Cenvat credit on chimney construction materials allowed where the chimney formed part of a pollution control system; penalty deleted on a debatable disclosed claim.

Cenvat credit was held admissible on cement used to construct a chimney treated as part of the pollution control system, so the input qualified for capital goods related use and the disallowance was set aside to that extent. Credit on cement used for the machinery foundation remained undisputed and was sustained. Penalty was also deleted because the credit was disclosed in statutory records, the issue was debatable, and no mala fide intent was established. The final position left only the foundation-related credit intact, while the balance credit and penalty were removed.

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Issues: (i) whether Cenvat credit on cement used for construction of chimney, stated to form part of the pollution control system, was admissible; (ii) whether penalty was sustainable where the credit was taken in statutory records on a debatable issue and without mala fides.

Issue (i): whether Cenvat credit on cement used for construction of chimney, stated to form part of the pollution control system, was admissible.

Analysis: The cement used for the foundation of machinery was not contested and the corresponding credit was confirmed. For the remaining quantity used in constructing the chimney, the chimney was treated as part of the pollution control system and, therefore, within the ambit of capital goods for Cenvat purposes. On that footing, the inputs used in such construction could not be denied credit.

Conclusion: Cenvat credit on the cement used for construction of the chimney was admissible and the disallowance to that extent was set aside.

Issue (ii): whether penalty was sustainable where the credit was taken in statutory records on a debatable issue and without mala fides.

Analysis: The credit had been availed after disclosure in statutory documents. The controversy was found to be a contentious and debatable one, and no mala fide intent was established so as to attract penal consequences.

Conclusion: Penalty was not warranted and was set aside.

Final Conclusion: The credit disallowance was sustained only for the portion relating to the machinery foundation, while the balance credit and the penalty were deleted.

Ratio Decidendi: Inputs used in constructing a chimney forming part of a pollution control system can qualify for Cenvat credit as capital goods related use, and penalty is not leviable in the absence of mala fides on a debatable issue disclosed in statutory records.

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