Modvat credit on stock inputs and finished goods was not retainable after switching to small scale exemption.

Where an assessee opted out of Modvat and moved to the Small Scale Sector Exemption Scheme, duty was not payable on the initial clearances after 1-4-1990 because those clearances attracted nil duty. Inputs lying in stock on the relevant date, and finished goods in stock, were therefore relatable only to nil-duty clearances. Credit already taken on such inputs and stock could not be retained under Modvat, and the Revenue was entitled to recover the ineligible credit; reversal was upheld.

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Issues: Whether Modvat credit already taken on inputs and finished goods in stock was liable to be reversed when the assessee opted out of the Modvat scheme and switched to the Small Scale Sector Exemption Scheme from 1-4-1990.

Analysis: On opting out of Modvat and availing the small scale exemption, no duty became payable on the initial clearances of finished products. Inputs lying in stock on the relevant date would be used only in the manufacture of goods cleared after 1-4-1990 and such clearances would bear nil duty. Finished goods in stock on that date would also attract nil duty. In that situation, credit of duty on the inputs and goods relatable to those stocks could not be retained under the Modvat scheme, and the Revenue was entitled to recover the ineligible credit.

Conclusion: The credit was not admissible and its reversal was upheld, against the assessee.

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