Deemed credit and debarment orders: credit adjustment upheld to avoid double duty, with interest and penalty sustained for breach.

Utilisation of deemed credit during a period of lawful debarment was not disturbed, because the Tribunal's direction permitting credit adjustment avoided double payment of duty and the Court found no reason to interfere with that approach. At the same time, admitted non-compliance with the debarment orders and the duty-payment mechanism justified interest and penalty, and the reduced penalty was sustained. The Court therefore left the credit-adjustment relief intact but upheld the revenue's claim for interest and penal consequences arising from the breach.

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Issues: (i) Whether the assessee was entitled to retain and utilise deemed credit during the period of debarment so as to avoid the duty demand raised by the department; (ii) Whether interest and penalty were sustainable on account of contravention of the debarment orders and the payment mechanism under the Central Excise Rules.

Issue (i): Whether the assessee was entitled to retain and utilise deemed credit during the period of debarment so as to avoid the duty demand raised by the department.

Analysis: The assessee had been directed to pay duty on consignment basis for specified periods, but continued to utilise credit in breach of those orders. The Tribunal found that the original restriction on credit operated only for two months and that deemed credit would ordinarily stand restored thereafter. It also held that demanding duty without allowing adjustment of the credit at the time of clearance would result in double payment of duty. The Court found no reason to interfere with that approach.

Conclusion: The issue was answered against the assessee and in favour of Revenue; the allowance of credit adjustment was upheld.

Issue (ii): Whether interest and penalty were sustainable on account of contravention of the debarment orders and the payment mechanism under the Central Excise Rules.

Analysis: The record showed admitted defaults in payment of duty and admitted utilisation of credit contrary to the debarment orders. In those circumstances, the Court held that there was no occasion to examine the broader submissions on budget changes or the manner in which deemed credit was to be computed. The Tribunal's view that interest was payable and that penalty must follow the admitted breach was affirmed, particularly since the penalty had already been reduced.

Conclusion: The issue was answered against the assessee and in favour of Revenue; the directions to pay interest and the reduced penalty were sustained.

Final Conclusion: The appeal failed on the admitted breach of the debarment orders and the consequent liability to interest and penalty, while the credit adjustment directed by the Tribunal was left undisturbed.

Ratio Decidendi: Where utilisation of credit is admittedly contrary to a lawful debarment order, interest and penalty may be sustained, and a court will not interfere with an adjustment of credit directed to avoid double taxation absent a challenge by the other side.

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