Modvat transition credit must be tested under transition rules, and disallowance beyond the show cause notice cannot stand.

Modvat credit could not be disallowed on a ground not covered by the show cause notice, because a demand beyond the notice was outside the scope of adjudication and the identifiable credit balance was set aside. Credit claimed on inputs lying in stock when the unit moved from Modvat to full exemption and later resumed dutiable clearances could not be rejected outright; the transition claim had to be examined under the applicable transition rules on the basis of input identity and eligibility. As the necessary factual enquiry had not been properly made, the matter required fresh consideration on merits.

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Issues: (i) Whether the disallowance of the balance Modvat credit as on 1-4-1987 could be sustained when that relief was not covered by the show cause notice. (ii) Whether credit relating to inputs lying in stock on 1-4-1987 could be denied outright when the unit moved from Modvat to full exemption and later resumed duty-paid clearances, or whether the claim required examination under the transition provisions.

Issue (i): Whether the disallowance of the balance Modvat credit as on 1-4-1987 could be sustained when that relief was not covered by the show cause notice.

Analysis: The disallowance of the balance credit in the RG 23A account was beyond the scope of the notice. A demand or disallowance cannot be upheld on a matter not put to notice, particularly where the affected amount was separately identifiable and no factual enquiry was required to test that objection.

Conclusion: The disallowance of the balance credit was unsustainable and was set aside in favour of the assessee.

Issue (ii): Whether credit relating to inputs lying in stock on 1-4-1987 could be denied outright when the unit moved from Modvat to full exemption and later resumed duty-paid clearances, or whether the claim required examination under the transition provisions.

Analysis: A manufacturer who shifts from Modvat to full exemption cannot automatically carry forward the earlier credit position into the new dutiable phase. The balance credit and the treatment of inputs in stock have to be regulated with reference to the restriction against credit on exempt final products and the transition requirements under the Modvat scheme. At the same time, a claim under the transition provision has to be examined on its own merits, including the identity of the inputs and whether the goods relied upon were in fact the same as those stated to be in stock. As that factual enquiry had not been properly undertaken, the matter required fresh consideration.

Conclusion: The denial of the claim could not be finally sustained without a de novo examination, and the matter was remitted for fresh decision on merits under the transition rule.

Final Conclusion: The appeal succeeded to the extent that the unauthorised disallowance was struck down, while the remaining issue was sent back for fresh adjudication on the factual and legal entitlement to transition credit.

Ratio Decidendi: Where Modvat credit issues turn on transition from exemption back to dutiable clearances, the authority must test the claim under the transition rules on the basis of identity and eligibility of the inputs, and a disallowance beyond the scope of the notice cannot stand.

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