Modvat credit reversal for full exemption was upheld where the assessee voluntarily agreed to comply with the exemption condition.

Full exemption under Notification No. 175/86-C.E. was available only if Modvat credit had not been availed. Where the assessee had initially taken credit and then voluntarily agreed to reverse it to obtain the exemption, the reversal merely gave effect to the exemption condition. The resulting disallowance and recovery of unutilised credit were treated as falling under Rule 57-I of the Central Excise Rules, not as a case of short levy, non-levy, or erroneous refund. Section 11A of the Central Excises and Salt Act, 1944 therefore did not apply, and a separate show cause notice was not required.

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Issues: Whether Modvat credit taken earlier could be required to be reversed while granting full exemption under Notification No. 175/86-C.E. dated 01.03.1986 without issuing a show cause notice and whether such demand was governed by Section 11A of the Central Excises and Salt Act, 1944.

Analysis: Full exemption under the notification was available only if Modvat credit was not availed of. The assessee had initially taken credit and thereafter sought full exemption, agreeing to refund the credit already taken. In such circumstances, the direction to reverse the credit merely gave effect to the condition attached to the exemption. The matter was not one of short levy, non-levy, or erroneous refund, and therefore Section 11A did not apply. The unutilised credit could be disallowed and recovered under Rule 57-I of the Central Excise Rules, 1944. Since the assessee had voluntarily consented to reverse the credit in order to obtain the more beneficial exemption, the plea that no show cause notice was issued was not available.

Conclusion: The reversal of Modvat credit was valid, no notice under Section 11A was necessary, and the assessee's challenge failed.

Ratio Decidendi: Where Modvat credit is not utilised and the assessee voluntarily undertakes to reverse it as a condition for availing full exemption, disallowance of the credit under Rule 57-I is not controlled by Section 11A and the assessee cannot later insist on a show cause notice.

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