PESHAWAR (Report by MUHAMMAD UMAIR ZEB, FINANCE AND TAX ANALYST) The Peshawar High Court (PHC) has delivered a significant ruling regarding the taxation of immovable property, declaring Section 7E of the Income Tax Ordinance, 2001 unconstitutional. This section, which imposed taxes on immovable property based on deemed income, was deemed beyond Parliament’s legislative competence.
In its landmark decision, the PHC emphasized the constitutional limitations on taxing immovable property and highlighted the need for legislative alignment with constitutional principles. According to leading Tax Analyst, Muhammad Umair Zeb, while speaking to local media, the court specifically referenced Entry No. 50 of the Fourth Schedule to the Constitution, affirming that while Parliament has jurisdiction to tax the Capital Value of Assets, it lacks authority to impose income tax directly on immoveable property.
Additionally, the PHC noted the Lahore High Court’s (LHC) ruling regarding Entry No. 47, which addressed the taxation of unrealized income from immovable property. While the LHC recommended amendments to the legislation, the PHC declined to intervene in the legislative process, emphasizing that it is the prerogative of Parliament to enact or amend laws as suggested by the Lahore High Court.
The distinction between taxing immovable property and taxing income arising from it was underscored by the PHC. While the former imposes a burden on the property itself, the latter imposes a burden on the property owner. As explained by Muhammad Umair Zeb, a leading Tax Analyst, the court referred to Section 11 of the Ordinance, which delineates various heads of income, highlighting that income from property (section 11-B) and capital gains (section 11-D) are separate categories.
The ruling stemmed from petitions challenging the legislation on grounds of legislative incompetence, discrimination, and being confiscatory. The court clarified that while Parliament has jurisdiction to tax the Capital Value of Assets, the impugned legislation failed to meet the required standards. Furthermore, the PHC referenced the parliamentary debate surrounding the legislation, noting that the objective was to tax unrealized income through a deeming clause based on fair market value. However, this approach was deemed impermissible in light of legal precedents, including judgments by the apex court and the Indian Supreme Court.
The PHC’s decision serves as a pivotal moment in clarifying the legal framework surrounding property taxation, emphasizing the distinction between the taxation of property itself and the taxation of income derived from property ownership. By upholding the integrity of constitutional principles, the PHC has reinforced the importance of legislative precision and adherence to constitutional boundaries in matters of taxation.
As stakeholders and policymakers reflect on the implications of the PHC’s ruling, there may be calls for legislative review and reform to ensure that taxation measures strike an appropriate balance between revenue generation and constitutional legitimacy. This landmark judgment serves as a reminder of the judiciary’s role in safeguarding constitutional principles and upholding the rule of law in matters of taxation and beyond.