Modvat credit barred during SSI exemption, and mere non-utilisation does not cure ineligibility.

Para 2 of Notification No. 16/97-C.E. barred availment of Modvat credit on inputs while the assessee was enjoying the Small Scale Industry exemption, and the prohibition operated at the stage of taking credit itself. Mere non-utilisation of the credited amount did not cure the ineligibility, because the restriction attached to availment, not only to use. The Modvat credit was therefore inadmissible during the exemption period, and the disallowance and penalty were upheld.

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Issues: Whether Modvat credit could be availed on inputs received during the period when the assessee was enjoying the benefit of Small Scale Industry exemption under Notification No. 16/97-C.E.; and whether mere entry of credit without actual utilisation avoided the ineligibility.

Analysis: The assessee had taken Modvat credit on inputs received before crossing the exemption threshold, but during the relevant period it was still operating under the SSI exemption notification. Para 2 of Notification No. 16/97-C.E. barred availment of credit under Rule 57A while the exemption was being enjoyed. The prohibition attached to the very availment of credit, and not merely to its utilisation. The plea that the credit was only entered in the records and not utilised was therefore of no assistance.

Conclusion: The Modvat credit was not admissible during the period of SSI exemption, and the disallowance and penalty were upheld.

Ratio Decidendi: Where an exemption notification expressly prohibits availment of Modvat credit while its benefit is being enjoyed, the assessee cannot claim credit merely because the amount was not actually utilised.

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