Limitation for Modvat credit demands fails where the department knew the facts and had already permitted credit.

Where the department had already received the relevant declaration for Modvat credit on capital goods, condoned the delay, and permitted credit after defacing the invoice, a later show cause notice issued more than two years afterwards was held time-barred. The material facts were known to the authorities in 1997, so an objection raised only in 1999 could not sustain reversal of credit or penalty. The demand was therefore treated as hopelessly barred by limitation, and the confirmation of demand and penalty could not be sustained.

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Issues: Whether the demand denying Modvat credit and imposing penalty was barred by limitation.

Analysis: The appellants had filed the relevant declaration for availing credit in respect of capital goods and had also sought condonation of delay for the declaration. The departmental authorities had communicated that the delay stood condoned and credit was permitted, and the invoice was defaced before the credit was taken. Since the show cause notice was issued more than two years later, the objection raised in 1999 could have been raised when the authorities were already aware of the full facts in 1997.

Conclusion: The demand was hopelessly barred by limitation, and the confirmation of demand and penalty could not be sustained.

Ratio Decidendi: When the department had full knowledge of the material facts and had itself permitted availment of credit, a subsequent notice issued beyond the normal period of limitation cannot sustain a demand for reversal of credit and penalty.

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