Penalties cannot survive after the underlying credit issue is decided for the assessee; deemed credit denial was upheld.

Once the substantive credit issue had been resolved in favour of the assessees by the larger Bench ruling, fines and penalties could not be independently sustained and were set aside. The objection that denial of deemed credit on crossing the clearance-value limit could not be raised because it was not specifically pleaded in the show cause notice was rejected, as the same contention had already been considered in the proceedings and the availability of the benefit depended on interpretation of the small scale industry notification. Rectification was therefore allowed only to delete the fines and penalties, while the challenge to the credit denial failed.

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Issues: (i) whether the fines and penalties were liable to be set aside in view of the earlier larger bench ruling; and (ii) whether denial of deemed credit on crossing the clearance-value limit could be challenged on the ground that the point was not raised in the show cause notice.

Issue (i): whether the fines and penalties were liable to be set aside in view of the earlier larger bench ruling.

Analysis: The prior order had omitted a finding on the sustainability of fine and penalty. The legal position on the underlying credit issue having already been settled in the earlier larger bench decision, the penalties could not be independently sustained once the substantive controversy stood concluded in favour of the assessees on that aspect.

Conclusion: The fines and penalties were held to be unsustainable and were set aside.

Issue (ii): whether denial of deemed credit on crossing the clearance-value limit could be challenged on the ground that the point was not raised in the show cause notice.

Analysis: The objection was rejected because the same contention had already been considered and answered in the earlier order. The benefit of the deemed credit scheme was linked to the assessee availing the corresponding small scale industry notification, and the interpretation of that notification governed the availability of the benefit. In that setting, the absence of a separate specific plea in the notice did not defeat the denial of the claim on this ground.

Conclusion: The contention based on non-mention in the show cause notice was rejected.

Final Conclusion: The rectification was granted only to the extent of deleting the fines and penalties, while the challenge to the credit issue failed.

Ratio Decidendi: Once the substantive legal issue underlying the demand is settled in the assessee's favour, penalties cannot survive independently; a contention already adjudicated in the proceedings cannot be reopened merely by asserting that it was not separately pleaded in the show cause notice.

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