Withdrawal of Modvat credit notice eliminates the basis for penalty where no surviving Rule 57T violation remains.

Penalty under Rule 173Q of the Central Excise Rules, 1944 could not be sustained where the show cause notice proposing recovery and disallowance of Modvat credit on capital goods was expressly withdrawn and the credit was allowed. Once the notice was withdrawn, the alleged Rule 57T non-compliance ceased to survive for adjudication, leaving no subsisting finding of violation to support penalty. The view followed the earlier principle that withdrawal of the recovery proposal for Modvat credit also removes the basis for penalty. The penalty was therefore held unsustainable and set aside in favour of the assessee.

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Issues: Whether penalty under Rule 173Q of the Central Excise Rules, 1944 could be sustained after the show cause notice proposing disallowance and recovery of Modvat credit had been withdrawn and the credit was allowed.

Analysis: The notice alleged non-compliance with Rule 57T in taking Modvat credit on capital goods and proposed recovery under Rule 57U read with Section 11A of the Central Excise Act, 1944, along with penalty under Rule 173Q of the Central Excise Rules, 1944. The adjudicating authority allowed the Modvat credit and expressly withdrew the show cause notice. Once the notice was withdrawn, the allegation of violation of Rule 57T no longer survived for adjudication. In the absence of a surviving allegation or finding of non-compliance, penalty under Rule 173Q could not be imposed. The conclusion was also supported by the earlier view that when the proposal for recovery of Modvat credit is withdrawn, no penalty is liable.

Conclusion: The penalty was not sustainable and was set aside in favour of the assessee.

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