Modvat credit on capital goods before installation was permissible under the then-existing rule; penalty was quashed.

Modvat credit on capital goods could be taken and utilised on receipt of the goods before installation because the rule then in force did not expressly require installation as a condition for availment. That restriction was introduced only by later amendment effective 1-1-1996, so it could not be applied to earlier compliance. The assessee had duty-paying documents and declaration, and the scheme was still new with clearer trade guidance issued later; the availment during the relevant period was therefore treated as permissible and the penalty was set aside.

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Issues: Whether Modvat credit on capital goods could be taken and utilised on receipt of the goods before installation under Rule 57Q(3) of the Central Excise Rules, 1944, and whether penalty was sustainable for such availment during the relevant period.

Analysis: The credit was taken after receipt of capital goods supported by duty-paying documents and declaration, and the provision as it then stood did not specifically prescribe that credit could be taken or utilised only after installation. That requirement was introduced only by amendment with effect from 1-1-1996. The record also showed that the concept of Modvat credit on capital goods was still new and clear instructions on utilisation were issued later by trade notice. In these circumstances, the assessee could not be faulted for availing and using the credit during the material period.

Conclusion: The taking and utilisation of credit during the relevant period were held to be permissible, and the penalty was set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the penalty imposed on the assessee was quashed.

Ratio Decidendi: Where the governing credit provision did not then expressly restrict availment or utilisation of capital goods credit until installation, a later amendment imposing such a restriction operates prospectively and cannot justify penalty for earlier compliance with the then-existing rule.

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