CENVAT credit on capital goods allowed where machinery served both own manufacture and job work despite exemption concerns

Duty demand and penalty for under-valuation were upheld because the liability to duty and interest was not seriously contested, and Section 11AC penalty was treated as correctly imposed for non-discharge of duty during the relevant period. CENVAT credit on capital goods was allowed because the machinery was used both for the assessee's own manufacture and for job work under Notification No. 214/86-C.E.; credit could not be denied merely because the assessee's own final product was exempt. The depreciation objection also failed because the revised return was not accepted and the income-tax authority had added back the depreciation, so no impermissible double benefit was established.

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Issues: (i) Whether the duty demand of Rs. 53,438 and the penalty under Section 11AC were sustainable. (ii) Whether CENVAT credit on capital goods was admissible when the goods were used both for own manufacture and for job work under Notification No. 214/86-C.E. (iii) Whether the depreciation aspect disentitled the assessee from taking CENVAT credit on the capital goods.

Issue (i): Whether the duty demand of Rs. 53,438 and the penalty under Section 11AC were sustainable.

Analysis: The demand related to under-valuation and was not seriously contested. The liability to duty and interest was therefore upheld, and the penalty was found to have been correctly imposed for non-discharge of the duty liability during the relevant period.

Conclusion: The duty demand, interest, and penalty on this count were upheld.

Issue (ii): Whether CENVAT credit on capital goods was admissible when the goods were used both for own manufacture and for job work under Notification No. 214/86-C.E.

Analysis: The capital goods were used for both the assessee's own production and job-work clearances for principal manufacturers. The reasoning that credit was barred merely because the assessee's own final product was exempt was rejected, since job-work clearances under Notification No. 214/86-C.E. were treated as non-exempt for this purpose and the same machinery was also used for dutiable activity. The Tribunal applied the principle that where capital goods are used for both exempted and dutiable manufacture, credit cannot be denied on that ground alone.

Conclusion: CENVAT credit on the capital goods was admissible and the denial was set aside.

Issue (iii): Whether the depreciation aspect disentitled the assessee from taking CENVAT credit on the capital goods.

Analysis: The records showed that although depreciation had been claimed earlier, the revised return was not accepted and the income-tax authority added back the depreciation. On that factual basis, the Tribunal held that the Department had not rebutted the position that the assessee did not obtain impermissible double of depreciation and credit.

Conclusion: The depreciation objection did not bar CENVAT credit.

Final Conclusion: The duty demand and related penalty were sustained, but the denial of CENVAT credit on capital goods was reversed, leaving the appeals successful only in part.

Ratio Decidendi: CENVAT credit cannot be denied on capital goods merely because the assessee's own product was exempt, where the same capital goods were also used for job work under Notification No. 214/86-C.E. and the factual basis for alleging double benefit is not established.

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