Wrongly utilized Modvat credit and inapplicable penalty provision led to sustained duty demand but penalty relief.

Wrongly utilized Modvat credit was recoverable where shortage of inputs was admitted, the notice substantially covered shortage and wrongful credit availment, and the assessee had partly debited and partly deposited the amount; the duty demand was therefore sustained. Penalty under Rule 173Q was not sustainable because, on the facts, the penalty was attributable to Rule 57I and had been imposed under an inapplicable provision; the deletion of penalty was accordingly maintained.

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Issues: (i) Whether duty demand was sustainable where the shortage of inputs was detected, the credit had been utilized, and the assessee had partly debited and partly deposited the amount; (ii) Whether penalty could be sustained under Rule 173Q for such wrongful availment of credit.

Issue (i): Whether duty demand was sustainable where the shortage of inputs was detected, the credit had been utilized, and the assessee had partly debited and partly deposited the amount?

Analysis: The shortage of glass bottles and LDPE bags was admitted. The notice, read as a whole, sufficiently covered the allegation of shortage of inputs/raw material and wrongful availment and utilization of Modvat credit. Mere misdescription of the provision did not invalidate the notice. Since the credit had already been utilized, the amount became recoverable, and the factual admissions and part payment supported confirmation of the demand.

Conclusion: The duty demand was rightly restored and is sustained against the assessee.

Issue (ii): Whether penalty could be sustained under Rule 173Q for such wrongful availment of credit?

Analysis: Penalty for wrongful availment of credit was held to be relatable to Rule 57I and not to Rule 173Q in the facts of the case. As the penalty had been imposed under the wrong provision, its setting aside was justified.

Conclusion: The penalty was not sustainable and remained set aside in favour of the assessee.

Final Conclusion: The appeal succeeded only to the extent of restoration of the duty demand, while the deletion of penalty was maintained.

Ratio Decidendi: A demand for wrongly utilized Modvat credit can be sustained where the shortage and utilization are admitted and the notice substantially covers the allegation, but penalty cannot be upheld under an inapplicable provision.

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