Modvat credit on hire purchase capital goods cannot be denied on grounds not stated in the show cause notice.

Modvat credit on capital goods acquired under lease or hire purchase cannot be denied merely because of that financing structure where the agreement shows responsibility for duty-related payments. The adjudication cannot enlarge the grounds in the show cause notice or supply a new basis for denial not clearly alleged there. On the stated facts, the notice failed to specify the precise breach of Rule 57R and Notification No. 27/94-C.E. (N.T.), and the objection that the financing company had not proved duty payment was unsustainable where the agreement indicated liability for excise duty payment. The impugned denial was therefore set aside, with consequential relief available according to law.

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Issues: Whether Modvat credit on capital goods obtained on lease/hire purchase basis could be denied for alleged non-compliance with Rule 57R of the Central Excise Rules, 1944 and Notification No. 27/94-C.E. (N.T.) dated 17-6-1994, and whether the adjudication order could enlarge the grounds stated in the show cause notice.

Analysis: The show cause notice did not specify the precise requirement of the notification said to have been breached, and the adjudication order travelled beyond the notice by supplying a new basis for denial. Such amplification of the notice was impermissible. On the facts of the hire purchase agreement, the purchaser was obliged to pay taxes and charges in the name and on behalf of the owner, and the schedule specifically indicated the liability for down payment of excise duty. The objection that the appellants had not established payment of duty by the financing company was therefore unsustainable.

Conclusion: The denial of Modvat credit was not sustainable, and the appeal succeeded in favour of the assessee.

Final Conclusion: The impugned orders were set aside and the assessee was held entitled to consequential relief according to law.

Ratio Decidendi: A benefit cannot be denied on a ground not clearly stated in the show cause notice, and Modvat credit cannot be refused merely because capital goods were acquired under a lease or hire purchase arrangement where the agreement itself shows responsibility for duty payment.

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