(a) The appellants received capital goods during the years 2001, 2002 and 2003 and took 50% of the credit amounting to Rs. 86,113/- during the financial year in which the goods were received and took the balance credit of Rs. 86,113/- in the year following the year of the receipt of the capital goods.

(b) The appellant also claimed depreciation of the value of the goods under Income Tax Act.

(c) The original authority held that when 50% of the credit of duty was taken on capital goods in a particular year, in respect of the balance 50% of the credit, the appellant claiming depreciation from Income Tax on the value of the goods plus 50% of credit yet to be taken, was in order and claiming of such depreciation did not bar them from taking of the balance credit of the 50% in the next year.

(d) The Commissioner (Appeals) held that Rule 4 (4) prohibits the availment of Cenvat credit on which depreciation has been claimed under the Income Tax Act.

4. Learned Advocate appearing for the appellant submits that the value of the goods for the purpose of Rule 4 of the Cenvat Credit Rules requires to be understood in proper perspective; when in the first year only 50% of the credit is allowed by the Central Government, the balance 50% being not available for taking as credit then that portion of the credit should be treated as part of the value and only when in the second year the balance 50% credit is permitted to be utilized, the ex-duty value excluding the entire duty amount will become the value of the goods. Therefore, they are taking 50% of the credit in the first year and claiming depreciation from the Income Tax on the value plus 50% credit in the first year and are taking the balance of 50% credit in the second year and claiming depreciation only on the ex-duty value in the second year. The learned Advocate also submits that the fact of Cenvat credit on capital goods as on 1.4.02 and 1.4.03 having been taken by them were in the knowledge of the Department which issued show cause notice in August, 2004 based on Audit objection invoking the period of limitation and the same is not legal and proper.

5. The learned DR reiterates the findings of the Commissioner (Appeals).

6.1 I have carefully considered the submissions from both sides. There are two different issues and which get interconnected in this case. One is depreciation under Income Tax Act. The depreciation under Income Tax Act is provided for as a tax incentive envisaged to provide for and to enable creation of capital goods. It is sufficient to note that the value of capital goods, plant and machinery etc. are given depreciation year by year, ultimately making the value of such capital goods in the books of account as zero and the effect of the same is that the income earned by the company will be proportionally shown less making it available to the reserve funds for replacing the capital goods, plant and machinery etc. This depreciation is not granted in one year i.e. the year of acquisition of the capital goods but over a period of time as prescribed in the Income Tax Act.

6.2 The Cenvat credit is also a benefit made available to the manufacturer of goods to avoid cascading effect of taxes. While in respect of raw materials or input service, credit is made available at one go, in respect of credit of duty paid on capital goods, for some reason, it has been allowed to be released not entirely in the very same year but is spread over the years. In other words, in the year of procurement, there is a limit of maximum of 50% of duty paid which can be taken as credit and the balance can be taken in the subsequent years. The duty paid on capital goods are thus neutralized over a period of time by granting the credit as above.

6.3 Rule 4 (4) of the Cenvat Credit Rules, 2002 which prescrib