Modvat credit compliance requires strict observance of input removal conditions, with penalties still subject to proportionality.

Unauthorised removal of inputs for processing without the permission and accounting required by Rule 57F(3) was treated as a substantive breach of the Modvat scheme, not a mere technical lapse, so adverse action including denial of credit, confiscation, duty demand and related consequences was justified in principle. The shortage of part of the inputs reinforced that finding. However, penal consequences were moderated: penalties on employees were reduced as personal gain was not shown, and the proprietor's penalty was set aside where the firm had already been proceeded against. Redemption fine was also reduced in part.

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Issues: Whether the removal of inputs for processing without obtaining permission under Rule 57F(3) justified denial of Modvat credit, confiscation of the seized goods, imposition of duty and penalties, and whether the quantum of penalty and redemption fine required reduction.

Analysis: The inputs were sent directly to the processing unit without entering the assessee's factory and without keeping proper accounts or obtaining the permission contemplated by Rule 57F(3). The omission was not treated as a mere procedural irregularity, because the credit scheme itself was invoked for the movement of inputs and the assessee was bound to comply with the conditions attached to it. The shortage of part of the inputs also supported the adverse finding. At the same time, the penalties imposed on the employees were considered excessive in the absence of personal gain, and the penalty on the proprietor was found unsustainable where the firm itself was already proceeded against.

Conclusion: The demand and confiscatory action were upheld in principle, but the penalties and redemption fine were reduced in part, and the penalty on the proprietor was set aside.

Final Conclusion: The appeal proceedings ended with partial relief to the appellants, with the substantive breach maintained but the penal consequences moderated.

Ratio Decidendi: Compliance with the conditions attached to availing Modvat credit is mandatory, and unauthorised removal of inputs for processing may justify adverse consequences beyond a mere technical irregularity, though penalties must still be proportionate to individual culpability.

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