Proforma credit limits under exemption notifications: credit tied to exempted goods cannot offset dutiable clearances, but only ineligible credit may be disallowed.

Proforma credit under Notification No. 201/79 could not be used for inputs consumed in exempted or nil-rated goods to offset duty on dutiable clearances, and the manufacturer had to make at least approximate allocation between dutiable and exempted production. The notification's appendix was treated as procedural and incapable of enlarging the substantive exemption. However, where allocation was not furnished, only the credit relatable to exempted or nil-rated goods could be disallowed on best-judgment assessment, and the balance credit admissible for dutiable goods had to be allowed.

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Issues: (i) Whether proforma credit under Notification No. 201/79 could be utilised in respect of inputs used in the manufacture of exempted or nil-rated goods for payment of duty on dutiable goods, and whether allocation of inputs between dutiable and exempted products was necessary; (ii) whether, on failure to furnish such allocation, the entire proforma credit could be disallowed or only the portion relatable to exempted goods.

Issue (i): Whether proforma credit under Notification No. 201/79 could be utilised in respect of inputs used in the manufacture of exempted or nil-rated goods for payment of duty on dutiable goods, and whether allocation of inputs between dutiable and exempted products was necessary.

Analysis: The notification exempted excisable goods only to the extent of duty already paid on the inputs used in their manufacture, and its Appendix was held to be procedural in character and incapable of overriding the substantive limitation in the main notification. The provision excluding goods exempted from the whole of duty or chargeable to nil rate of duty was read as taking such goods, and the inputs used in them, outside the operation of the exemption. The Court further held that the manufacturer had to identify, at least approximately, the allocation of inputs between dutiable and exempted products so that the admissible credit could be worked out.

Conclusion: The answer was against the assessee. Proforma credit attributable to inputs used in exempted or nil-rated goods was not available for utilisation against dutiable clearances, and allocation of inputs was necessary.

Issue (ii): Whether, on failure to furnish such allocation, the entire proforma credit could be disallowed or only the portion relatable to exempted goods.

Analysis: Although the assessee did not cooperate in furnishing the allocation, the Court held that the credit admissible in respect of inputs used for dutiable goods could not be denied merely because part of the credit related to exempted goods. The proper course was to determine, on the basis of best judgment and any material furnished, the portion relatable to exempted goods and disallow only that part, while allowing the balance.

Conclusion: The answer was in favour of the assessee. Only the credit attributable to exempted or nil-rated goods could be disallowed, and the balance had to be allowed.

Final Conclusion: The lower orders were upheld on the interpretation of the notification and the need for allocation, but were modified to confine disallowance to the credit relatable to exempted or nil-rated goods, with consequential relief to the assessee.

Ratio Decidendi: A procedural appendix to an exemption notification cannot enlarge the substantive exemption or permit credit on inputs used in exempted or nil-rated goods to be carried forward for dutiable goods, but disallowance must be restricted to the ineligible portion of credit and not extended to credit otherwise admissible.

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