Input tax claim and credit: SC defines applicability of Section 8 of Sales Tax Act

ISLAMABAD: The Supreme Court observed that Section 8 of the Sales Tax Act, 1990, only prohibits the claim, credit or deduction of input tax on input/raw materials that were either never intended for use in making taxable supplies or were actually used for purposes other than making taxable supplies by a registered person.

The judgment authored by Chief Justice Yahya Afridi said that the loss of input/raw materials through the fire, as in the present case, does not fall within the scope of “used or to be used for any purpose other than for taxable supplies made or to be made”, as stipulated in Section 8.

Loss of goods due to damage does not equate to “use”. Therefore, Section 8(1)(a) does not apply to cases where input/raw materials have been lost through fire. Moreover, as we are informed, no notification under Section 8(1)(b) related to goods lost due to damage or fire has ever been issued. Even otherwise, Section 8(1)(b) permits the exclusion of specific input goods from the scope of Section 7 of the Sales Tax Act, requiring a clear identification of such goods or classes of goods, which, as we are informed, has never included damaged cotton-gin.

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A three-judge bench headed by Chief Justice Yahya Afridi, and comprising Justice Syed Hasan Azhar Rizvi, and Justice Shahid Waheed heard the Commissioner Inland Revenue, Legal Zone, Large Taxpayers Office, Lahore, appeal against the Lahore High Court judgment dated 04.12.2001.

M/s Mayfair Spinning Mills Ltd (respondent-taxpayer), a manufacturer of cotton yarn, purchased 28,899 bales of ginned cotton in December 1996. The total value of the purchase amounted to Rs305.12 million, with the input tax paid by the respondent taxpayer amounting to Rs30.69 million. The respondent-taxpayer submitted its sales tax return for December 1996 on January 20, 1997, wherein the total output tax was determined to be Rs2.113 million. After adjusting the input tax paid for December 1996, a refund of Rs28.579 million was claimed.

After issuing a show cause notice to the respondent-taxpayer to justify the refund claim, the tax officer passed an order dated 15.09.1998, granting the respondent-taxpayer a partial refund of Rs12.95 million (Rs 12,950,669/-) of input tax. This decision was based on the ground that some of the cotton bales purchased by the respondent-taxpayer had been partially damaged, while others were completely destroyed in a fire on 11.01.1997, rendering them unusable for taxable supplies. Dissatisfied with this order, the respondent-taxpayer appealed to the Collector (Appeals), who upheld the original order and dismissed the appeal on 25.11.1998. The respondent-taxpayer appealed to the Customs, Excise and Sales Tax Tribunal, which also rejected the appeal through an order dated 01.05.1999.

The Deputy Collector Sales Tax (Refund), Lahore, then challenged the said order before the Lahore High Court (LHC), which decided the appeal in a 2:1 split decision in favour of the respondent-taxpayer, through a judgment dated 04.12.2001. The Commissioner Inland Revenue, Lahore then approached the apex court against the LHC’s judgment.

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