Modvat credit on essential inputs was admissible; demand failed because non-declaration could not sustain an inconsistent charge.

Modvat credit on Acetone used in manufacturing gas cylinders was held admissible because the input was found to be an essential ingredient used in or in relation to the final product. The demand could not be sustained on a separate theory of non-declaration when the notice was founded on wrongful availment of credit and that basic allegation failed on merits. For the same reason, the extended period was unavailable once the substantive charge did not survive. The adverse findings against the assessee were set aside.

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Issues: Whether Modvat credit on Acetone used in the manufacture of gas cylinders was admissible, and whether the demand could be sustained for alleged non-declaration and invocation of the extended period.

Analysis: The liability notice proceeded on the basis that the credit on Acetone was wrongly taken in breach of the Modvat scheme and that the input had been misdeclared. The appellate authority itself found that Acetone was an essential input used in or in relation to the manufacture of the final product and that credit on it was admissible. In that situation, confirmation of the demand on the separate ground that Acetone had not been properly declared was inconsistent with the notice and the findings on merits. Once the basic allegation of wrongful availment of credit failed, the demand for the extended period also could not stand.

Conclusion: The credit was admissible and the demand was not sustainable. The findings against the assessee were set aside.

Ratio Decidendi: Where Modvat credit is held admissible on merits, a demand cannot be sustained on an inconsistent ground of non-declaration, and the extended period cannot be invoked once the substantive charge of wrongful availment fails.

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