Cenvat credit usage condition applies to earlier capital goods, but bona fide interpretation can justify deletion of penalty.

Credit on capital goods under the amended Cenvat scheme was held to depend on the statutory usage condition as an integral part of the scheme, including for capital goods received before 1-4-2000; the credit demand was therefore sustained. Penalty was nevertheless deleted because the second instalment of credit was taken on a bona fide interpretation of the amended rules, and that conduct did not warrant penal consequences. The document thus records partial relief to the assessee, with eligibility for credit rejected but penal action set aside.

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Issues: (i) Whether credit on capital goods received before 1-4-2000 could be taken only subject to the usage condition under the new Cenvat regime; (ii) Whether penalty was warranted where the credit was taken on a bona fide interpretation of the rules.

Issue (i): Whether credit on capital goods received before 1-4-2000 could be taken only subject to the usage condition under the new Cenvat regime.

Analysis: The credit provisions under Rule 57AC were required to be read as a whole. The scheme for taking credit on capital goods, including goods received prior to 1-4-2000, was linked to the fundamental basis of Cenvat credit, namely that the capital goods should be used for manufacture of excisable goods on which duty is payable. The condition relating to use could not be confined only to the clause dealing with goods received on or after 1-4-2000 and was applicable even to capital goods received earlier.

Conclusion: The demand of Cenvat credit was confirmed and the assessee's challenge on eligibility failed.

Issue (ii): Whether penalty was warranted where the credit was taken on a bona fide interpretation of the rules.

Analysis: The taking of the second instalment of credit after the introduction of the new rules was based on a bona fide understanding of the amended scheme. In the circumstances, the conduct did not justify penal consequences.

Conclusion: The penalty was set aside in favour of the assessee.

Final Conclusion: The credit demand was sustained, but the penal consequence was removed, resulting in partial relief to the assessee.

Ratio Decidendi: Credit on capital goods under the amended Cenvat scheme must be construed with its usage condition as an integral part of the scheme, while bona fide interpretation of the rules may justify deletion of penalty.

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