Captive consumption exemption cannot be denied on assumed external power diversion without proper notice or quantified evidence.

Denial of Notification No. 67/95-C.E. was held unsustainable where the assessee received only a short hearing notice with a proposal to deny exemption, as this did not constitute proper show cause notice or fair opportunity and breached natural justice. Exemption for char and dolo char used to generate steam and electricity was also upheld because the steam was consumed within the factory, the electricity was produced through a captive manufacturing chain, and the department did not properly quantify any separate use attributable to the disputed inputs. A mere assumption that part of the electricity was diverted outside the factory was insufficient to deny relief.

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Issues: (i) whether the denial of the benefit of Notification No. 67/95-C.E. was vitiated for want of proper show cause notice and adequate opportunity of hearing; (ii) whether char and dolo char used in the factory for generation of steam and electricity were eligible for exemption when part of the electricity was diverted outside the factory.

Issue (i): whether the denial of the benefit of Notification No. 67/95-C.E. was vitiated for want of proper show cause notice and adequate opportunity of hearing.

Analysis: The appellant was only served with a letter fixing a short date of personal hearing with a proposal to deny exemption. That did not amount to a proper show cause notice or a fair opportunity to meet the case against it.

Conclusion: The denial of exemption was vitiated for breach of natural justice and was not sustainable on this ground.

Issue (ii): whether char and dolo char used in the factory for generation of steam and electricity were eligible for exemption when part of the electricity was diverted outside the factory.

Analysis: The inputs arose as unburnt coal and were used in the generation of steam, which was entirely consumed within the factory for producing electricity. The electricity was generated with multiple inputs, including waste heat and coal, and the department had not properly quantified any separate consumption attributable to the disputed inputs. Mere assumption that some electricity went outside the factory was insufficient to deny the exemption.

Conclusion: The inputs were eligible for exemption to the extent they were used in the captively consumed process within the factory, and the denial based on partial external use of electricity was unsustainable.

Final Conclusion: The appeal succeeded, the impugned order was set aside, and the exemption claim was upheld.

Ratio Decidendi: Where captively consumed inputs are used in a manufacturing chain within the factory, exemption cannot be denied on a mere assumption of external diversion of part of the final electricity output, especially when no proper quantification or fair notice has been given.

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