Depreciation on unavailed capital goods duty credit is permissible where Cenvat credit is limited to the first 50% under the rules.

Rule 4(2) of the Cenvat Credit Rules allows only 50% of the duty on capital goods to be taken as credit in the year of receipt, with the balance available in a later year if the goods remain in use. Rule 4(4) bars Cenvat credit only for the same duty component on which depreciation is claimed under section 32 of the Income-Tax Act. Where the assessee took credit only on the first 50% and claimed depreciation only on the unavailed balance, the rule was not breached. The document states that depreciation may be claimed on the portion of duty not taken as credit, and that adverse demand, interest and penalty orders could not stand.

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Issues: Whether the assessee was barred from claiming depreciation under Section 32 of the Income-Tax Act, 1961 on the portion of duty on capital goods for which Cenvat credit was not taken in the first financial year, and whether the demand, interest and penalty could survive.

Analysis: Rule 4(2)(a) of the Cenvat Credit Rules permits only fifty per cent of the duty on capital goods to be taken as credit in the year of receipt, while Rule 4(2)(b) permits the balance credit in a subsequent year if the capital goods remain in use. Rule 4(4) prohibits Cenvat credit only in respect of that part of the duty value on which depreciation is claimed. On the facts, the assessee took credit only on fifty per cent in the first year and claimed depreciation only on the remaining portion on which no credit had been availed. The restriction in Rule 4(4), therefore, was not breached.

Conclusion: The assessee was entitled to claim depreciation on the unavailed portion without violating the Cenvat Credit Rules, and the adverse orders could not stand.

Final Conclusion: The appeals succeeded and the impugned orders were set aside with consequential relief.

Ratio Decidendi: Where the credit scheme itself restricts immediate Cenvat credit to fifty per cent of the duty on capital goods, depreciation may be claimed on the remaining portion not taken as credit, because Rule 4(4) bars only credit on the same duty component on which depreciation is actually claimed.

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