Prior show cause notice is mandatory before disallowing input credit; a defective endorsement may be treated as notice for fresh hearing.

Rule 57-I(1) of the Central Excise Rules, 1944 required the proper officer to issue a prior show cause notice before disallowing credit of duty paid on inputs. An assessment endorsement made without such notice could not be sustained as a final disallowance. In the absence of a counter affidavit, the assertion that no prior notice was given was accepted, and the endorsement was treated as a show cause notice to cure the procedural defect. The manufacturer was granted time to file an explanation, and the proper officer was directed to consider that explanation and pass orders according to law.

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Issues: Whether an assessment endorsement disallowing credit under Rule 57-I of the Central Excise Rules, 1944 could be treated as a show cause notice, and whether prior notice and opportunity were required before disallowing the credit.

Analysis: Rule 57-I(1) required the proper officer to give a show cause notice before disallowing credit of duty paid on inputs taken by a manufacturer. The endorsement in question was made without any prior show cause notice, and in the absence of a counter affidavit the petitioner's assertion to that effect was accepted. To cure the procedural defect, the endorsement was directed to be treated as a show cause notice, and the petitioner was given time to file an explanation. The proper officer was then required to consider the explanation and pass appropriate orders according to law.

Conclusion: The impugned endorsement could not stand as a final disallowance of credit without observance of the notice requirement, but it was treated as a show cause notice and the matter was remitted for fresh consideration after the petitioner's objection.

Ratio Decidendi: Where a fiscal provision requires a prior show cause notice before disallowing credit, any disallowance made without such notice cannot be sustained as final and may, in appropriate circumstances, be treated only as a notice to enable hearing and adjudication.

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