CENVAT credit adjustment against closing balance defeats separate demand and penalty where exemption is later opted for.

Wrongly availed CENVAT credit taken before opting for exemption was held adjustable against the closing balance in the credit account on the relevant date, because the available balance exceeded the disputed amount. On that footing, no separate recovery of the credit survived, and the basis for penalty also failed. The demand, interest and penalty were therefore set aside, recognising that where the disputed credit is covered by the closing balance at the time of opting for exemption, it need not be paid back separately.

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Issues: Whether the wrongly availed CENVAT credit, taken before the assessee opted for exemption under Notification No. 30/2004, was liable to be paid back separately or could be adjusted against the closing balance of the CENVAT credit account on the date of opting for exemption, and whether penalty was sustainable.

Analysis: The credit entries were found to have been taken on two occasions before the exemption was opted for. The records showed that the assessee had a sufficient closing balance in the CENVAT credit account on the relevant date, and the wrongly availed amount was within that balance. On that basis, the disputed credit was treated as capable of adjustment against the closing balance as on the date of lapse of credit under the exemption scheme. Since the credit was not separately recoverable on the facts found, the foundation for penalty also did not survive.

Conclusion: The assessee was not required to pay the disputed CENVAT credit separately, as it stood adjusted against the closing balance on the date of opting for exemption, and no penalty was leviable.

Final Conclusion: The demand, interest, and penalty were set aside and the appeal succeeded.

Ratio Decidendi: Where wrongly availed CENVAT credit is covered by an available closing balance on the date when exemption is opted for, the amount may be adjusted against that balance and no separate demand or penalty survives.

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