Modvat credit on duty-paid capital goods: deferred 50% credit cannot be denied, and related penalty fails.

Where Modvat credit on duty-paid capital goods is accepted, and the only dispute concerns the timing of availment, the balance 50% credit may be claimed in the subsequent eligible financial year. The denial of that deferred credit is unsustainable once entitlement to credit itself has been recognised, and any consequential penalty cannot survive. A separate disallowance that was not challenged remains unaffected.

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Issues: Whether the assessee was entitled to avail the balance 50% of Modvat credit on capital goods in the subsequent financial year and whether the penalty sustained by the lower authority could survive.

Analysis: The capital goods were imported under the EPCG scheme and the duty element had been paid before the transition to the new credit regime. The appellate authority had already accepted the assessee's entitlement to Modvat credit on the duty-paid capital goods, restricting only the timing of availment to 50% in the relevant financial year and the remaining 50% in the next financial year. In that situation, the dispute over immediate entitlement to 100% credit did not require examination on merits. The denial of the balance credit for the later financial year was therefore unsustainable, and the penalty attached to that denial could not stand. The separate disallowance of Rs. 88,266, not challenged, remained unaffected.

Conclusion: The assessee was entitled to the balance 50% credit in the subsequent financial year and the penalty was set aside, while the unchallenged disallowance of Rs. 88,266 was upheld.

Final Conclusion: The appeals were allowed only to the extent of deleting the denial of the balance credit and the penalty, with the remaining disallowance left intact.

Ratio Decidendi: Where entitlement to Modvat credit on duty-paid capital goods is accepted and only the timing of availment is in issue, denial of the balance credit for the later eligible year cannot be sustained, and any consequential penalty must also fail.

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