Transitional MODVAT credit survives procedural lapse where duty-paid inputs in stock satisfy substantive eligibility conditions

Under the transitional MODVAT scheme, credit on duty-paid inputs lying in stock was not defeated merely because prior permission of the Assistant Collector had not been obtained; the absence of prior permission was treated as a procedural irregularity capable of later verification and regularisation. The exception under Rule 57H was read as overriding the ordinary filing requirements under Rules 57A and 57G where the substantive conditions were met. On limitation, the objection to reversal of MODVAT credit was not accepted as a decisive ground for relief and was rejected.

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Issues: (i) Whether the demand for reversal of MODVAT credit was barred by limitation. (ii) Whether credit taken on inputs lying in stock under the transitional provision was vitiated merely because it was taken before obtaining formal permission of the Assistant Collector.

Issue (i): Whether the demand for reversal of MODVAT credit was barred by limitation.

Analysis: The assessments were recorded as provisional in the RT-12 verifications, and on that basis the limitation objection was not accepted as a decisive ground for relief. The matter was therefore not pressed further on limitation.

Conclusion: The plea of limitation was rejected.

Issue (ii): Whether credit taken on inputs lying in stock under the transitional provision was vitiated merely because it was taken before obtaining formal permission of the Assistant Collector.

Analysis: The transitional scheme under Rule 57H permitted credit on duty-paid inputs received before filing the declaration if the inputs were lying in stock or had been received in the factory on or after 1 March 1986. The Court treated the absence of prior permission as a procedural irregularity capable of regularisation after verification of the duty-paid nature of the inputs. It further held that the transitional provision was an exception to the ordinary requirements under Rule 57A read with Rule 57G.

Conclusion: The reversal of MODVAT credit was not sustainable merely for want of prior permission.

Final Conclusion: The orders directing reversal of credit were set aside, and the appeals succeeded, with liberty to the department to verify the duty-paid character of the inputs in accordance with law.

Ratio Decidendi: Under the transitional MODVAT scheme, procedural non-compliance in obtaining prior permission does not by itself defeat credit on duty-paid inputs lying in stock, if the substantive conditions of the exception are otherwise met and capable of verification.

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