Procedural lapse in Modvat credit movement did not justify denial, and penalty failed without proof of duty evasion.

Modvat credit could not be denied where processed goods were moved under the Rule 57F(3) procedure and the defect was only in documentation, with no substantive duty prejudice shown. The lapse was treated as a procedural contravention, and the credit denial and recovery were set aside. Penalty under Rule 173Q also failed because the statutory ingredients, including ineligible credit, improper accounting, or intent to evade duty, were not proved. With confiscation not sustained and no evasion established, the penalty was set aside. The appeal succeeded on both the credit and penalty issues.

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Issues: (i) Whether Modvat credit of Rs. 4,664/- was liable to be denied for the movement of processed goods under Rule 57F(3). (ii) Whether penalty of Rs. 5,000/- under Rule 173Q was sustainable.

Issue (i): Whether Modvat credit of Rs. 4,664/- was liable to be denied for the movement of processed goods under Rule 57F(3).

Analysis: The goods were sent for processing between units under the Rule 57F(3) procedure and were not shown to have suffered any substantive duty-related prejudice. The lapse arose from incorrect documentation and was treated as a procedural contravention. Duty on the final product had been debited, and the confiscation of the goods and vehicle was not sustained in appeal.

Conclusion: The denial and recovery of Modvat credit was not justified and was set aside in favour of the assessee.

Issue (ii): Whether penalty of Rs. 5,000/- under Rule 173Q was sustainable.

Analysis: Penalty under Rule 173Q required establishment of the statutory ingredients, including intentional ineligible credit, improper use of inputs, failure to account properly, or intent to evade duty. Those ingredients were not proved. Since confiscation was not upheld and no intent to evade duty was established, penalty could not be sustained.

Conclusion: The penalty under Rule 173Q was not sustainable and was set aside in favour of the assessee.

Final Conclusion: The impugned orders were set aside and the appeal succeeded on both the credit and penalty issues.

Ratio Decidendi: Where a contravention is merely procedural and the statutory ingredients for confiscation or penalty are not established, Modvat credit cannot be denied and penalty under Rule 173Q cannot be sustained.

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