Modvat credit reversal after error notice can justify remission of penalty despite an initial rules violation.

Wrong availment of Modvat credit on capital goods was treated as a breach of the Modvat Rules, but immediate reversal of the credit after the defect was pointed out justified remission of penalty. The Larger Bench ruling in DCW Ltd. was applied to hold that rectification of the mistake could relieve the assessee from penal consequence even though the initial lapse remained a violation. Penalty was therefore not sustained and was remitted in favour of the assessee.

---

---

Issues: Whether penalty was imposable for wrong availment of Modvat credit on capital goods when the credit was reversed after the lapse was pointed out.

Analysis: The credit taken on capital goods was found to be contrary to the conditions under the Modvat Rules, and the appellate authority accepted that there was a violation. However, the wrongly availed credit had been reversed immediately after the defect was brought to notice. The decision of the Larger Bench in DCW Ltd. was applied to hold that such rectification justified remission of penalty, even though the lapse itself was not ignored.

Conclusion: Penalty was not sustained and was remitted in favour of the assessee.

---