Legal Principle & Question Decided

Ruling Summary: This decision was rendered by the Sindh High Court on 2023-12-31, officially reported as 2024 PLD 132. In this matter between Hakimsons (Impex) (Private) Limited through duly authorized JUDGMENT and the Respondent, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.

Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.

Full Judgment Text & Judicial Ruling

Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar, Agha Faisal Title:Hakimsons (Impex) (Private) Limited through duly authorized

JUDGMENT

Reported As: PLD 2024 Sindh 132 Result: Petitions dismissed Judgment

JUDGMENT MUHAMMAD JUNAID GHAFFAR, J. All these Petitions involve a common legal question and are therefore, being decided through this common Judgment. The Petitioners have challenged the provisions of Section 7E of the Income Tax Ordinance, 2001 ("Ordinance") introduced through Finance Act, 2022, on the ground that it is ultra vires to the Constitution and so also discriminatory; confiscatory; hence, void, ab initio and liable to be struck down. 2. At the very outset we may state, and this is without disrespect to any of the learned Counsel for the Petitioners as well as Respondents, that their arguments have been noted and recorded in this judgment collectively for ease, convenience and to avoid overlapping, if any. Petitioners Counsel[1] have contended that Section 7E of the Ordinance imposes tax on property which is not within the competence of the Federal Legislature pursuant to Entry 50 of the Federal Legislative List provided in the Fourth Schedule to the Constitution of the Islamic Republic of Pakistan ("Constitution"); that it is only the Provincial Legislature who can tax an immovable property; that Section 7E ibid within itself is discriminatory as it provides certain exceptions and exclusions without providing any rationale to such exclusions and or exemptions; that notwithstanding the validity of the concept of deemed income, while imposing tax under Section 7E of the Ordinance no transaction has been outlined on the basis of which any deemed income can accrue; that tax can only be imposed on the income from property, whereas, under Section 7E ibid even properties which cannot be let out or generate any income, have also been included; that it is also in violation of the concept of

---

## Page 2

income received or income receivable; that there is no concept of any fictional income as it is alien to the Ordinance; that in pith and substance it is a tax on immovable property which cannot be levied by the Federal Legislature; that it is an attempt or a colourable exercise of powers under the Constitution so as to impose a tax for which the Constitution does not confer any authority upon the Federation; that it has also failed to take or provide basis and differentiation in the nature of property; its location, and the earning potential, if at all a tax has to be sustained; that even such properties have been taxed for which there is no permission to raise any construction; that there is also an anomaly in the holding period of the property in question; that per settled law what cannot be done directly, cannot be permitted to be done indirectly; that as and when deemed income has been held to be valid and legal, it has always had nexus with respect to generation of income or a transaction which can lead to an income; that the concept of deemed income was introduced to avoid benefits being claimed through losses, whereas, in the instant matter it is not present; that the speech of the Finance Minister while introducing this levy by way of Finance Bill is very relevant inasmuch as the intent and object of the said levy as disclosed is to discourage holding the properties which does not fall within the domain of the Federal Legislature; that it amounts to violate the fundamental rights as enshrined in Article 23 read with Article 253 of the Constitution; that if at all, the impugned levy is to be sustained vis--vis. the speech of the Finance Minister, it ought to have been levied through an Act of Parliament by following the procedure as contemplated under Article 70 of the Constitution; that in fact it is an attempt to control ownership of immoveable properties; hence, by way of a Finance Bill or a Money Bill introduced through Article 73 of the Constitution, no valid legislation can be made; that tax can only be levied when. there is an earning potential, which admittedly, in the present facts and circumstances, is lacking; that it fails to pass the twin test regarding discrimination as settled by the Hon'ble Supreme Court of Pakistan and India; that in essence it imposes tax on property and in pith and substance it is not a tax on income or deemed income; that even otherwise, it has been imposed retrospectively for the current tax/ financial year, whereas, it could only have been levied, if at all, from the next tax year; that it is confiscatory in nature inasmuch as there are instances wherein, the tax payer, notwithstanding holding of various properties, is not generating any income so as to pay the tax on its deemed income; that when the Finance Bill was sent to the Senate of Pakistan, a resolution was passed against this very levy and the advice of Senate must not be ignored; that all deemed income have some nexus with a business activity which in the instant matter is lacking; that it amounts to double taxation as property tax is already levied by the Provinces; that it fails to meet the settled principles regarding discrimination i.e. intelligible differentia; that the exclusion and exemption provided to various persons within Section 7E ibid must have nexus with some policy objectives of the Government which in the present facts and circumstances is completely lacking; that an idle property is being taxed under the garb of deemed income; that when the levy itself offends or goes against the competence of the Federal Legislature, no concept of deemed income can be invoked; that the levy amounts to crossing the legislative boundaries which cannot be sustained; that the tax levied through Section 7E ibid lacks a triggering event i.e. receiving of income or money; that mere holding of immovable property cannot lead to any tax by way of a fictional income, and therefore, by placing reliance on the cases reported as[2] they have prayed that the provision in question is liable to be declared as ultra vires to the Constitution. 3. On the other hand, Respondents Counsel[3] have contended that the concept of deemed income is not alien to the Income Tax Law, whereas, it has been validated in a number of cases by the superior courts; that it is a tax on income and not on property; hence, is within the competence of the Federal Legislature under Entry 47 to the Fourth Schedule of the Constitution; that is a conscious policy decision of the Federation and therefore, per settled law Courts must show restraint while interfering in the legislative competence of the Government; that it is not a case of

---

## Page 3

exercising any powers under Entry 50 of the Fourth Schedule to the Constitution inasmuch as it is not a tax on the very property in question; but on the deemed income from the said property; hence, permissible; that in terms of Section 15 of the Ordinance, tax from rental income is already in field arid is being paid by the tax payers; that various other taxes are also legible on properties under various provisions of the Ordinance; that there is no discrimination within Section 7E of the Ordinance as the exceptions which have been provided are in respect of different classes of persons which are otherwise enjoying various exemptions and exceptions under the Ordinance; that the levy itself is a tax, hence, within the competence of the Federal Legislature to introduce the same under Article 70 of the Constitution by way of a Money Bill; that any hardship or inability to pay a tax is not a ground to declare the same as ultra vires; that there is no concept of retrospectivity in the levy: that the levy is not in violation of any of the fundamental rights as provided in the Constitution including Article 23 and Article 253 to the Constitution; that no property is being acquired forcibly, whereas, reasonable exceptions and exemptions have also been provided to the petitioners/tax-payers within Section 7E of the Ordinance; that it is neither confiscatory nor discriminatory, whereas; the tax has been levied to fulfil various obligations and functions of the State which requires immediate taxation measures; that under the concept of deemed income there is no requirement of a particular transaction to generate income; that it is a case of reasonable classification within 7E of the Ordinance, hence, cannot be declared ultra vires on this ground; that it is the prerogative of the legislature to choose a class of persons on whom the tax may be imposed or not; that a tax on income is not by itself a tax on property; that income can be deemed without any transaction; that presumptive income or presumptive tax are provided in the Ordinance in various Sections and it is not necessary that there must be an actual income for taxation purposes; that re-characterisation of income is permissible under the Ordinance; that the tax on such income has been levied reasonably vis-a-vis. values of the properties; that various tax payers had availed the benefits of Foreign Assets Declaration Act, 2018 followed by an Ordinance of 2019, hence, when benefits of the said legislation on property was availed, then subsequently, the competence to levy tax on income on the same property cannot be challenged; that the rental income of property is being taxed from the very inception of Income Tax Act, 1922 and such tax is covered by Entry 47 ibid; hence, cannot be declared ultra vires to the Constitution; and by placing reliance on the cases reported as[4] they have prayed for dismissal of these petitions. 4. Learned Assistant Attorney General appearing on behalf of the Federation pursuant to issuance of notice has contended that it is within the competence of the Federal Legislature to tax any income from property and the provision in question is not a tax by itself on such property; that income in this matter is being generated through the property; that it falls within the competence of Federal Legislature under Entry 47 of the Fourth Schedule to the Constitution; that per settled law the Courts must endeavour to save the legislation as far as possible; hence, by placing reliance on the cases reported as[5] he has sought dismissal of these Petitions. 5. We have heard all the learned Counsel for the parties including learned Assistant Attorney General and have perused the record. The Petitioners before us are resident taxpayers under various categories and since these Petitions are only premised on a legal challenge, independent facts and status of each petitioner need not be discussed. Their primary challenge is that Section 7E of the Ordinance introduced through Finance Act 2022 is ultra vires to the Constitution as firstly, it is beyond the competence of the Federal Legislature in terms of Entry 50 of the Fourth Schedule to the Constitution. Secondly, notwithstanding the issue regarding competency of the Federal Legislature, even otherwise, the levy by itself is confiscatory, discriminatory and is an attempt of a colourable exercise of power, as in pith and substance the levy in question is a tax on property, and

---

## Page 4

not on its income, which in terms of Entry 50 ibid cannot be imposed by the Federal Legislature. This is the entire gist of their case for seeking a declaration the it is Ultra vires to the Constitution. 6. On the other hand, case of the Federation is that it is not a tax per-se on any immovable property; but is a tax on deemed income of the property and falls within the competence of the Federal Legislature under Entry 47 of the Fourth Schedule to the Constitution. It is their further case that the concept of deemed income has been held to be valid in various cases including the celebrated case of Elahi Cotton (Supra) pronounced by Hon'ble Supreme Court of Pakistan; and therefore, the impugned levy cannot be declared as ultra vires as contended on behalf of the Petitioners. 7. For a better understanding of the controversy in hand, it would be advantageous to refer to Entry 47 and 50 of the Fourth Schedule to the Constitution enacted pursuant to Article 70(4) and Article 142(a) of the Constitution. The same reads as under:- "47. Taxes on income other than agricultural income. "50. Taxes on the capital value of the assets, not including taxes [* * *][6] on immoveable property." 8. From perusal of the aforesaid Entry 47, it appears that the Federal Legislature can impose taxes on income other than an agricultural income. A plain reading of this entry makes it clear that insofar as any income is concerned, a tax can be validly levied by the Federal Legislature. Perhaps, to this effect, there is no dispute and Petitioners Counsel have not raised any objection, that if it is a case of any income, tax can be levied by the Federation. Insofar as Entry 50 as above is concerned, again it permits the Federal Legislature to impose taxes on the capital value of the assets, not including taxes on immoveable property. The case of the Petitioners before us is to the effect that the impugned levy under Section 7E is not a tax on income; but a tax on immoveable property, which in terms of Entry 50 ibid is not within the competence of the Federal Legislature. To proceed further, it would be advantageous to refer to the relevant provisions of the impugned levy introduced by way of Section 7E in the Ordinance, through Finance Act, 2022 which reads as under: - "[7E. Tax on deemed income. - (1) For tax year 2022 and onwards, a tax shall be imposed at the rates specified in Division VIIIC of Part-I of the First Schedule on the income specified in this section. (2) A resident person shall be treated to have derived, as income chargeable to tax under this section, an amount equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of tax year excluding the following, namely:- (a) one capital asset owned by the resident person; (b) self-owned business premises from where, the business is carried out by the persons appearing on the active taxpayers' list at any time during the year; (c) self-owned agriculture land where agriculture activity is carried out by person excluding farmhouse and land annexed thereto; (d) capital asset allotted to - (i) a Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces; (ii) a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government; (iii) a war wounded person while in service of Pakistan armed forces or Federal or provincial government; and (iv) an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority; (e) any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon; (f) capital asset in the first tax year of acquisition where tax under section 236K has been paid;

---

## Page 5

(g) where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million; (h) capital assets owned by a provincial government or a local government; or (i) capital assets owned by a local authority, a development authority, builders and developers for land development and construction, subject to the condition that such persons are registered with Directorate General of Designated Non-Financial Businesses and Professions. (3) The Federal Government may include or exclude any person or property for the purpose of this section. (4) In this section- (a) "capital asset" means property of any kind held by a person, whether or not connected with a business, but does not include - (i) any stock-in-trade, consumable stores or raw materials held for the purpose of business; (ii) any shares, stocks or securities; (iii) any property with respect to which the person is entitled to a depreciation deduction under section 22 or amortization deduction under section 24; or (iv) any movable asset not mentioned in clauses (i), (ii) or (iii); (b) "farmhouse" means a house constructed on a total minimum area of 2000 square yards with a minimum covered area of 5000 square feet used as a single dwelling unit with or without an annex: Provided that where there are more than one dwelling units in a compound and the average area of the compound is more than 2000 square yards for a dwelling unit, each one of such dwelling units shall be treated as a separate farmhouse."; 9. From perusal of the aforesaid provision, it appears that for tax year 2022 and thereafter, a tax has been imposed at the rates specified in Division VIIIC of Part-I of the First Schedule[7] on the income specified in this section. Subsection (2) of Section 7E ibid has further provided that a resident person shall be treated to have derived, as income on the amount equal to five percent of the fair market value of capital assets situated in Pakistan held on the last day of the tax year, excluding one capital asset owned by the resident person; self-owned business premises from where the business is carried out; self-owned agriculture land where agriculture activity is carried out by such person and the capital asset allotted to a Shaheed or dependents of a Shaheed belonging to Pakistan Armed Forces; a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government; a war wounded person while in service of Pakistan armed forces or Federal or provincial government; and an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by, the allotment authority; any property from which income is chargeable to tax under the Ordinance and tax leviable is paid thereon; capital asset in the first tax year of acquisition where tax under section 236K has been paid; and where the fair market value of the capital assets in aggregate excluding the capital assets mentioned in clauses (a), (b), (c), (d), (e) and (f) does not exceed Rupees twenty-five million. Similarly, capital assets have been defined in subsection 4(a) of Section 7E ibid, and means property of any kind held by a person, whether or not connected with a business, but does not include any stock-in-trade, consumable stores or raw materials, any shares, stocks or securities; any property to which a person is entitled to a depreciation deduction under Section 22 or amortization under Section 24 and any moveable asset not mentioned in clauses (i) (ii) or (iii) ibid. The arguments of the petitioners Counsel as noted hereinabove are three fold; that the impugned levy is discriminatory; it is confiscatory, and beyond the legislative competence of the Federal Legislature. We will deal with these one by one in the following manner. (A) DISCRIMINATION

---

## Page 6

10. As to the argument regarding meting out discrimination to the petitioners as against the exceptions provided in Section 7E (2) ibid, it can be safely held that that this argument is not only misconceived but even has no force or legs to stand. Time and again, it has been held by the Hon'ble Supreme Court as well as various High Courts of the country that the legislature has the competence to levy tax on different classes of persons and merely for the fact that someone is exempted from the levy of such tax, it cannot, always be pleaded that it is discriminatory in nature and is liable to be struck down in terms of Article 25[8] of the Constitution. It has to be clearly established from bare perusal of the impugned legislation that the levy has discriminated a same class of persons. In order that a law be struck down on the touchstone of Article 25 of the Constitution, it must be demonstrated that the said law is not based on intelligible criteria; does not have a nexus with the purpose of law[9]. Per settled law the legislature is competent to classify persons or properties into different categories subject to different rates of tax[10]. Further that the test of vice of discrimination in a taxing law are less rigorous and if there is equality and uniformity within each group founded on intelligible differentia having a rational nexus with the object sought to be achieved by the law, the Constitutional mandate that a law should not be discriminatory is fulfilled[11]. When the impugned provision of Section 7E ibid is looked into keeping in mind the above dicta laid down by the Hon'ble Supreme Court, it clearly reflects that the classes of persons who have been exempted from such levy are within the competence of the legislature as being classified separately, whereas, it is not the case of the Petitioners that they fall within the same class of those persons who have been exempted from the levy of tax in question. Much stress was laid on Subsection 2(d)(iv) of Section 7E ibid as to why certain exemption has been provided to a category of persons specified therein and to this, it may be observed that the very exemption is also further clarified and is not generic in nature. It only extends to persons specified in subsection 2(d)(iv) of Section 7E to the original allottees of the capital assets and that also being duly certified by the allotment authority. It may be observed that such category of person is allotted various properties which fall within their terms and condition of service from time to time either as an incentive or on their promotions, whereas, the exception provided is only to the extent of such original allotment and not thereafter. Though it is settled law that the guarantee of equal protection of laws also extend to taxing statutes; however, If the taxation, generally speaking, imposes a similar burden on every one with reference to that particular kind and extent of property, on the same basis of taxation, the law shall not be open to attack on the ground of inequality, even though the result of the taxation may be that the total burden on different persons may be unequal[12]. Hence, if the Legislature has classified persons or properties into different categories, which are subjected to different rates of taxation with reference to income or property, such a classification would not be open to the attack of inequality on the ground that the total burden resulting from such a classification is unequal[13]. In deciding whether a taxation law is discriminatory or not it is necessary to bear in mind that the State has a wide discretion in selecting the persons or objects it will tax, and that a statute is not open to attack on the ground that it taxes some persons or objects and not others[14]. In the celebrated case of I A Sherwani[15] while deliberating on the question of equal protection in law the Hon'ble Supreme Court has been pleased to hold that that equal protection of law does not envisage that every citizen is to be treated alike in all circumstances, but it contemplates that persons similarly situated or similarly placed are to be treated alike; that no standard of universal application to test reasonableness of a classification can be laid down as what may be reasonable classification in a particular set of circumstances, may be unreasonable in the other set of circumstances; and finally that in order to make a classification reasonable, it should be based (a) on an intelligible differentia which distinguishes persons or things that are grouped together from those who have been left out; and (b) that the differentia must have rational nexus to the object sought to be achieved by such

---

## Page 7

classification. At para 26 of the said judgment the Hon'ble Supreme Court has deduced the principle of law that equal protection of law does not envisage that every citizen is to be treated alike in all circumstances, but it contemplates that persons similarly situated or similarly placed are to be treated alike. It has been further held reasonable classification is permissible provided it is based on an intelligible differentia which distinguishes persons or things that are grouped together from those who have been left out and that the differentia must have rational nexus to the object sought to be achieved by such classification. It may further be pointed out that different laws can be validly enacted for different sexes, persons in different age-groups, persons having different financial standings and that no standard of universal application to test reasonableness of a classification can be laid down as what may be reasonable classification in a particular set of circumstances, may be unreasonable in the other set of circumstances. Going further it has been observed that the question, as to whether a particular classification is valid or not, cannot be decided on the basis of advantages and…

Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.

Related Legal Research & Directories

• Browse all judgments from Sindh High Court
• Browse Pakistani court decisions from the year 2023
• Search Pakistani statutes: Constitution of Pakistan 1973, PPC, CrPC, CPC & Family Laws
• Analyze this case with Al Wakeelo AI Legal Assistant