The story...

An Indian report linked the chief of the ISI to the funding of the 9/11 attacks.

Our take...

This claim generally refers to a story in the India Times (see here for more), and it does claim that the ISI chief was removed from his job as a result of this discovery. Whether there’s confirmation of this story is something we look at on another page, but it’s worth pointing out that India has long linked the ISI to terrorism. Here’s a piece from 2003, for instance:

Significantly, these attacks are not merely targeted at Jammu and Kashmir. It is not as if the J&K problem were resolved, in whatever manner, Pakistan's hostility towards India would cease. That the hostility of Pakistan is deep-rooted is explained by the ISI terrorist modules planted all over the country. A report in June, 2002, indicated that as many as 65 modules in nine states across the country had been identified as centres for agents of Pakistan's ISI. Most of them are "sleepers" and spring to deadly action when directed. Some of the prominent centres identified are Muzafarnagar, Saharanpur, Bijnor, Moradabad, Bareili, Kanpur, Varanasi and Azamgarh—all in U.P., Kolkata, Murshidabad, Dinajpur and Siliguri—all in West Bengal, Sivan, Dharbhanga, Madhubani, Purnia, Kishanganj, Katihar, Gaya, Hazaribagh, Giridih, Patna, Sitamarhi and Jamshedpur—all in Bihar. There is no need to reproduce names pertaining to other states but they are all there right down to the southern state of Kerala.

In Pakistan itself the various jihadi militant organisations have formed themselves into a Jehadi Council in collaboration with the ISI. The most important terrorist organisation of the Council is the Lashkar-e-Toiba and its philosophy is that the every fidayeen of the LeT is committed to destroy Hindustan and fight until it is reduced to dust. In the process, if the fidayeen gets killed he will be blessed by Allah and find a place in Paradise. The LeT chief Hafiz Mohammed Saeed had also said that Indian Muslims should be aroused to rise and revolt so that India disintegrates. The LeT convention in April 2001, which was attended by the then D.G. of ISI, Mehmood Ahmad, had passed a resolution calling on its cadres in India to emulate the example of Mahmud Ghaznavi, the Afghan invader of the 11th century who destroyed temples and idols and looted systematically, the most important thereof being the ravaging of the Somnath temple in 1025 A.D. Does this explain the terrorist attacks on Akshardham temple in Gujarat, Raghunath temple in Jammu and the Sai Baba temple in Hyderabad in recent weeks? If anything, such attacks can be expected to continue.
http://www.tribuneindia.com/2003/20030105/spectrum/main7.htm

Note the widespread nature of the concern here, far more than simply about problems in Kashmir. Rather, the author believes that these groups want India to entirely disintegrate. And General Ahmad, linked by India to the 9/11 attacks, is specifically named as calling for attacks on Indian temples. If this were known after September 11 2001 then it does suggest that India might feel they would benefit from his being removed. And a report from the time Ahmad was removed from his ISI post does accuse him of links to terrorism:

Musharraf has also been persuaded to arrest fundamentalist leaders like Fazlur Rehman and take restrictive action against extremist parties and political groups in Pakistan. Musharraf has transferred or removed seven out of 11 senior army commanders, who opposed his support to the US. Of them, General Aziz and the ISI chief, General Mehmood Ahmad, were active in fomenting terrorism in Kashmir.
http://www.indianexpress.com/res/web/pIe/ie20011019/ed4.html

Another report from India points out that it’s strongly in their interests to keep a wedge between Pakistan and the US, to limit any alliance, and the ISI-Atta link is a key part of that:

India’s concerns that the US is refashioning a new alliance with Pakistan continue, but Government sources say India has kept itself in the new great game quite successfully.

First; toppling the Taliban and replace it with something less friendly to Pakistan. Taliban has allowed the territory of Afghanistan to be the recruiting ground of terrorists who are then exported to Kashmir. This goal is sure to be achieved since the US is bent upon throwing the Taliban into history’s dustbin. India has teamed up with Iran and Russia to support the Northern Alliance, and to some extent, Zahir Shah, to reduce Islamabad’s influence. Islamabad is so far unsuccessful in finding a pliant alternative to the Taliban.

The second Indian goal was to limit the breath and depth of a new US-Pakistan relationship. Geography has forced a marriage of interests between the US and Pakistan. India accepts that reality. The real issue is ensuring that it does not go too far. India counts on three factors to keep an alliance in abeyance.

One, it has worked hard to show up Pakistan’s complicity in Afghanistan-based terrorism. India is reported to have tipped off the US that the ISI financially backed the STC suicide hijacker, Mohammed Atta. The sacking of the ISI chief, Mehmood Ahmad, was a direct consequence. Pakistan is in a Catch-22 spot. The more intelligence they share with the US, the more they indict themselves as accomplices.
http://news.indiamart.com/news-analysis/pm-meeting-bush-his--4975.html

The Indian Prime Minister summed up the position just a few weeks after 9/11:

PRIME MINISTER Atal Bihari Vajpayee recently admitted that there is some disappointment in India that the US is not as sensitive to Indian concerns on terrorism as we had expected. I was told by senior members of the US establishment over the last three weeks that the US is also disappointed about India not appreciating the extent to which the US campaign against terrorism is safeguarding Indian security concerns. It is in this context of mutual disappointments that US Secretary of State Colin Powell held discussions in New Delhi on October 16 and 17.

It rankles public opinion in India that the US chose Pakistan over India as an active partner in its campaign against international terrorism, despite India offering unconditional support to the US. Indeed, the US has supported Pakistan on the issue of Kashmir against Indian interests. It seems the US is not interested in acting against terrorism sponsored by Pakistan. It is only concerned with terrorism directed against itself and its allies in Western Europe and Japan. Also, that the restoration of economic and military assistance in return for its support will strengthen Pakistan’s position. This is bound to adversely affect Indian security interests resulting in an arms race in the subcontinent.
http://www.indianexpress.com/res/web/pIe/ie20011019/ed4.html

Vajpayee clearly feels aggrieved that Pakistan receives substantial US funding and support, not least because be believes they then sponsor terrorism against India. The incentive to persuade the US to see the Indian side of things is obvious. We’ve no idea whether India let this influence their intelligence on Atta and the ISI, but it’s worth keeping in mind, just as a cautionary note.