Modvat credit cannot be suspended by executive instruction pending cost audit; statutory utilisation rights prevail.

The Modvat credit scheme under the Central Excise Rules, 1944 is a statutory, self-contained framework for earning, taking and utilising credit, and it cannot be curtailed by executive instruction. Section 14AA of the Central Excise Act, 1944 contains its own safeguards for special audit, including a reason-to-believe standard and nomination by a senior officer. Accordingly, referral of units for cost audit did not justify a general bar on payment of duty out of Modvat credit pending receipt of the audit report, and the restrictive circular was held to be beyond power and unsustainable.

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Issues: Whether the Central Board of Excise and Customs could direct that units referred for cost audit should not be permitted to pay duty out of Modvat credits until the audit report was received, and whether the Modvat scheme could be suspended or curtailed by executive instruction.

Analysis: The Modvat scheme was held to be a statutory, self-contained and exhaustive scheme under the Central Excise Rules, 1944, governing the manner of earning, taking and utilising credit. Section 14AA of the Central Excise Act, 1944 was found to contain its own safeguards, including the requirement of reason to believe and nomination of a cost accountant by a high-ranking officer. On that basis, the Court held that initiation of special audit did not authorise a general suspension of utilisation of Modvat credit. The disputed direction, which prohibited payment of duty out of Modvat credits pending scrutiny, went beyond the powers of the issuing authority and could not be sustained.

Conclusion: The impugned direction disabling utilisation of Modvat credit pending cost audit was illegal and ultra vires and was quashed. The petition succeeded in part.

Ratio Decidendi: An executive circular cannot curtail or suspend a statutory credit scheme, and any restriction on utilisation of credit must be authorised by the parent Act or rules.

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