Modvat credit under Rule 57R(8) was not barred merely because it was later used for duty payment on final products.

Rule 57R(8) of the Central Excise Rules, 1944 restricts Modvat credit where the assessee claims depreciation under section 32 of the Income-tax Act, 1961 or treats the specified duty element on capital goods as revenue expenditure. The provision does not, on its face, link disallowance of credit to the later use of that credit for payment of duty on final products. On that reading, the assessee had a prima facie case for continuance of Modvat credit, and unconditional stay of recovery and penalty was warranted.

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Issues: Whether credit of duty on capital goods under Rule 57R(8) of the Central Excise Rules, 1944 was barred because the assessee had used the credit to pay duty on final products and had claimed such duty as revenue expenditure under the Income-tax Act, 1961.

Analysis: The restriction in Rule 57R(8) applies where the assessee claims depreciation under Section 32 of the Income-tax Act, 1961 or claims the specified duty element on capital goods as revenue expenditure. The rule does not, on its face, connect disallowance of Modvat credit with the later use of that credit for payment of excise duty on final products. The order also records a prima facie disagreement on whether such indirect tax treatment could defeat the rule, but the prevailing view was that the proviso does not extend that far at the interim stage.

Conclusion: The assessee had a prima facie case for continuance of Modvat credit, and unconditional stay of recovery and penalty was warranted.

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