Unutilised excess MODVAT credit reversed before use did not attract interest, and the related penalty could not stand.

Excess MODVAT credit reversed before utilisation did not attract interest because inadmissible credit, once taken but not used, does not create an interest liability on that footing. On the same facts, the penalty could not survive after the excess credit had been reversed, as the penal action was based on the very credit found not to have resulted in utilisation. The ruling therefore treats reversal before use as sufficient to negate both interest and penalty consequences for the excess credit.

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Issues: Whether interest was payable on excess MODVAT credit taken but not utilised, and whether penalty could be sustained when the excess credit had been reversed.

Analysis: The excess MODVAT credit was reversed by the assessee before utilisation. The controlling principle applied was that where inadmissible credit is taken but not utilised, liability to pay interest does not arise. Once interest is held to be not payable on that footing, penal action based on the same excess credit cannot survive.

Conclusion: Interest was not payable on the reversed but unutilised excess credit, and the penalty was also set aside.

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