Transitional MODVAT credit was limited to pre-scheme unutilised balances, while wrongly allowed credit could be reopened and corrected.

Transitional MODVAT credit under Rule 57H(3) was confined to the unutilised balance lying before the commencement of the scheme, so credit relating to inputs received in March 1986 could not be shifted under that transitional provision and had to be examined only under the ordinary MODVAT rules. The earlier permission to transfer credit did not bar correction where credit had been wrongly allowed, and irregular credit could be reopened and recovered even if the initial allowance resulted from error or misconstruction. The matter was therefore remanded for de novo determination of the segregated entitlement to transitional and ordinary credit.

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Issues: (i) Whether the assessee was entitled under the transitional MODVAT provisions to transfer the entire balance lying in RG-23 Part II to RG-23A Part II, including credit taken on inputs received in March 1986. (ii) Whether the department was barred from reopening and correcting the earlier permission that had been granted for transfer of credit.

Issue (i): Whether the assessee was entitled under the transitional MODVAT provisions to transfer the entire balance lying in RG-23 Part II to RG-23A Part II, including credit taken on inputs received in March 1986.

Analysis: The transfer contemplated by the transitional provision was confined to credit lying unutilised before the commencement of the MODVAT scheme. Credit arising from inputs received in March 1986, though taken in RG-23 Part II and later sought to be transferred, did not fall within that limited category. Such credit could be considered only under the ordinary MODVAT provisions governing credit on inputs, subject to the relevant conditions.

Conclusion: The assessee was entitled only to transfer the pre-1-3-1986 unutilised balance and not the credit attributable to inputs received in March 1986.

Issue (ii): Whether the department was barred from reopening and correcting the earlier permission that had been granted for transfer of credit.

Analysis: The earlier permission did not create an indefeasible bar to correction where credit had been wrongly allowed. Recovery of irregularly taken credit was permissible, including in a case where the allowance resulted from error or misconstruction by an officer. The de novo proceedings pursuant to remand were therefore within jurisdiction.

Conclusion: The department was not barred from reopening the matter and the de novo proceedings were legally valid.

Final Conclusion: The appeal succeeded only to the extent that the matter required fresh adjudication on the segregated entitlement to transitional credit and ordinary MODVAT credit. The impugned order was set aside and the dispute was remanded for de novo decision on the eligible credit.

Ratio Decidendi: Transitional transfer under Rule 57H(3) is confined to credit lying unutilised before the commencement of the MODVAT scheme, while credit on inputs received after that point must be tested under the ordinary MODVAT provisions; wrongly allowed credit may be reopened and corrected in accordance with the recovery provisions.

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