Capital goods credit cannot be denied for temporary removal of machinery parts for repair and reinstallation.

Credit on capital goods for the subsequent year cannot be denied merely because parts of machinery were temporarily sent out of the factory for repair and later reinstalled. Under Rule 4(2)(b) of the CENVAT Credit Rules, 2004, the relevant requirement is that the capital goods remain in the manufacturer's possession and are used in the relevant year. Temporary removal for repair did not breach that condition because the machinery was restored and put back to use. On that basis, denial of credit was unjustified and the issue was decided in favour of the assessee.

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Issues: Whether credit on capital goods could be denied for the second year merely because parts of the machinery were sent out of the factory for repair and were later brought back and installed.

Analysis: Under Rule 4(2)(b) of the CENVAT Credit Rules, 2004, the entitlement to credit in the subsequent year depends on the capital goods being in the possession and use of the manufacturer. Temporary removal of parts for repair did not amount to a violation of that requirement, since the goods were restored and used in the relevant year. Denial of credit in such circumstances would make the scheme unworkable and create avoidable administrative difficulty.

Conclusion: The denial of credit was unjustified and the issue was decided in favour of the assessee.

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