Modvat credit on capital goods could not be denied where the goods remained in possession and were neither sold nor cleared.

Capital goods remaining in the assessee's possession, and neither sold nor cleared, did not justify denial of Modvat credit under Rule 57S(1)(ii). The Tribunal treated the absence of transfer or clearance as decisive, and held that duty demand could not be sustained merely on the assumption that the goods attracted excise duty. On that factual basis, entitlement to credit was upheld and the Revenue's challenge failed.

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Issues: Whether Modvat credit on capital goods could be denied and duty demanded under Rule 57S(1)(ii) where the goods remained in the assessee's possession and were not sold or cleared.

Analysis: The Tribunal noted that the goods in question continued to remain in the assessee's possession. In the light of the meaning of sale and purchase referred to in Section 2(h) and the factual position that there was no transfer or clearance of the goods, the basis for demanding duty or denying credit was not established. The continued possession of the capital goods was treated as material in deciding entitlement to credit.

Conclusion: Modvat credit could not be denied on the facts of the case, and the departmental appeal failed.

Final Conclusion: The assessee's entitlement to Modvat credit on the capital goods was upheld, resulting in dismissal of the Revenue's challenge.

Ratio Decidendi: Where capital goods remain in the assessee's possession and are neither sold nor cleared, Modvat credit cannot be denied merely on the assumption that duty is payable under the relevant excise rule.

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