Modvat credit on capital goods cannot be denied for dual use in dutiable and exempted product manufacture.

Modvat credit on capital goods could not be denied merely because the same goods were used in the manufacture of both dutiable and exempted final products. The amended Rule 57R(1), read with the scheme of Rules 57T and 57Q, was treated as applying only where capital goods were used exclusively for exempted products, and dual or partial use did not attract denial of credit. The later re-insertion of the word "exclusively" was viewed as confirming that position. The denial of credit was therefore unsustainable, and the impugned order was set aside with consequential relief to the assessee.

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Issues: Whether Modvat credit on capital goods could be denied merely because the same capital goods were used for manufacture of both dutiable and exempted final products.

Analysis: Rule 57R(1), as amended during the relevant period, omitted the word "exclusively", but the provision was read as applying only where capital goods were used for exempted final products alone. The contemporaneous scheme under Rule 57T, which referred to exclusive use for exempted products, and the structure of Rule 57Q indicated that partial or dual use of the same capital goods in the factory did not attract denial of credit. The later re-insertion of the word "exclusively" was treated as confirming the intended position rather than creating a new restriction.

Conclusion: Modvat credit was not admissible to be denied where the capital goods were used for both dutiable and exempted products; the denial was unsustainable and the appeal succeeded.

Final Conclusion: The impugned order was set aside and the assessee obtained consequential relief in accordance with law.

Ratio Decidendi: Modvat credit on capital goods cannot be denied unless the capital goods are used exclusively for exempted final products; dual use for dutiable and exempted products does not justify denial.

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