Modvat credit on hypothecated capital goods was treated as prima facie admissible where ownership remained with the manufacturer.

Modvat credit on a Ring Frame was held prima facie not barred under Rule 57R(3) because the hypothecation deed created only a charge for the financier and did not transfer absolute ownership, while the financier's letter confirmed that ownership remained with the manufacturer. On that basis, the statutory restriction for capital goods acquired on loan without transfer of property did not apply. The remaining credit was also treated as prima facie admissible under Rule 57Q, with the wider eligibility recognised by the Larger Bench ruling in Jawahar Mills as affirmed by the Supreme Court. Interim relief was therefore granted in full, protecting the assessee from immediate recovery.

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Issues: (i) Whether Modvat credit on the Ring Frame was barred under Rule 57R(3) on the ground that the capital goods had been acquired on loan and the property therein had not been transferred to the manufacturer; (ii) Whether the balance Modvat credit was prima facie admissible as capital goods credit under Rule 57Q.

Issue (i): Whether Modvat credit on the Ring Frame was barred under Rule 57R(3) on the ground that the capital goods had been acquired on loan and the property therein had not been transferred to the manufacturer.

Analysis: The hypothecation deed showed only a charge in favour of the financier till repayment of the term loan and did not indicate transfer of absolute property in the machinery to the financier. A letter from the financier also stated that ownership of the capital goods vested in the manufacturer and that no depreciation would be claimed for income-tax purposes. On these facts, the statutory bar against credit for capital goods acquired otherwise than by direct purchase, where property is not transferred, did not appear to apply.

Conclusion: The bar under Rule 57R(3) was not attracted, and the assessee made out a prima facie case for credit on the Ring Frame.

Issue (ii): Whether the balance Modvat credit was prima facie admissible as capital goods credit under Rule 57Q.

Analysis: The denial of credit on the remaining capital goods was challenged on the basis of the Larger Bench ruling in Jawahar Mills, which had been affirmed by the Supreme Court. That precedent supported a wide eligibility for capital goods credit under Rule 57Q during the relevant period.

Conclusion: The balance credit was also prima facie admissible under Rule 57Q.

Final Conclusion: The application for interim relief succeeded in full, and the assessee was protected from immediate recovery pending disposal of the matter.

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