Input Tax on Fire-Destroyed Raw Material: Supreme Court Allows Adjustment

Independently written and published by Shahbaz Shah Legal Journal.

Fire loss did not turn a taxable purchase into a non-taxable use

The Supreme Court of Pakistan has allowed A.J Textile Mills’ claim to adjust input sales tax paid on raw material destroyed by fire. The Court held that accidental destruction did not amount to using the material for a purpose other than taxable supplies within section 8(1)(a) of the Sales Tax Act, 1990. The taxpayer had satisfied the conditions for adjustment under section 7 applicable to its case. Judgment, paragraphs 6–8.

The distinction is practical. A business may buy raw material for manufacturing taxable goods and lose it before production. That loss does not, by itself, change the purpose for which the material was purchased. The Court applied its earlier decision in Commissioner Inland Revenue v. Mayfair Spinning Mills Ltd., 2025 SCMR 1, set aside the Peshawar High Court judgment and restored the Appellate Tribunal Inland Revenue’s decision. Judgment, paragraphs 6–8.

Why the tax department refused the adjustment

The dispute concerned input tax of Rs 3,181,649 on raw material valued at Rs 20,566,082. Following a fire, the department objected that the destroyed material had never entered the manufacture of taxable supplies. Its case was that the absence of actual use barred the adjustment under section 8. The judgment also records receipt of insurance proceeds. Judgment, paragraphs 1–2.

The adjudicating authority confirmed the departmental case. After the matter passed through the appellate process, the Tribunal ruled for the taxpayer on 11 May 2010. The Peshawar High Court reversed that decision on 27 September 2017 in Sales Tax Reference No. 33/2011. Leave to appeal was granted to examine whether a manufacturer could adjust input tax on material destroyed by fire before it could be used for taxable supplies. Judgment, paragraphs 1–2 and the leave order reproduced on page 3.

The taxpayer argued that the entitlement arose from acquiring material for taxable production. The department insisted that the material had to be used in the taxable activity. This difference between intended taxable use and actual consumption became the central legal question. Judgment, paragraphs 3–4.

The three conditions the Supreme Court applied

Applying Mayfair Spinning Mills, the Court identified three requirements under the statutory scheme relevant to the dispute:

• Input tax must have been paid on inputs or raw material intended for making taxable supplies.
• The purchase must serve taxable production, whether those supplies have already been made or will be made in the future.
• The input tax paid in the tax period must be deducted against output tax due for that same period under the provisions being considered.

The Court found that A.J Textile Mills met those requirements and that the department did not dispute the relevant factual position. Judgment, paragraphs 6–7.

The second requirement explains why actual consumption during the same period was not essential. The expression covering supplies made or to be made includes production planned for the future. It does not require a manufacturer to wait until each purchased input has physically entered the manufacturing process before claiming an otherwise lawful adjustment. Judgment, paragraph 6, reproducing Mayfair paragraph 12.2.

The timing point must still be read carefully. The Court’s rejection of an actual-consumption requirement did not remove every condition governing the period in which adjustment may be claimed. Its reasoning concerned the statutory provisions applicable to this dispute. A claim for a different tax period must be tested against the legislation governing that period. Judgment, paragraphs 6–7.

Why section 8(1)(a) did not apply

The department’s argument treated destruction as though it were an alternative use of the goods. The Court rejected that premise. The exclusion concerned material never intended for taxable supplies or actually used for a different purpose. Accidental fire loss fell outside that description. Judgment, paragraph 7.

This is the decisive distinction: material acquired for taxable manufacturing does not become material used for a non-taxable purpose merely because it is destroyed. The fire explains why manufacture could not occur; it does not establish a different commercial use. On the accepted facts, section 8(1)(a) could not disallow the adjustment. Judgment, paragraphs 6–7.

What the judgment decided about insurance

The background records that the taxpayer received an insurance amount. The department nevertheless failed in its challenge to the input adjustment. The judgment does not formulate a separate general rule governing every insurance settlement, nor does it decide a distinct tax question concerning the insurance proceeds themselves. Its operative reasoning addresses sections 7 and 8 and the effect of destruction by fire. Judgment, paragraphs 2 and 6–8.

For that reason, describing the case as a universal exemption for insured losses would overstate it. The relief was an input tax adjustment on the established facts, with the statutory conditions satisfied. Judgment, paragraphs 7–8.

The result and its practical value

Civil Appeal No. 1137 of 2018 was allowed. The Supreme Court set aside the High Court judgment and restored the Tribunal’s decision through its short order of 22 June 2026, for which this judgment supplies reasons. Justice Aqeel Ahmed Abbasi wrote for the bench comprising Justices Muhammad Ali Mazhar, Irfan Saadat Khan and Aqeel Ahmed Abbasi. Judgment, opening page and paragraph 8.

For manufacturers and tax advisers, the decision directs attention to proof of the purchase’s purpose and the statutory conditions for adjustment. Purchase invoices, the tax record, evidence of the intended taxable production and the fire-loss record will matter when explaining why the goods were acquired and why production did not take place. That is a practical implication of the Court’s reasoning, rather than a new documentary checklist imposed by the judgment. Judgment, paragraphs 6–7.

A related procedural issue arises where a tax case returns to the department after appeal. Our analysis of sales tax limitation following remand addresses a different question: the time available for fresh adjudication. The present case concerns entitlement to input adjustment after fire loss.

Sources

• Supreme Court judgment and PDF download: M/s A.J Textile Mills Ltd. v. Commissioner, Regional Tax Office, Sales Tax (Wing), Peshawar and another, Civil Appeal No. 1137 of 2018, decided 2026-06-22.
• Full case details and judgment summary.
• Supreme Court official judgment register. Locate the case using its number and decision date.

Authorities discussed above are identified as applied or cited in this judgment.

Frequently asked questions

Can a manufacturer claim input tax on raw material destroyed by fire?

Yes, on the facts and provisions applied in A.J Textile Mills, where the material was intended for taxable supplies and the conditions under section 7 were satisfied. Read the judgment.

Does fire loss count as use for a non-taxable purpose?

The Court held that destruction by fire did not fall within non-taxable use under section 8(1)(a) in this case. Read the judgment.

Must the raw material be consumed during the same tax period?

The Court rejected actual consumption in the same period as a condition under the text it applied. It separately retained the adjustment-period conditions discussed in the judgment. Read the judgment.

Did the Supreme Court order an unconditional cash refund?

No. It allowed the appeal and restored the Tribunal’s decision concerning the disputed input tax adjustment. Read the judgment.