Modvat credit reversal on book write-off alone was not required when inputs remained physically available for use.

Mere write-off of inputs in the books did not require reversal of validly taken Modvat/Cenvat credit for the pre-amendment period when the inputs continued to exist in the factory and were capable of use. The Gujarat HC treated book write-off as distinct from physical clearance or destruction, and held that the then-existing rules contained no time limit for consumption and no reversal requirement for unused inputs. Board circulars could not create a liability not found in the rules, especially before the later insertion of a specific write-off reversal provision. The revenue appeals failed and the assessee's credit was upheld.

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Issues: Whether, prior to the insertion of the specific reversal provision in the Cenvat Credit Rules, an assessee was required to reverse Modvat/Cenvat credit merely because inputs were written off partially or fully in the books of account, when the inputs continued to exist in the factory and were capable of use.

Analysis: The reduction or write-off of the value of inputs in the accounts for income-tax or balance-sheet purposes was held to be distinct from physical clearance or destruction of the inputs. Under the Modvat scheme as it then stood, credit was taken on receipt of inputs and could be utilised later, and the rules did not prescribe any time limit for consumption or any provision requiring reversal merely because the inputs remained unused for some time. The Board circulars of 1995 and 2002 could not impose a liability not found in the rules, particularly for a period before the later introduction of Rule 5B, which expressly dealt with write-off situations.

Conclusion: Mere write-off of inputs in the books did not, by itself, require reversal of Modvat/Cenvat credit for the relevant period.

Final Conclusion: The revenue appeals failed, and the credit retained by the assessee was upheld for the pre-amendment period.

Ratio Decidendi: A circular cannot create a duty to reverse validly taken credit where the governing Modvat/Cenvat rules did not themselves provide for reversal on mere book write-off of inputs that remained physically available for use.

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