Damage to goods, raw materials caused by fire: Losses not covered under Sec 8(1)(a) of ST Act, 1990: SC

ISLAMABAD: The Supreme Court held that the loss of goods due to damage or the loss of raw materials in a fire is not covered under Section 8(1)(a) of the Sales Tax Act, 1990.

A three-member bench, headed by Justice Muhammad Ali Mazhar and comprising Justice Irfan Saadat Khan and Justice Aqeel Ahmed Abbasi set aside the Peshawar High Court (PHC) judgment dated 27-09-2017 and restore the decision of the Appellate Tribunal Inland Revenue, Peshawar Bench.

The legal issue in the instant case was “whether input tax paid on raw materials that have been destroyed in fire can be claimed in adjustment by the manufacturer-assessee against output tax, although such raw materials were not available for making taxable supplies.”

The judgment observed that the facts and the law points involved in instant case are similar to the facts and the legal issue decided in the case of Mayfair Spinning Mills Ltd (2025 SCMR 1). It said that under the scheme of STA, 1990 in terms of Section 7, a registered person is required to establish firstly, that the input tax paid on purchases of inputs or raw materials must be intended for the purpose of making taxable supplies, Secondly, that the input tax paid must be for producing taxable supplies, irrespective of whether those taxable supplies have actually been made or are to be made in the future and thirdly, that the input tax paid in a tax period is to be deducted from the output tax due for the same tax period and not against any future tax period.

The judgment noted that the appellant (M/s A.J Textile Mills Ltd) has met all above conditions, whereas, the respondent (Commissioner Regional Tax Office, Sales Tax (Wing), Peshawar)has not disputed this factual aspect of the matter, but has declined the claim of input adjustment while referring to provisions of Section 8 of STA,1990 which only prohibits the claim, credit, or deduction of input tax on input/raw materials that were either never intended for the use in making taxable supplies or actually used for the purposes other than making taxable supplies by a registered person.

According to the facts, during an audit by DGRRA Lahore, it was observed that the appellant unlawfully adjusted an input tax of Rs3,181,649/- against output tax for raw material worth Rs20,566,082/- which was destroyed by fire. A contravention case under Sections 3, 6, 7, 8, 11, 26, 33 and 34 of the STA, 1990, involving the claimed input tax credit of Rs3,181,649/- and an additional tax of Rs3,436,181/- was framed, leading to a show cause notice dated 11.10.2005 issued by the Adjudicating Authority, which subsequently confirmed the allegations via Order-in-Original No. 07 of 2005 dated 03.12.2005.

Aggrieved by this, the appellant filed a first appeal which was decided on 20.03.2006, leading the respondent to file a second appeal before the Appellate Tribunal Inland Revenue, Peshawar Bench, where the appeal filed by the appellant was accepted vide, order dated 11.05.2010, thereby the contravention report and show cause notice were vacated and both the orders of Revenue Authorities were set aside.

Dissatisfied with the Tribunal’s decision, the respondent filed Sales Tax Reference No.33/2011 before the Peshawar High Court, which set aside the judgment of the Appellate Tribunal Inland Revenue, Peshawar dated 11.05.2010, and held that the appellant was not entitled to deduct/adjust the amount of input tax against the goods which have not been used in the taxable supplies as required under Section 8(1)(a) of the STA, 1990, vide judgment dated 27.09.2017. Feeling aggrieved, the appellant challenged the same before the Supreme Court.

Copyright Business Recorder, 2026