Modvat credit on paper bags cannot be denied on a ground not contained in the show cause notice.

Modvat credit on paper bags used as inputs could not be denied where the department had earlier stated that the monetary restriction in Notification 175/86 did not apply to such inputs. The show cause notice alleged that credit was taken without departmental permission, but the appellate order disallowed it on a different ground, namely that differential credit had been taken after a delay of more than nine months. As Modvat credit did not require prior permission and the order went beyond the notice, the disallowance was legally unsustainable and was set aside.

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Issues: Whether the denial of Modvat credit on paper bags could be sustained when the department had earlier informed that the restriction in Notification 175/86 did not apply to paper bags and the impugned order proceeded on a ground not contained in the show cause notice.

Analysis: The credit related to paper bags used as inputs in manufacture, and the department's letter of 19-10-1989 had stated that the monetary restriction was not applicable to such inputs. The show cause notice alleged that credit had been taken without obtaining permission, whereas the appellate order rejected the claim on the different footing that differential credit had been taken after a delay of more than nine months. Since taking Modvat credit did not require departmental permission, and the impugned order travelled beyond the basis of the notice, the order was legally unsustainable.

Conclusion: The disallowance of Modvat credit was set aside and the appeal was allowed in favour of the assessee.

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