Modvat credit and misstatement of facts attract Section 11AC penalty, and later reversal does not erase liability.

Wrongful availment of Modvat credit on capital goods contrary to a specific undertaking that depreciation under the Income-tax Act would not be claimed attracts penalty under Section 11AC read with the Central Excise Rules. The subsequent claim of depreciation amounted to a misstatement of material facts, and later reversal of the credit did not extinguish the original penal liability. The reduced-penalty framework under Section 11AC applied, and the restriction of penalty to 25% of the duty involved was sustained, leaving no basis for complete waiver of penalty.

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Issues: Whether penalty under Section 11AC, read with the applicable Central Excise Rules, was sustainable where the assessee had availed Modvat credit on capital goods while having declared that depreciation would not be claimed under the Income-tax Act, but later claimed such depreciation and reversed the credit.

Analysis: The declaration filed by the assessee specifically stated that depreciation under Section 32 of the Income-tax Act would not be claimed in respect of the duty element on capital goods. The subsequent claim of depreciation contradicted that declaration and constituted a misstatement of material facts. The fact that the credit was later reversed did not erase the initial wrongful availment or the penalty liability. The reduced penalty framework under Section 11AC was applicable, and the Commissioner (Appeals) had already granted the statutory benefit by restricting the penalty to 25% of the duty involved.

Conclusion: The penalty was held to be leviable, and the assessee was not entitled to complete waiver of penalty. The reduction of penalty to 25% of the duty involved was upheld.

Ratio Decidendi: Wrongful availment of Modvat credit contrary to a declared undertaking, coupled with misstatement of material facts, attracts penalty under Section 11AC, and subsequent reversal of credit does not by itself extinguish the penal liability.

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