CENVAT credit restriction breach justified penalty despite separate records and claimed bona fide belief.

Penalty was sustained for wrongful utilisation of CENVAT credit against non-taxable output services, because the credit restrictions under Rule 6 of the CENVAT Credit Rules, 2004 were treated as mandatory and were breached on the facts. Maintenance of separate records did not cure the violation where the appellant still used input service credit beyond the permitted limits. The plea of bona fide belief and absence of mala fide was rejected, as the restriction was considered clear and the contravention sufficient to attract penal consequences. The order imposing penalty was therefore upheld and no relief was granted.

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Issues: Whether penalty was rightly imposed for utilization of CENVAT credit contrary to Rule 6 of the CENVAT Credit Rules, 2004, despite maintenance of separate records and the plea of bona fide belief.

Analysis: The appellant had maintained separate records but had still utilized input service credit in relation to non-taxable output services. The governing scheme permitted utilization of credit only within the limits prescribed for exempted or non-taxable services, and where such limits were breached, the statutory violation attracted penal consequences. The plea that the issue was merely interpretational and that there was no mala fide was rejected because the credit restriction was treated as mandatory and the breach was held to be clear on the facts.

Conclusion: The penalty under section 76 of the Finance Act, 1994 was held to be justified, and the appeal failed.

Final Conclusion: The appellant was not granted relief, and the order imposing penalty for contravention of the CENVAT credit restrictions was sustained.

Ratio Decidendi: Where the statute mandates restriction on utilization of CENVAT credit for exempted or non-taxable output services, breach of that restriction justifies penalty notwithstanding the assessee's claim of bona fide belief or maintenance of separate records.

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