Modvat credit on damaged capital goods cleared as scrap cannot be proportionately reversed without express statutory authority.

Clearance of damaged capital goods as waste and scrap on payment of duty did not justify compulsory reversal of Modvat credit, because Rule 57S(2)(c) covered capital goods sold as waste and scrap without distinguishing the cause of scrap generation. In the absence of any express provision requiring proportionate reversal, recovery of part of the credit could not be sustained, and the demand was set aside in favour of the assessee.

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Issues: Whether capital goods cleared as waste and scrap after damage in a fire accident attracted reversal of Modvat credit, and whether proportionate reversal of credit could be directed in the absence of a specific legal provision.

Analysis: Rule 57S(2)(c) of the Central Excise Rules, 1944 specifically covers clearance of capital goods sold as waste and scrap on payment of duty leviable on such waste and scrap. The provision does not distinguish between capital goods becoming waste and scrap through use over time and capital goods becoming waste and scrap during their economic life due to a fire accident. In the absence of any express legal provision requiring proportionate reversal of Modvat credit, such reversal and recovery cannot be sustained.

Conclusion: The direction to reverse and repay part of the Modvat credit was unsustainable and was set aside in favour of the assessee.

Final Conclusion: Clearance of damaged capital goods as scrap on payment of duty did not justify compulsory reversal of the Modvat credit taken earlier, and the appeal succeeded.

Ratio Decidendi: Where capital goods are cleared as waste and scrap on payment of duty, Modvat credit cannot be required to be proportionately reversed unless the statute expressly provides for such reversal.

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