Cenvat credit cannot be denied for non-simultaneous manufacture of exempted and dutiable goods; later exemption does not require reversal.

Cenvat credit cannot be denied merely because exempted and dutiable goods were not manufactured simultaneously, where the assessee's overall manufacturing activity covered both categories. Credit validly taken on inputs already in stock is not required to be reversed only because the finished goods later became exempt. Scrap cleared on payment of duty also supports the view that the assessee was not engaged solely in exempt clearances for purposes of denying credit. On these principles, the demand, interest, and penalties could not survive, and relief followed for the assessee.

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Issues: (i) Whether Cenvat credit was deniable because the assessee manufactured exempted and dutiable goods in different periods rather than simultaneously; (ii) whether credit already earned on inputs lying in stock was required to be reversed on a later exemption; (iii) whether scrap cleared on payment of duty negatived the department's objection to availment of credit.

Issue (i): Whether Cenvat credit was deniable because the assessee manufactured exempted and dutiable goods in different periods rather than simultaneously.

Analysis: The assessee manufactured both dutiable and exempted products, though not always at the same time. The period could not be artificially split so as to deny credit merely because for some intervals only exempted goods were produced, when the overall manufacturing activity covered both categories. The Tribunal relied on the principle that the relevant rule does not require day-to-day simultaneous manufacture of dutiable and exempted goods.

Conclusion: Credit was not deniable on this ground and the finding was in favour of the assessee.

Issue (ii): Whether credit already earned on inputs lying in stock was required to be reversed on a later exemption.

Analysis: Once credit is validly taken, a subsequent exemption does not by itself require reversal of credit that had been lawfully earned. The demand for reversal of credit on inputs in stock as on the relevant date was inconsistent with the principle that vested credit cannot be undone merely because the finished goods later became exempt.

Conclusion: Reversal of the earned credit was not required and the finding was in favour of the assessee.

Issue (iii): Whether scrap cleared on payment of duty negatived the department's objection to availment of credit.

Analysis: Scrap generated in the manufacturing process was removed on payment of duty. It was treated as waste that could be regarded as a final product for the purpose of the credit scheme. On that basis, it could not be said that the assessee had cleared only exempted products so as to justify denial of credit.

Conclusion: The scrap clearance supported the assessee's entitlement to credit and the finding was in favour of the assessee.

Final Conclusion: The demand, interest, and penalties could not survive, and the appeals were allowed with consequential relief.

Ratio Decidendi: Cenvat credit law does not require simultaneous day-to-day manufacture of exempted and dutiable goods, and credit validly earned is not reversed merely because the goods subsequently become exempt.

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