Modvat credit on duty-paid inputs cannot be reversed merely because an exemption notification was breached.

Modvat credit on duty-paid inputs could not be reversed merely because the assessee had availed Small Scale Industry exemption under Notification No. 16/97-C.E. during the relevant period. The note states that, even if the exemption was wrongly continued for part of the period, the consequence was duty liability on finished goods cleared in breach of the notification, not denial of validly taken credit. Credit supported by duty-paying documents remained available unless actually utilised in a manner contrary to the rules.

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Issues: Whether Modvat credit on duty-paid inputs could be denied or reversed merely because the assessee was availing Small Scale Industry exemption under Notification No. 16/97-C.E. during the period of availment.

Analysis: The exemption notification was being availed by the assessee up to the point when the prescribed limit was expected to be crossed. During that period, credit was taken on inputs supported by duty-paying documents. Even assuming that the assessee had wrongly continued to enjoy the exemption for a part of the period, the consequence of such violation was liability to duty on the finished goods cleared during that period. The demand for reversal of Modvat credit was not justified because the credit had been validly taken under the Modvat Credit Rules and had not been utilised for discharge of duty while the exemption continued. The proper course in case of breach of the notification was action for violation of the notification, not denial or recovery of the credit itself.

Conclusion: Modvat credit could not be ordered to be reversed or recovered merely on account of violation of the exemption notification; the issue was decided in favour of the assessee.

Final Conclusion: The denial of Modvat credit was unsustainable, and the assessee's appeal succeeded with the relief flowing from that determination.

Ratio Decidendi: Breach of an exemption notification may attract duty liability for the clearances made in violation of the notification, but it does not by itself justify reversal or recovery of validly taken Modvat credit on duty-paid inputs that has not been utilised.

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