Businesses that paid should gather the returns, payment challans and any 7E computations and take advice promptly rather than wait for a general FBR instruction.
• The provision has also been repealed. The FBR's Circular No. 02 of 2026-27 (8 September 2026), explaining the Finance Act, 2026, records that tax on deemed income "has been abolished by omission of section 7E", with Division VIIIC omitted and references removed from section 8. There is no live 7E charge to plan around.
• Disclosure obligations continue. The ruling removes a tax; it does not remove the duty to declare property correctly in the return and wealth statement.
• Provincial taxes are untouched. The judgment concerns a federal levy. It does not address property taxes imposed by Sindh, which continue to apply.

What remains open

• Refunds and closed years. Neither the short order nor the reports of the detailed judgment expressly deal with refund of tax already paid or with assessments that became final without challenge. "Void ab initio" supports a refund claim, but the FBR may take points on limitation and finality. Expect this to be litigated.
• The full text of the reasons. We read the official judgment file, which sets out the short order and the High Courts' views; the Court's own analysis is summarised above from Business Recorder's report of the detailed reasons. The exact formulation should be checked against the full text before it is relied on in a pleading.
• Other deeming provisions. The Court did not condemn legal fictions in tax law as such. Whether other deemed-income or property-linked federal charges survive will depend on the same pith-and-substance test, applied provision by provision. Those provisions were not before the Court.
• Timing of the repeal. The FBR circular we reviewed does not state the date from which the omission operates. For years before the omission, taxpayers rely on the judgment.
• The wider fiscal boundary. The Court's call for coordination between the Federation and the Provinces signals that disputes over who may tax property, services and capital are not over.

The super tax ruling is a useful contrast: there the FCC upheld a federal levy, while here it applied the competence limit firmly.

Citation

Case	Taxpayers v. Federation of Pakistan, FBR and Commissioners Inland Revenue: C.P.L.A. No. 1442-K of 2022 and connected petitions, appeals and transferred cases of 2026
Court	Federal Constitutional Court of Pakistan, Islamabad
Bench	Amin-ud-Din Khan, CJ and Ali Baqar Najafi, J (reasons by the Chief Justice)
Hearing	13 to 15 and 27 to 30 April 2026
Short order	7 May 2026
Detailed reasons	Reported on 17 June 2026
Reported citation	None located at the time of writing

For advice on FBR proceedings and appeals, see our tax and customs practice.

Common questions

This article is general information about Pakistani law and procedure, not legal advice for any specific matter. If this touches on something you're currently facing, get in touch and we'll advise on your facts directly.