Deemed credit on stock inputs cannot be reversed later merely because some inputs are subsequently cleared as such.

Deemed credit under Notification No. 35/2003-Central Excise (N.T.) was admissible on grey fabrics declared as inputs lying in stock, because the decisive question was their character when credit was taken. The notification covered inputs in stock, in process, and inputs contained in finished goods, and did not authorise denial or reversal merely because some inputs were later cleared as such. A later disposal event could not retrospectively defeat credit validly availed on stock inputs. The demand for reversal and penalty was therefore unsustainable, and relief was granted to the assessee.

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Issues: Whether deemed credit under Notification No. 35/2003-Central Excise (N.T.) was admissible on grey fabrics declared as inputs lying in stock, and whether such credit could be denied or reversed merely because a portion of the inputs was cleared as such.

Analysis: The notification, issued under sub-rule (3) of rule 9A of the Central Excise Rules, 2002, provides deemed credit for inputs lying in stock or in process and for inputs contained in finished goods lying in stock. The decisive enquiry was the character of the goods at the time credit was availed. The appellant was a manufacturer engaged in processing fabrics, and the grey fabrics declared in stock were treated as inputs for the finished product. The notification did not provide for subsequent denial or reversal of credit merely because some inputs were later cleared as such. Denial of credit on the basis of a later event had no legal support.

Conclusion: Deemed credit was held to be admissible, and the demand for reversal and penalty was unsustainable.

Final Conclusion: The order of the lower authorities was set aside and relief was granted to the assessee.

Ratio Decidendi: Where credit is validly taken on inputs lying in stock under a deemed-credit notification, it cannot be denied retrospectively merely because some of those inputs are later cleared as such, unless the notification itself authorises such reversal.

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