Cenvat credit on capital goods reversed after objection cannot sustain demand or consequential penalty under the partial credit rule.

Rule 4(2) of the Cenvat Credit Rules allows only 50% credit on capital goods in the first financial year, with the balance available later. Where an assessee took the full credit within one year but reversed the excess after the objection was raised, denial of credit was held unsustainable and the consequential penalty could not survive. The disputed credit was therefore restored and the penalty set aside on the same footing as the underlying demand.

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Issues: Whether denial of Cenvat credit and consequential penalties was sustainable where the assessee had taken credit on capital goods in excess of the permissible 50% in the first financial year and later reversed part of the credit.

Analysis: Rule 4(2) of the Cenvat Credit Rules permits only 50% credit on capital goods in the first financial year and the balance in the subsequent financial year. The admitted position was that the assessee had availed the full credit within one financial year, but after the objection was raised, the excess portion was reversed. In these circumstances, the demand raised by denying the 50% credit was not sustainable, and the penalty based on the same demand could not survive.

Conclusion: The denial of credit was set aside and the consequential penalties were also set aside, in favour of the assessee.

Final Conclusion: The assessee was held entitled to the disputed credit, and the penalty order fell with the unsustainable demand.

Ratio Decidendi: Where capital goods credit is governed by a rule allowing only partial credit in the first year and the balance later, an excess availment that is reversed on being pointed out does not justify sustaining the credit demand or consequential penalty.

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