Accrued Modvat credit survived lapse and could offset earlier duty liability; demand also required correction for excess clearances.

Accrued Modvat credit could be used to discharge duty liability relating to a period before the credit lapsed on 1-3-1997, because the entitlement arose when the inputs were used and a later lapse provision could not defeat that vested credit. The demand was also required to be reduced because it had been computed for May 1996 to August 1996, although the clearances covered only May 1996 to July 1996. The discussion therefore supports adjustment of the lapsed credit against the earlier duty liability and correction of the excess demand.

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Issues: (i) whether Modvat credit that lapsed on 1-3-1997 could be utilised against duty demands relating to a period prior to that date but confirmed later, and (ii) whether the duty demand required correction by excluding clearances pertaining to August 1996.

Issue (i): Whether Modvat credit that lapsed on 1-3-1997 could be utilised against duty demands relating to a period prior to that date but confirmed later.

Analysis: The right to Modvat credit accrued when inputs were used in manufacture, and a later change in the credit scheme could not deprive the assessee of that accrued entitlement. Where the liability related to a period before the credit lapsed, the relevant credit would have been available for discharge of the duty had the demand been determined in time. The fact that the demand was confirmed after 1-3-1997 did not justify denial of utilisation of the credit that had already accrued.

Conclusion: The lapsed Modvat credit was available for adjustment against the pre-1-3-1997 duty liability, and the issue was decided in favour of the assessee.

Issue (ii): Whether the duty demand required correction by excluding clearances pertaining to August 1996.

Analysis: The demand had been computed for May 1996 to August 1996, although the clearances were only for May 1996 to July 1996. The computation therefore contained an excess amount attributable to the additional month, and the demand required downward correction.

Conclusion: The demand was liable to be reduced by the amount attributable to August 1996, and this issue was also decided in favour of the assessee.

Final Conclusion: The appeals succeeded, the impugned orders were set aside, and the assessee was held entitled to adjust the lapsed credit against the duty liability with the demand computation corrected accordingly.

Ratio Decidendi: A credit right that has accrued under the existing Modvat scheme cannot be defeated by a subsequent lapse provision when the underlying duty liability pertains to an earlier period; such accrued credit remains available for set-off against that liability.

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