Small scale exemption remains available after MODVAT credit is surrendered, with procedural lapse not defeating the claim.

Eligibility for small scale industry exemption was upheld where the assessee had timely filed classification lists and RT-12 returns showing its claim to exemption, later refunded the limited MODVAT credit earlier availed, and the only irregularity was a procedural lapse in using closing credit. The deciding factor was that prior credit usage, once surrendered, did not legally bar a switch from MODVAT to exemption, and the absence of a formal opt-out declaration could not defeat the exemption on these facts. The duty demand and personal penalty were therefore set aside.

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Issues: Whether the assessee was entitled to the exemption under Notification No. 175/86 as amended despite prior availing of MODVAT credit and a subsequent procedural lapse in utilising closing credit, and whether the demand and personal penalty were sustainable.

Analysis: The assessee had filed classification lists and RT-12 returns showing an intention to claim exemption, and those declarations had been filed in time and approved. The earlier utilisation of a small closing MODVAT credit from the previous year was later refunded. The determining factor was whether such prior credit usage and the absence of a formal opt-out declaration could defeat the otherwise available small scale industry exemption. The order held that, on these facts, there was no legal bar to switching from MODVAT to exemption once the credit already availed was surrendered, and that the isolated use of the closing credit was only a procedural lapse. The finding that the assessee had intended to continue MODVAT for the entire year was therefore not sustainable.

Conclusion: The assessee was held entitled to the exemption, and both the duty demand and the personal penalty were set aside.

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