Wrong utilisation of Modvat credit attracts penalty when reasonable verification of duty payment is not taken.

Wrong utilisation of Modvat credit attracts penalty where the assessee fails to verify that the appropriate duty was paid on inputs, and a mere plea of inadvertence does not negate culpability. The tribunal held that Rule 173Q(1)(bb) applied because credit had been taken and used without reasonable steps to confirm the duty position, and the continued practice over time weakened the defence. Penalty was therefore sustained, but the quantum was reduced as excessive on the facts.

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Issues: Whether penalty was imposable for wrong utilisation of Modvat credit and, if so, whether the quantum of penalty required reduction.

Analysis: The credit was utilised against basic excise duty even though the duty paid on the inputs was not the appropriate duty for that purpose. Rule 173Q(1)(bb) made a person liable to penalty where credit was wrongly taken or where reasonable steps were not taken to ensure that the appropriate duty had been paid. On the facts, the failure to verify the nature of the duty and the continued practice for a substantial period negatived the plea that the lapse was merely inadvertent and without culpability. The precedent relied upon was found inapplicable on the facts.

Conclusion: Penalty was rightly imposable, but the amount was reduced from Rs. 60,000 to Rs. 20,000.

Final Conclusion: The appeal succeeded only to the limited extent of reduction of penalty, while the finding of liability to penalty was sustained.

Ratio Decidendi: Wrong utilisation of Modvat credit attracts penalty where the assessee fails to take reasonable steps to verify that the appropriate duty has been paid, and absence of mala fide does not by itself preclude penalty.

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