CENVAT penalty cannot survive once the underlying credit demand is dropped, the High Court confirms.

Penalty under the CENVAT Credit Rules could not be sustained once the demand for reversal of credit had been dropped, because the penalty was consequential to the same alleged irregular availment of credit. The Tribunal's view that an independent penalty cannot survive when the underlying demand is not upheld was accepted as the correct legal position. The High Court found no substantial question of law to interfere with that conclusion, leaving the penalty unsustainable on the facts presented.

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Issues: Whether penalty under the CENVAT Credit Rules could be sustained after the demand for reversal of credit was dropped.

Analysis: The dispute arose from alleged irregular availment of CENVAT credit and the consequential proposal to recover the credit, interest and penalty. The adjudicating authority dropped the demand but still imposed penalty. The Tribunal held that once the demand itself is not sustained, the penalty cannot independently survive. The High Court accepted that this was the correct legal position and found no substantial question of law warranting interference.

Conclusion: Penalty could not be sustained after the demand was dropped, and the assessee's appeal failed.

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