Transitional MODVAT credit exception applies where pre-existing credit was legally allowable, despite the 31-1-1986 cut-off.

Rule 57H(2) transitional restriction on MODVAT credit for inputs duty-paid on or before 31-1-1986 does not apply where credit was legally allowable under a pre-existing rule or notification before 1-3-1986. The decisive test is whether the inputs fell within the scope of Rule 56A entitlement, not whether the assessee had actually availed the earlier credit. As the products and inputs were within Rule 56A and the Revenue did not dispute that position, the cut-off date could not defeat the claim. MODVAT credit was therefore available under the statutory exception, and denial of credit was set aside.

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Issues: Whether inputs on which duty was paid on or before 31-1-1986 were excluded from MODVAT credit under the transitional proviso in Rule 57H(2), notwithstanding that credit was allowable under Rule 56A prior to 1-3-1986.

Analysis: The transitional restriction in Rule 57H(2) bars credit for inputs duty-paid on or before 31-1-1986, except where credit was allowable under any rule or notification before 1-3-1986. The decisive question is whether the inputs fell within the class for which credit was legally allowable under Rule 56A, not whether the assessee had actually availed that credit. Since the Revenue did not dispute that the assessee's products and inputs were within the ambit of Rule 56A, the cut-off date could not defeat the claim. The earlier rejection had not properly examined this aspect.

Conclusion: The assessee was entitled to MODVAT credit under the exception in Rule 57H(2), even though duty had been paid on the inputs on or before 31-1-1986.

Final Conclusion: The appeal succeeded and the denial of credit on the basis of the cut-off date was set aside.

Ratio Decidendi: Where credit was legally allowable under a pre-existing rule or notification before 1-3-1986, the Rule 57H(2) cut-off for duty-paid inputs on or before 31-1-1986 does not apply merely because the assessee had not actually availed that earlier credit.

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