Small-scale exemption under Notification No. 1/93 was preserved despite earlier Modvat credit on capital goods

Small-scale exemption under Notification No. 1/93 was available where Modvat credit on capital goods had been taken in an earlier year, but no fresh credit was availed during the exemption period itself. The notification condition was not applied to deny exemption merely because an outstanding credit balance remained from an earlier period, especially where the balance was minimal and offered to be foregone. On these facts, the restriction was held unjustified and the duty demand on exempt clearances was set aside.

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Issues: Whether the assessee was entitled to the small-scale exemption under Notification No. 1/93 while it had availed Modvat credit on capital goods earlier, but not during the period when the exempt clearances were made.

Analysis: The assessee had taken credit on machinery in an earlier financial year, when it was not availing the exemption, and during the relevant exemption year it had not taken any fresh Modvat credit on capital goods. The outstanding credit balance was minimal and was offered to be foregone. On these facts, the condition in the notification could not be applied so as to raise a duty demand of Rs. 3 lakhs on exempt clearances. The restriction in the notification, as applied by the adjudicating authority, was unjustified in the circumstances.

Conclusion: The assessee was entitled to the exemption, and the demand of duty was rightly set aside.

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