LAHORE, Dec 22: A sales tax payer is eligible for refund of the input tax paid by him on the purchase of raw material if it is destroyed by accidental fire before being converted into taxable supplies, the Lahore High Court held on Saturday.

The court was confronted with the question whether input tax deduction can be made under Section 7 of the Sales Tax Act, 1990, in respect of goods destroyed by fire and, therefore, no longer available for making taxable supplies.

The question cropped up in an tax appeal filed by Barrister Ahmad Jamal Sukhera on behalf of a spinning mill against an order of the Sales Tax Appellate Tribunal. It was heard by a division bench comprising Justices Nasim Sikandar and Mansoor Ahmad.

In an unprecedented development, the bench returned a split judgment.

Justice Sikandar held that the appellant concern was not liable because of destruction of its taxable goods while Justice Ahmad dismissed the appeal.

The case was referred to Justice Jawad S. Khawaja as a referee judge. Justice Khwaja agreed with Justice Sikandar and their combined verdict settled the following points of law:

1. A person registered under the Sales Tax Act is entitled to adjustment or refund of input tax paid on purchase of goods for the purpose of making taxable supplies even if the goods are destroyed by fire and are no longer available for making taxable supplies.

2. The charging provisions of Section 3 read with sub-section(3) are conditional that the levy would be subject to other provisions of the Act. The other provisions, inter alia contemplate input tax and output tax and their adjustment in certain specific situations. The liability to pay tax under Section 3(3) is on the person making taxable supplies. The appellant, while paying input tax, was not making any taxable supplies. Therefore, if the appellant paying input tax on the supply of goods received by him was not entitled to its adjustment or refund, he was not covered by the said charging provisions inasmuch as he never made taxable supplies. He was entitled to receive the sum paid as input tax to the exchequer. To withhold the amount paid as input tax in this situation amounts to confiscation, which the State cannot resort to except in due process of law.

3. The receipt of compensation from the insurance company in respect of the loss of goods is extraneous to the adjustment of input and output taxes. 4. The view of the department that Sales Tax Act is not a tax on consumption is also not well founded. If nothing else, sub-section(1) and sub-section(3) of Section 3-B make it clear that the incidence of tax charged under Section 3 has to pass on to the consumer ultimately. The provisions regarding input as well as output tax as referred in the definition clause of the Act read with Section 7 and 8 thereof are only the modalities prescribed to protect the interest of the exchequer against any pilferage, evasion or fraud. Every maker of taxable supply is an agent of the exchequer to receive the amount on its behalf and then to pass it on to the next supplies till finally the consumer bears the brunt.

5. The use of word ‘purpose’ and ‘supplies made or to be made’ are indicative of the fact that the payment of input tax is available for adjustment as well as refund not with regard to any specific goods but with regard to the input tax paid during a particular tax period.

6. The negatives contained in Section 8 were also improperly interpreted by the departmental authorities. According to sub-section(1) of Section 8, a registered person is not entitled to reclaim or deduct input tax paid inter-alia on the grounds used or to be used for any purpose other than for taxable supplies made or to be made by him. The goods on which input tax was paid by the appellant and were subsequently destroyed were not meant for use nor were intended to be used for any purpose other than taxable supplies.

The appellant, Mayfair Spinning Mills Ltd, was ordered to be paid Rs16 million as refund following the acceptance of its appeal by the court.