Capital goods credit remains admissible when machinery is later used for dutiable production and not exclusively for exempt goods.

Capital goods credit was held admissible where machines were not used exclusively for exempt manufacture. The equipment was first employed for nil-rate cotton knitted fabrics and later for dutiable manmade knitted fabrics and collars, and the record did not show that credit was taken before dutiable production commenced. Because exclusive use for non-dutiable goods was not established, Rule 57R(1) of the Central Excise Rules, 1944 did not apply, the disallowance was unsustainable, and the assessee succeeded.

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Issues: Whether capital goods credit was admissible when the machines were initially used for manufacture of nil-rate goods and later for dutiable goods, and whether the bar under Rule 57R(1) of the Central Excise Rules, 1944 applied.

Analysis: The capital goods were not used exclusively for the manufacture of goods not chargeable to duty. The record showed that the machines were first employed in manufacturing cotton knitted fabrics attracting nil rate of duty and were thereafter used for manufacture of manmade knitted fabrics and collars chargeable to duty. The Revenue did not rebut the appellants' case that the credit was utilised only after commencement of manufacture of dutiable goods. In the absence of exclusive use for exempt goods, the restriction under Rule 57R(1) was not attracted.

Conclusion: The capital goods credit was admissible and the disallowance was unsustainable, in favour of the assessee.

Final Conclusion: The impugned order was set aside and the appeal was allowed.

Ratio Decidendi: Capital goods credit is not barred where the goods are not used exclusively for exempt manufacture and the credit is utilised after dutiable production commences.

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