Deferred Cenvat credit on capital goods does not require actual use where goods remain available for production.

For deferred Cenvat credit on capital goods under Rule 4(2), "possession and use" was read to mean that the goods remain available with the manufacturer for intended use in production, not that they must be actually put to use before credit is taken. On that construction, balance credit was admissible and denial of credit was unjustified. The demand was also treated as time-barred because the credit position had been disclosed in monthly returns, leaving no suppression or misstatement with intent to evade duty. As a result, the extended limitation period was unavailable and the penalty could not survive.

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Issues: (i) Whether balance Cenvat credit on capital goods could be taken under Rule 4(2) even though the capital goods had not yet been actually put to use, and (ii) whether the demand was barred by limitation and the penalty sustainable.

Issue (i): Whether balance Cenvat credit on capital goods could be taken under Rule 4(2) even though the capital goods had not yet been actually put to use.

Analysis: The expression requiring the capital goods to be in the "possession and use" of the manufacturer was read together and understood to mean that the goods remained available with the manufacturer for use in the manufacture of final products. The phrase was not construed as insisting upon actual physical use as a precondition for availing the deferred credit. Support was drawn from the earlier Modvat regime and from prior decisions recognising that credit could be taken before installation or actual use where the goods were retained for intended use in production.

Conclusion: The balance 50% Cenvat credit was admissible to the assessee, and the denial of credit was unjustified.

Issue (ii): Whether the demand was barred by limitation and the penalty sustainable.

Analysis: The taking of the balance credit had been disclosed in statutory monthly returns, so the department had knowledge of the relevant facts. The dispute turned on interpretation of the rule, and there was no suppression or misstatement with intent to evade duty. In such circumstances, the extended limitation period could not be invoked. Once the demand failed on merits and on limitation, no basis remained for penalty.

Conclusion: The demand was barred by limitation and the penalty could not survive.

Final Conclusion: The appeals succeeded in full, with the credit restored and all consequential consequences set aside.

Ratio Decidendi: For deferred Cenvat credit on capital goods, "possession and use" does not require actual use where the goods remain available for intended use in production, and mere interpretative dispute disclosed in returns does not justify invoking the extended limitation period.

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