Cenvat credit on finished stock at de-bonding was inadmissible, but same-day reversal avoided interest and penalty.

Cenvat credit on finished yarn lying in stock at the time of de-bonding was held inadmissible because the goods were finished products, not inputs used in or in relation to manufacture, so the credit demand was upheld. Interest was not payable where the wrongly taken credit was reversed on the same day as availment, leaving no continuing liability for use of credit. Penalty was also set aside because the availment and reversal were disclosed in the statutory returns, making penal action unjustified on the facts. The ratio stated that same-day reversal of inadmissible credit, coupled with disclosure in returns, may exclude interest and penalty even though the credit itself remains recoverable.

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Issues: (i) Whether cenvat credit of duty taken on stock of finished yarn lying at the time of de-bonding was admissible; (ii) Whether interest was payable when the credit was reversed on the same day it was taken; (iii) Whether penalty was sustainable when the availment was disclosed in the returns.

Issue (i): Whether cenvat credit of duty taken on stock of finished yarn lying at the time of de-bonding was admissible.

Analysis: The stock of cotton yarn and synthetic yarn lying in the factory at the time of de-bonding was finished goods and not inputs meant for use in or in relation to manufacture. The credit taken on such finished goods was therefore not permissible, even though the duty had been paid at de-bonding.

Conclusion: The cenvat credit demand was rightly confirmed against the assessee.

Issue (ii): Whether interest was payable when the credit was reversed on the same day it was taken.

Analysis: The entire stock was cleared on the same day on payment of duty, so the credit taken stood reversed on the very day of availment. In such circumstances, there was no occasion to charge interest.

Conclusion: Interest was not payable and the levy of interest was set aside.

Issue (iii): Whether penalty was sustainable when the availment was disclosed in the returns.

Analysis: The credit was reversed on the same day and the availment was reflected in the ER-1 return as well as the cenvat credit return. On these facts, imposition of penalty was unjustified.

Conclusion: Penalty was not sustainable and was set aside.

Final Conclusion: The demand of wrongly availed cenvat credit was upheld, but the liabilities towards interest and penalty were deleted, leaving the assessee with only the credit demand confirmed.

Ratio Decidendi: Where inadmissible cenvat credit is reversed on the same day it is taken and the availment is disclosed in the statutory returns, interest and penalty are not warranted even though the credit itself remains recoverable.

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