Voluntary reversal of irregular Modvat credit before notice defeated penalty, despite inadmissibility under the input-receipt rule.

Penalty was not sustainable where Modvat credit, though irregularly availed, was fully reversed before issuance of the show cause notice. The inputs had not been received in the factory as required under Rule 57A of the Central Excise Rules, 1944, so the credit was inadmissible; however, voluntary reversal before notice negatived penal consequence. Applying the cited precedent, the Tribunal held that the assessee's pre-notice reversal did not justify penalty under the invoked penal provisions, and the penalty was set aside.

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Issues: Whether penalty was sustainable where the Modvat credit, though irregularly taken, was reversed voluntarily before issue of the show cause notice.

Analysis: The credit had not been admissible because the inputs were not received in the factory as required under Rule 57A of the Central Excise Rules, 1944. However, the assessee reversed the entire credit before the show cause notice was issued. Relying on the principle that voluntary payment or reversal before issuance of notice negatives penal consequence, and following the cited precedent, the Tribunal held that the conduct did not justify imposition of penalty under the penal provisions invoked.

Conclusion: Penalty was not leviable and was set aside in favour of the assessee.

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