Cenvat credit and drawback cannot be retained on the same duty element; penalty must remain proportionate to the lapse.

Wrongful Cenvat credit taken as an opening balance was held inadmissible where the assessee had not maintained separate accounts for inputs used in dutiable and exempted goods and failed to prove that the inputs were confined to exported goods without rebate or drawback. The record also showed availing of drawback, and Cenvat credit could not be retained on the same excise component. On penalty, Rule 15 permits a penalty up to the amount wrongly taken but does not require the full credit amount in every case. Applying proportionality, the penalty was reduced to Rs. 90,000.

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Issues: (i) Whether the credit taken as opening balance in the return for December 2005 was admissible when the assessee had not maintained separate accounts for inputs used in dutiable and exempted goods and had also been availing drawback. (ii) Whether the penalty imposed for wrongful availment of credit was liable to be sustained in the full amount.

Issue (i): Whether the credit taken as opening balance in the return for December 2005 was admissible when the assessee had not maintained separate accounts for inputs used in dutiable and exempted goods and had also been availing drawback.

Analysis: The credit shown as opening balance related to inputs used during an earlier period when separate accounts were required to be maintained if Cenvat credit was to be claimed. The assessee failed to establish with reliable evidence that the disputed inputs were used only for exported goods without claiming rebate or drawback. The record also indicated that drawback had been availed, and Cenvat credit and drawback could not be simultaneously retained on the same excise component. In these circumstances, the credit was not shown to be legally available as opening balance.

Conclusion: The credit was rightly held inadmissible and the demand was sustainable.

Issue (ii): Whether the penalty imposed for wrongful availment of credit was liable to be sustained in the full amount.

Analysis: Rule 15 authorises penalty not exceeding the amount of credit wrongly taken; it does not mandate a penalty equal to the entire disputed credit in every case. Considering the facts and the nature of the lapse, a lesser penalty was found sufficient to meet the ends of justice.

Conclusion: The penalty was reduced to Rs. 90,000.

Final Conclusion: The dispute on credit was decided against the assessee, but the penalty was substantially curtailed, resulting in only partial relief.

Ratio Decidendi: Wrongful Cenvat credit taken without maintaining the required separate accounts and without proof negating drawback or rebate cannot be sustained, and penalty under the Cenvat Credit Rules must remain within the statutory ceiling and be proportionate to the facts.

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