Leased capital goods and reversed credit: credit demand, interest, and penalty were not justified without utilisation.

Cenvat credit on capital goods was not required to be reversed merely because the goods were leased out and remained in the lessee's premises; the prior credit was not treated as inadmissible on that ground. An irregular book entry of credit also did not attract interest or penalty where the assessee reversed the entry without utilising the amount, since no actual use of the credit occurred. The ruling confirms that leasing arrangements alone do not justify credit demand, and that reversal before utilisation can exclude interest and penal consequences.

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Issues: (i) Whether Cenvat credit availed on capital goods was liable to be demanded back merely because the capital goods were leased out and remained in the lessee's premises; (ii) Whether interest and penalty were leviable where the assessee had made an irregular book entry of credit but had reversed it without utilizing the amount.

Issue (i): Whether Cenvat credit availed on capital goods was liable to be demanded back merely because the capital goods were leased out and remained in the lessee's premises.

Analysis: Rule 8 of the Cenvat Credit Rules, 2002 permits transfer of unutilized Cenvat credit when a factory is leased, transferred, amalgamated, or otherwise moved to a new unit. The capital goods in question had already been credited and were not removed as such from the factory in the sense contemplated by the demand. The fact that the goods were leased out and located in the lessee's premises did not, by itself, justify reversal of the credit already taken on capital goods.

Conclusion: The demand of duty on the capital goods was not sustainable and the Revenue's challenge on this issue failed.

Issue (ii): Whether interest and penalty were leviable where the assessee had made an irregular book entry of credit but had reversed it without utilizing the amount.

Analysis: The irregular balance credit was only taken by a book entry after the unit had been leased out, and it was undisputed that the amount was reversed and not utilized. On that factual basis, the levy of interest was unwarranted and the penalty under Rule 13 of the Cenvat Credit Rules, 2002 was not justified, since no actual use of the credit had occurred.

Conclusion: Interest and penalty were set aside and the assessee succeeded on this issue.

Final Conclusion: The assessee's appeal was allowed and the Revenue's appeal was rejected, with the assessee obtaining relief on both the credit demand and the connected interest and penalty issues.

Ratio Decidendi: Leased capital goods are not liable to credit reversal merely because they stand in the lessee's premises, and interest or penalty is not leviable where irregular credit is reversed without utilization.

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