Proforma credit on duty-paid inputs in stock was upheld where the notification covered goods on the effective date.

Proforma credit under Rule 56A was held admissible on duty-paid inputs lying in stock on 1-3-1994 and later used to manufacture the notified finished products, because the notification granting credit covered raw materials or component parts already paid with duty and did not exclude stock on the effective date; the later amendment was treated as clarificatory. A separate demand could not be sustained without the show cause notice required under Rule 56A(5), but that defect was secondary because the substantive credit entitlement was upheld. The Revenue appeals therefore failed and allowance of credit was affirmed.

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Issues: (i) whether proforma credit under Rule 56A was admissible on inputs lying in stock as on 1-3-1994 and used in the manufacture of the notified finished products; (ii) whether the demand in one appeal could be sustained in the absence of a show cause notice under Rule 56A(5).

Issue (i): whether proforma credit under Rule 56A was admissible on inputs lying in stock as on 1-3-1994 and used in the manufacture of the notified finished products.

Analysis: The notification issued under Rule 56A(1) allowed credit of duty already paid on raw materials or component parts used for the manufacture of the specified finished goods. The Tribunal held that, once the notification came into force on 1-3-1994 and contemplated credit on duty already paid goods, it necessarily covered goods received by that date, including quantities remaining in stock. The later amendment of 6-4-1994 was treated as clarificatory. The Tribunal also relied on earlier decisions holding that sewing thread is a variety of yarn and that credit could not be denied merely because the inputs were in stock when the benefit became available. Rule 56A(8) was held to be irrelevant to the controversy.

Conclusion: Proforma credit on inputs lying in stock as on 1-3-1994 was admissible and the Revenue's objection failed.

Issue (ii): whether the demand in one appeal could be sustained in the absence of a show cause notice under Rule 56A(5).

Analysis: The Tribunal noticed the assessee's objection that no show cause notice had been issued for disallowance of the relevant credit. It accepted that a demand cannot be sustained without the notice required by the rule, but found that this objection did not alter the overall result because the substantive entitlement to credit on stock lying as on 1-3-1994 had already been upheld.

Conclusion: The absence of a show cause notice could not sustain the demand, and the objection was in favour of the assessee.

Final Conclusion: The Revenue appeals failed in full, and the orders allowing proforma credit on the stock of duty-paid inputs were upheld.

Ratio Decidendi: Where a notification under Rule 56A grants credit of duty already paid on specified raw materials, the benefit extends to duty-paid inputs lying in stock on the effective date, unless the notification expressly excludes such stock.

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