Premature Modvat credit reversed before use does not attract penalty where no culpable intent to contravene the law is shown.

Penalty under Rule 173Q(1)(bb) was not attracted where Modvat credit on admissible capital goods was taken before installation but was not utilised and was promptly reversed suo motu after the irregularity was noticed. The premature credit was later lawfully availed after installation, and the record showed no intention to contravene the law or wrongfully use the credit. On these facts, the ingredients for penalty were not made out, and the penalty was set aside.

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Issues: Whether penalty under Rule 173Q(1)(bb) of the Central Excise Rules, 1944 was warranted where Modvat credit on capital goods was taken before installation but was promptly reversed before utilization and later availed lawfully after installation.

Analysis: Rule 57Q(7) of the Central Excise Rules, 1944 prohibited taking credit on capital goods before installation or use. However, the record showed that the credit was otherwise admissible, that the assessee had not utilized the prematurely taken credit, and that the credit was reversed suo motu soon after the irregularity was noticed. The prior finding that the matter was only an irregularity was not disturbed, and the facts disclosed no intention to contravene the law or to wrongfully avail and use the credit. In these circumstances, the ingredients for penalty under Rule 173Q(1)(bb) were not made out.

Conclusion: Penalty was not sustainable and was set aside in favour of the assessee.

Ratio Decidendi: Where credit is prematurely taken on admissible capital goods but is not utilized and is voluntarily reversed promptly, penalty provisions requiring a contravention with culpable intent are not attracted.

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