Exemption for in-factory use survives withdrawal where intended use had already begun; duty and penalties need fresh quantification.

For exemption conditioned on use within the factory, woollen knitted fabrics already placed in the tailoring section before withdrawal of the notification continued to qualify because the intended exempt use had commenced before the withdrawal date; 6,124.975 kg remained exempt, while the balance was dutiable. Where the dates of removal were ascertainable from records, duty on the non-exempt balance had to be assessed under Rule 9A(1)(ii), not Rule 9A(5). Penalty and redemption fine also required fresh quantification after the duty and assessable value were worked out.

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Issues: (i) Whether woollen knitted fabrics removed to the tailoring section before withdrawal of the exemption notification retained exemption when used later in the manufacture of hosiery articles; (ii) whether duty on the balance quantity was to be assessed under Rule 9A(1)(ii) or Rule 9A(5) of the Central Excise Rules, 1944, and whether penalty and redemption fine required redetermination.

Issue (i): Whether woollen knitted fabrics removed to the tailoring section before withdrawal of the exemption notification retained exemption when used later in the manufacture of hosiery articles.

Analysis: The exemption under Notification No. 213 of 1972 operated for woollen knitted fabrics used within the factory in the manufacture of hosiery articles and stood withdrawn on 1.3.1979 by Notification No. 101/79. The decisive factor was not merely the date of manufacture, but whether the process of use for the exempted end-use had commenced before withdrawal. Where 6124.975 kg. of fabrics were already in stock in the tailoring section on 1.3.1979, the intended process of use had begun before withdrawal. For the remaining quantity, no step toward use for hosiery manufacture had been taken before withdrawal.

Conclusion: The quantity of 6124.975 kg. remained entitled to exemption, but the balance quantity was not exempt.

Issue (ii): Whether duty on the balance quantity was to be assessed under Rule 9A(1)(ii) or Rule 9A(5) of the Central Excise Rules, 1944, and whether penalty and redemption fine required redetermination.

Analysis: Where the dates of removal were ascertainable from records, the applicable provision for assessment was Rule 9A(1)(ii), not Rule 9A(5). Since the assessable quantity and duty liability were yet to be properly worked out, the quantum of penalty and redemption fine could not be finally sustained and had to be reconsidered after determining the value of the goods and the duty evaded.

Conclusion: Duty on the balance quantity had to be assessed under Rule 9A(1)(ii), and the penalty and redemption fine were required to be redetermined after fresh quantification.

Final Conclusion: The appeal succeeded to the extent of preserving exemption for the quantity already in the tailoring section before withdrawal of the notification, while the remaining quantity was held dutiable and the matter was remitted for fresh adjudication on duty, penalty, and redemption fine.

Ratio Decidendi: For exemption conditioned on use within the factory, exemption can survive withdrawal of the notification where the process of intended use had commenced before withdrawal, and when dates of removal are ascertainable, duty must be assessed under the rule applicable to actual removal rather than the deeming provision.

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