Modvat credit on exempted goods failed where records showed no credit was taken on the inputs used for duty-free products.

Modvat credit and the related duty demand could not be sustained where the assessee's records showed that exempted final products were made from inputs on which no credit had been taken and separate accounts were maintained. The evidence did not establish that the credit availed on the relevant dates related to the inputs used for the duty-free goods, and the claim was not effectively rebutted. On that basis, denial of credit was unjustified and the demand and penalty were set aside.

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Issues: Whether Modvat credit and the consequent demand could be sustained where the assessee claimed that the inputs used in the exempted final products were from stock on which no credit had been taken and separate accounts were maintained.

Analysis: The claim that the exempted goods were manufactured from inputs on which no credit had been availed was supported by the assessee's records and was not effectively rebutted. The record did not clearly establish that the credit availed on the relevant dates related to the inputs used for the duty-free finished goods. Where the evidence shows that no credit was taken on the inputs used in exempted products, denial of credit and the corresponding demand cannot be sustained. Support was also drawn from the Board's circular and the Tribunal's earlier decision on the same principle.

Conclusion: The demand of duty and the penalty were not sustainable and were set aside in favour of the assessee.

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