Effective notice and proportionate input tax credit apply where mixed-use capital goods serve taxable and exempt outputs.

Pre-assessment notices must disclose the specific basis for proposed turnover modification and input tax credit reversal; notices asking only for factual particulars do not amount to an effective opportunity where the objection first appears in the assessment order. On mixed-use capital goods in a captive power plant, input tax credit may be allowed proportionately when the goods are used for both taxable and exempt outputs, rather than denied in full. The assessment was set aside and the matter remitted for fresh consideration and de novo assessment after hearing the assessee and examining the proportionate credit claim.

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Issues: (i) Whether the pre-assessment notices afforded the assessee an effective opportunity to meet the proposed modification of turnover and reversal of input tax credit. (ii) Whether input tax credit on capital goods used in a captive power plant generating both taxable-manufacturing power consumption and exempt electricity sales could be denied in full, or allowed proportionately.

Issue (i): Whether the pre-assessment notices afforded the assessee an effective opportunity to meet the proposed modification of turnover and reversal of input tax credit.

Analysis: The notices called only for factual particulars of the capital goods and their use, but did not reveal the specific basis on which the assessing authority intended to deny credit. The precise objection emerged only in the assessment order. On that footing, the assessee was not put on effective notice of the proposed modification, even though some opportunity had been extended.

Conclusion: The opportunity granted was not an effective opportunity, and the assessment order could not be sustained on that basis.

Issue (ii): Whether input tax credit on capital goods used in a captive power plant generating both taxable-manufacturing power consumption and exempt electricity sales could be denied in full, or allowed proportionately.

Analysis: Capital goods used exclusively for exempt goods are denied credit under the statutory scheme, while capital goods used for both taxable and exempt outputs are eligible for proportionate credit after the amendment introducing the proviso to Section 19(6). The assessee's case fell within mixed use, requiring examination of proportionate entitlement on merits.

Conclusion: Pro rata input tax credit was legally permissible on the capital goods used for both taxable and exempt purposes, subject to verification in assessment.

Final Conclusion: The impugned assessment was set aside and the matter was remitted for fresh consideration and de novo assessment after hearing the assessee and examining the proportionate claim of input tax credit.

Ratio Decidendi: Where an assessment proposes denial of input tax credit on mixed-use capital goods, the assessee must be specifically put on notice of that basis, and proportionate credit cannot be denied in full when the statutory scheme permits allocation between taxable and exempt uses.

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