Show Cause Notice Limits and Modvat Credit on Burnt Inputs: unnotified duty demand set aside, deposit adjusted, credit liability sustained.

A duty demand cannot be confirmed beyond the scope of the show cause notice, so the unnotified demand was set aside. An admitted deposit must be adjusted against the assessed liability, and the assessee was entitled to deduction of that amount. Modvat credit taken on duty-paid inputs was confined to the statutory mode of utilisation under the credit rules and was not extinguished merely because the inputs were destroyed by fire; the demand relating to the burnt inputs was therefore sustained.

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Issues: (i) Whether the demand of Rs. 7,35,581, not mentioned in the show cause notice, could be sustained in adjudication; (ii) whether the sum of Rs. 4 lakhs already deposited was liable to be deducted from the demand; and (iii) whether Modvat credit taken on inputs destroyed in fire was liable to be remitted or recovered.

Issue (i): Whether the demand of Rs. 7,35,581, not mentioned in the show cause notice, could be sustained in adjudication.

Analysis: A demand cannot be adjudged for an amount that was not proposed in the show cause notice. The notice did not contain any demand for Rs. 7,35,581, and therefore the adjudicating authority had no basis to confirm that sum.

Conclusion: The demand of Rs. 7,35,581 was set aside in favour of the assessee.

Issue (ii): Whether the sum of Rs. 4 lakhs already deposited was liable to be deducted from the demand.

Analysis: The deposit was admitted, and the amount had not been given credit while computing the liability. The amount was therefore required to be adjusted against the duty demand.

Conclusion: The assessee was entitled to deduction of Rs. 4 lakhs from the demand.

Issue (iii): Whether Modvat credit taken on inputs destroyed in fire was liable to be remitted or recovered.

Analysis: Modvat credit on duty-paid inputs functions as a credit balance available only for payment of duty on final products or for permitted utilisation under the governing rules. Remission provisions apply where manufactured goods are destroyed in circumstances beyond control, but that principle does not extend to credit already taken on market-purchased inputs merely because they were burnt. Rule 196, dealing with goods moving under Chapter X procedure, was also inapplicable. Under Rule 57A(2), the credit could be used only for the permitted statutory purpose, and any unutilised credit balance remained recoverable if wrongly retained.

Conclusion: The demand on the burnt inputs was upheld against the assessee.

Final Conclusion: The demand was reduced by setting aside the unnotified portion and allowing adjustment of the admitted deposit, but the liability on the Modvat credit relating to burnt inputs was sustained.

Ratio Decidendi: A duty demand cannot exceed the scope of the show cause notice, and Modvat credit taken on inputs remains confined to the statutory mode of utilisation under the credit rules and is not extinguished merely because the inputs are destroyed by fire.

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