Section 11AC penalty is unsustainable where Modvat credit is reversed and duty demand is otherwise confirmed.

Penalty under Section 11AC of the Central Excise Act was held inapplicable where the dispute concerned wrong availment of Modvat credit on inputs found short and the credit had already been reversed and appropriated towards the duty demand. The demand arising from disallowance and reversal of the credit was upheld, but the statutory ingredients for imposing penalty under Section 11AC, namely non-payment or short payment of duty in the required circumstances, were not established on the facts. The text notes that penal action under the Modvat rules could have been considered, but no such penalty was imposed.

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Issues: Whether penalty under Section 11AC of the Central Excise Act, 1944 was sustainable where the dispute related to wrong availment of Modvat credit and the duty demand had been met by reversal of credit.

Analysis: Penalty under Section 11AC is attracted only where there is non-payment or short payment of duty with the conditions required by that provision. On the facts found, the matter was one of wrong availment of Modvat credit on inputs found short, and the credit had already been reversed and appropriated towards the duty confirmed. In those circumstances, the demand relating to credit reversal was upheld, but the ingredients necessary to invoke Section 11AC for penalty were not made out. The possibility of penal action under the Modvat rules was noted, but no such penalty had been imposed.

Conclusion: Penalty under Section 11AC was not sustainable and was set aside, while the confirmation of duty by disallowing the Modvat credit was upheld.

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