23/04/2025
INPUT TAX DISALLOWANCE UNDER SECTION 8(1)(a) DOES NOT APPLY TO CASES WHERE INPUT / RAW MATERIALS HAVE BEEN LOST / DAMAGED, AS SUCH LOSSES DO NOT CONSTITUTE USAGE FOR NONTAXABLE PURPOSES.
Civil Appeals. No. 947 of 2002
SUPREME COURT OF PAKISTAN
M/S MAYFAIR SPINNING MILLS LTD VS THE COLLECTOR OF SALES TAX & FEDERAL EXCISE
Brief facts:
M/s Mayfair Spinning Mills Ltd., a manufacturer of cotton yarn, had purchased bales of ginned cotton in December 1996 and paid input tax accordingly. However, at the time of filing of sales tax return, the company calculated output tax which appeared to be less after adjusting input tax. Therefore, the company claimed the refund.
The Tax Officer issued a show cause notice to justify the refund claim which culminated into passing of order, granting a partial refund due to some cotton bales being damaged and others destroyed in a fire, making them unusable for taxable supplies. The respondent appealed this decision, but both the Collector (Appeals) and the Customs, Excise and Sales Tax Tribunal upheld the Tax Officer's decision.
The case was subsequently taken to the Lahore High Court, where a 2:1 split decision favored the respondent. The majority opinion held that input tax can be adjusted by the taxpayer.
The Commissioner Inland Revenue then sought leave to appeal, questioning the interpretation of sections 7 and 10 of the ST Act, asserting that these provisions were misconstrued, particularly regarding the relationship between input tax and the goods purchased. The respondent-taxpayer defended the majority view, arguing that input tax may be deducted for both past and future taxable supplies without needing the goods to be actually used in production.
Decision:
The Supreme Court dismissed the appeal by the Commissioner Inland Revenue, upholding the Lahore High Court's majority opinion stating that loss of goods to fire does not invalidate the input tax adjustment claim, as the materials purchased were intended to be used for production. The Court clarified that deductions are not restricted to goods physically used in the tax period but can include intended future use.
The Court also addressed the question whether input tax deductions could be claimed under Section 7 of the ST Act for goods destroyed by fire and no longer available for taxable supplies. It was answered that registered persons can deduct input tax incurred for taxable supplies made or to be made, focusing on the following three key conditions:
the input tax must be intended for taxable supplies,
it can be accounted for future supplies; and
the deductions must align with the same tax period as the output tax.
The Court further held that section 8, which disallows input tax on goods for nontaxable supplies, was not applicable since loss through destruction does not equal use for non-taxable purposes.
Consequently, the tax authority's appeal was dismissed, allowing the taxpayer to claim full refund.
