Interest not recoverable after pre-notice reversal, but wrongful credit with depreciation can still attract penalty.

Interest under Rule 57U(5) is not recoverable where the credit amount is reversed before issuance of the demand notice, because the statutory condition for charging interest is not met. Wrongly availing credit on capital goods while also claiming depreciation under the Income-tax Act remains impermissible, and such conduct can attract penalty even if the credit is later reversed. The penalty was reduced on the facts, but the principle that simultaneous credit and depreciation is not allowed was affirmed.

---

---

Issues: (i) whether interest was recoverable when the credit amount had been reversed before issuance of the notice of demand; (ii) whether penalty was leviable for wrongly availing credit while also claiming depreciation under the Income-tax Act.

Issue (i): whether interest was recoverable when the credit amount had been reversed before issuance of the notice of demand.

Analysis: Under Rule 57U(5), interest becomes payable where the manufacturer fails to pay the amount determined within the prescribed period after notice. Here, the credit amount had already been reversed before the show cause notice was issued, so the statutory condition for charging interest was not satisfied.

Conclusion: Interest was not recoverable and the demand was set aside.

Issue (ii): whether penalty was leviable for wrongly availing credit while also claiming depreciation under the Income-tax Act.

Analysis: The appellant had availed credit and depreciation on the same capital goods, which was impermissible. Even though the credit was reversed after the error came to light, the wrong availment justified imposition of penalty. Considering the facts and circumstances, the penalty was reduced.

Conclusion: Penalty was leviable, but it was reduced to Rs. 5,000.

Final Conclusion: The demand of interest failed, while the penalty survived with substantial reduction.

Ratio Decidendi: Interest under Rule 57U(5) is not payable where the amount is reversed before notice, but wrongful simultaneous availing of credit and depreciation can attract penalty.

---