Modvat recredit requires statutory refund procedure; unilateral adjustment is impermissible, though penalty may fail without mala fides

Excess central excise duty paid through application of a higher rate could not be neutralised by unilateral recredit in the Modvat account, because the prescribed mechanism required the assessee to seek refund and follow the statutory certificate-and-recovery procedure. The buyer's valid credit on the invoice was unaffected, and correspondence between the parties did not alter the Revenue's position. The duty demand was therefore upheld. On penalty, the absence of mala fides and the fact that the assessee had only departed from the prescribed procedure meant penal action was unwarranted, so the penalty was set aside.

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Issues: (i) whether the assessee could unilaterally take recredit in Modvat account of duty paid in excess without first claiming refund; (ii) whether penalty was justified in the facts of the case.

Issue (i): Whether the assessee could unilaterally take recredit in Modvat account of duty paid in excess without first claiming refund.

Analysis: The excess duty payment arose from payment at 30% when the correct rate was 20%. The buyer had legitimately taken Modvat credit on the strength of the invoice and the correspondence between the assessee and the buyer did not affect the Revenue. The statutory mechanism under Rule 57E of the Central Excise Rules, 1944 contemplated refund by the assessee and consequential certificate and recovery, not unilateral recredit in the Modvat account.

Conclusion: The unilateral recredit was impermissible and the demand of duty was upheld against the assessee.

Issue (ii): Whether penalty was justified in the facts of the case.

Analysis: The facts did not indicate mala fides on the part of the assessee. Although the assessee acted contrary to the prescribed procedure, the circumstances did not warrant penal action.

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

Final Conclusion: The duty demand survived, but the penal consequence did not, leaving only the tax liability intact while granting relief from penalty.

Ratio Decidendi: Excess duty paid in error cannot be neutralised by unilateral recredit in Modvat account when the statute provides a refund-based procedure, and penalty is unwarranted in the absence of mala fides.

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