CENVAT credit limitation and penalty fail where the assessee was not shown to be involved in supplier fraud.

CENVAT credit taken on invoices issued by grey fabric suppliers was held not to justify invocation of the extended period of limitation where the assessee was not shown to be a party to the alleged fraud and was entitled to avail credit under the prevailing rules. On that footing, the demand was time-barred and could not be sustained. Penalty also failed because excise penalty requires a sustainable demand and culpable conduct; once the assessee was found uninvolved in the suppliers' fraud and the demand itself was barred by limitation, the basis for penalty disappeared. The assessee's appeal succeeded and the Revenue's challenge to the reduced penalty failed.

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Issues: (i) whether the demand of inadmissible CENVAT credit could be sustained by invoking the extended period of limitation, and (ii) whether penalty was imposable where the assessee was found not to be a party to the alleged fraud by the grey fabric suppliers.

Issue (i): whether the demand of inadmissible CENVAT credit could be sustained by invoking the extended period of limitation

Analysis: The credit was taken on invoices issued by grey fabric suppliers. The record showed that the assessee was entitled to avail credit on the basis of such invoices under the then prevailing credit rules. The finding that the assessee was not involved in the fraud, together with the earlier decision applying the limitation principle in identical circumstances, led to the conclusion that the ingredients for invoking the extended period were absent.

Conclusion: The demand was barred by limitation and could not be sustained.

Issue (ii): whether penalty was imposable where the assessee was found not to be a party to the alleged fraud by the grey fabric suppliers

Analysis: Penalty under the excise law presupposes a sustainable demand founded on culpable conduct. Once the assessee was found not to be a participant in the supplier's fraud and the demand itself was held time-barred, the basis for penalty also disappeared.

Conclusion: Penalty was not imposable.

Final Conclusion: The impugned order was set aside, the assessee's appeal succeeded, and the Revenue's challenge to reduction of penalty failed.

Ratio Decidendi: Where CENVAT credit is taken on invoices and the assessee is not shown to be party to any fraud, the extended period of limitation cannot be invoked and penalty cannot survive.

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