Modvat credit remains available despite small-scale exemption eligibility when duty is paid on final goods.

An assessee eligible for a small-scale exemption notification was not compelled to clear goods at nil duty and could instead opt to pay duty at the normal rate and claim Modvat credit on duty-paid inputs, where otherwise admissible. For specified goods covered by Rule 57A, payment of duty on the final product preserved entitlement to take and utilise Modvat credit. The Rules did not provide for lapse of credit standing in the Modvat account, and such credit remained available for utilisation under Rule 57F. The disallowance of credit was therefore unsustainable.

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Issues: Whether an assessee who was eligible for exemption under a small-scale exemption notification could still choose to clear the final product on payment of duty and avail Modvat credit on duty-paid inputs, and whether the credit balance in RG 23A Part II could lapse.

Analysis: The entitlement to exemption did not compel the assessee to clear the goods at nil rate of duty. The legal position recognised an assessee's option either to avail exemption or to pay duty at the normal rate and claim Modvat credit if otherwise admissible. Since the inputs and final products were specified goods under Rule 57A and duty was paid on the final product, the assessee was entitled to take and utilise Modvat credit on the inputs. The Rules did not provide for lapse of credit standing in the Modvat account, and such credit remained available for utilisation under Rule 57F.

Conclusion: The assessee was entitled to avail Modvat credit, the credit balance did not lapse, and the disallowance of credit was unsustainable.

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