Modvat credit and show cause notice requirements defeated a belated recovery demand where the statutory bar did not apply.

Modvat credit on inputs was held not barred where the inputs were covered by the declaration procedure and had already qualified for proforma credit under the earlier scheme, so the restriction in Rule 57H(2) did not apply. Recovery of credit also required a valid show cause notice within the prescribed limitation period under Rule 57I; a belated demand could not be sustained by relying only on RT-12 assessment memoranda, and notice was necessary to satisfy natural justice. The impugned order was therefore set aside.

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Issues: (i) Whether credit of duty paid on inputs was barred by Rule 57H(2) of the Central Excise Rules, 1944 when the inputs were covered by the relevant declaration procedure and the benefit of proforma credit under the earlier scheme was available; (ii) Whether denial and recovery of credit could be sustained without issuance of a show cause notice within the prescribed time under Rule 57I of the Central Excise Rules, 1944.

Issue (i): Whether credit of duty paid on inputs was barred by Rule 57H(2) of the Central Excise Rules, 1944 when the inputs were covered by the relevant declaration procedure and the benefit of proforma credit under the earlier scheme was available.

Analysis: Rule 57H was held applicable only to credit relating to inputs received and lying in stock on the date of opting for the Modvat scheme, and not as a general bar to credit taken on documents under Rule 57G(2). The bar under Rule 57H(2) was not attracted where the inputs had enjoyed proforma credit under Rule 56A through Notification No. 201/79-C.E., and that earlier benefit was available for duty paid raw materials and components used in manufacture. Since that position was not disputed, the restriction in Rule 57H(2) did not apply.

Conclusion: The credit could not be denied under Rule 57H(2), and this issue was decided in favour of the assessee.

Issue (ii): Whether denial and recovery of credit could be sustained without issuance of a show cause notice within the prescribed time under Rule 57I of the Central Excise Rules, 1944.

Analysis: The demand was sought to be made by notice issued long after the relevant credit was taken, and Rule 57I required notice within the prescribed limitation period. The absence of a show cause notice could not be cured by reference to RT-12 assessment memoranda, because recovery of credit required prior notice and disclosure of the material relied upon. Dispensing with notice would violate the principles of natural justice, and the contrary view was not sustainable.

Conclusion: The demand was not sustainable without a valid show cause notice, and this issue was decided in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal succeeded on both substantive credit entitlement and procedural validity of the demand.

Ratio Decidendi: A Modvat credit denial cannot be sustained where the statutory bar is inapplicable on the facts, and recovery of credit must be preceded by a valid show cause notice issued within the prescribed limitation period, in observance of natural justice.

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