Deemed credit debarment can be regularised with interest, but breach of the debarment order still attracts penalty

Deemed credit temporarily debarred for default in duty payment was treated as restorable after the debarment period, so demanding full duty for the same period was considered impermissible double recovery; the credit was to be regularised on payment of interest. Utilisation of credit during the debarment period remained a breach of the Central Excise Rules and attracted penalty, but the quantum was reduced in light of the overall circumstances. The result was limited relief on the credit issue, with penal consequences still sustained in modified form.

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Issues: (i) Whether deemed credit could be adjusted during the period of debarment imposed for default in payment of duty, and whether the demand on that footing was sustainable; (ii) Whether the respondents were liable to penalty for utilising credit contrary to the debarment orders.

Issue (i): Whether deemed credit could be adjusted during the period of debarment imposed for default in payment of duty, and whether the demand on that footing was sustainable.

Analysis: The respondents had defaulted in payment of duty and debarment orders were issued for two months in each case. The credit in question was deemed credit, normally available at the time of clearance of final products. The restriction imposed by the original authority was only temporary, and the credit was treated as restored after the expiry of the debarment period. On that reasoning, insisting upon full duty demand for the period of debarment would amount to double payment. The proper course was to permit adjustment of the credit towards duty dues at the time of clearance of final products, with interest for the period of delay.

Conclusion: The demand was not sustained in full, and the credit was directed to be regularised on payment of interest.

Issue (ii): Whether the respondents were liable to penalty for utilising credit contrary to the debarment orders.

Analysis: The utilisation of credit during the debarment period was contrary to the orders issued under the Central Excise Rules. That violation attracted penal consequences, although the quantum required modification in view of the overall circumstances and the treatment given to the credit issue.

Conclusion: Penalty was warranted, but it was reduced to Rs. 1 lakh.

Final Conclusion: The appeal succeeded only to a limited extent: the credit issue was regularised on payment of interest, and the penalty was sustained in a reduced amount.

Ratio Decidendi: Where deemed credit is temporarily debarred but is otherwise available on clearance of final products, denial of its adjustment so as to require full duty payment for the same period would result in impermissible double recovery; the credit may be regularised on payment of interest, while penal action may still follow for breach of the debarment order.

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