Reversal of disputed input credit cures the bar on deemed Modvat credit under the exemption notification.

Deemed Modvat credit under Notification No. 29/96-C.E. was restricted where credit had been taken on a specified input treated as a consumable, including light diesel oil used as fuel. The controlling principle stated is that full reversal of the disputed credit places the assessee in the same position as if no credit had been taken. On that basis, reversal cured the notification-based objection, removed the bar to deemed credit, and made denial of the benefit unsustainable. The result stated in the text is that the duty demand could not be sustained and the assessee remained entitled to the notification benefit.

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Issues: Whether deemed Modvat credit under Notification No. 29/96-C.E. could be denied on the ground that the assessee had taken credit on light diesel oil treated as a consumable, and whether subsequent reversal of that credit removed the bar to availment of deemed credit.

Analysis: The notification denied deemed credit where a manufacturer availed credit in respect of the specified inputs used in the manufacture of the specified final products. The Tribunal held that light diesel oil used as fuel fell within the expression "consumable", and therefore credit taken on such input attracted the restriction in the notification. However, it also accepted the settled principle that once the entire credit taken on the disputed input is reversed, the position is to be treated as if no credit had been taken. On that basis, the reversal of credit on light diesel oil cured the objection based on condition 4 of the notification.

Conclusion: The denial of deemed Modvat credit was unsustainable after reversal of the credit on light diesel oil, and the assessee was entitled to the benefit of the notification.

Final Conclusion: The demand of duty could not be sustained and the appeal succeeded with consequential relief.

Ratio Decidendi: Where credit taken on a disputed input is fully reversed, the legal effect is to place the assessee in the position as if no credit had been taken for purposes of the restriction on deemed credit under the exemption notification.

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