Capital goods credit remains usable after a temporary compounded levy bar ends, as earned Modvat/Cenvat credit does not lapse.

Capital goods credit earned under the Modvat/Cenvat scheme before a compounded levy notification came into force did not lapse merely because that special regime imposed a temporary bar on utilisation. The notification was effective only while the compounded levy scheme operated and did not state that validly earned credit would be extinguished after its cessation. Credit on capital goods is earned on procurement, while utilisation is subject to scheme conditions and timing; a temporary restriction cannot be read as permanently destroying accrued credit. The Board circular also recognised the distinction between earning and utilising credit, so the denial of utilisation after the notification ceased was unsustainable.

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Issues: Whether capital goods credit earned under the Modvat/Cenvat scheme before the operation of the compounded levy notification could be utilised after the notification ceased to operate, or whether the prohibition in the compounded levy notification caused such credit to lapse.

Analysis: The capital goods were eligible for Modvat credit when procured. The prohibition contained in the compounded levy notification operated only during the period in which that scheme was in force. The notification did not state that credit already earned would lapse permanently after the scheme ended. Credit under the capital goods scheme is earned on procurement and, in the case of capital goods, is utilisable only subject to the scheme's own conditions and timing. A temporary bar created for a special compounded levy regime cannot be read as extending beyond that regime so as to destroy credit already earned. The Board circular also recognised the distinction between earning credit and utilising it.

Conclusion: The earned capital goods credit remained available for utilisation once the compounded levy restriction ceased, and the denial of credit was unsustainable.

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