Revenue-neutral Cenvat credit lapse avoids mandatory penalty, but procedural contravention can still attract a limited penalty.

Non-reversal of Cenvat credit on inputs written off as obsolete did not attract mandatory penalty under Section 11AC where the inputs were later found in the factory and used in manufacture, making the omission revenue neutral and merely procedural. The failure to reverse credit at the time of write-off still amounted to a contravention of the credit rules, so a limited penalty under Rule 27 of the Cenvat Credit Rules, 2002 was upheld. The mandatory penal consequence was rejected, but a nominal penalty for the procedural lapse was sustained.

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Issues: (i) Whether mandatory penalty under Section 11AC was imposable for non-reversal of Cenvat credit on inputs written off as obsolete, and (ii) whether a penalty could still be imposed for the procedural lapse.

Issue (i): Whether mandatory penalty under Section 11AC was imposable for non-reversal of Cenvat credit on inputs written off as obsolete.

Analysis: The inputs, though initially written off as obsolete, were later found to have remained in the factory and were used for manufacture of final products. In that factual setting, the appellant did not gain any undue benefit by the omission to reverse credit at the time of write-off. The situation was treated as revenue neutral and the omission was characterised as a procedural lapse rather than conduct warranting mandatory penal consequence.

Conclusion: Mandatory penalty under Section 11AC was not imposable.

Issue (ii): Whether a penalty could still be imposed for the procedural lapse.

Analysis: Even though the mandatory penalty was not justified, the failure to reverse credit when the inputs were written off was a lapse under the credit rules. The lapse was not treated as warranting the full mandatory penalty, but it did justify a limited penalty for contravention of the procedural requirement.

Conclusion: A limited penalty under Rule 27 of the Cenvat Credit Rules, 2002 was imposable.

Final Conclusion: The appellant succeeded in resisting the mandatory penalty, but the order was sustained only to the extent of a nominal penalty for the procedural violation.

Ratio Decidendi: Where no revenue loss or unjust benefit results and the default is merely procedural, mandatory penalty is not warranted, though a minor penalty for the procedural contravention may still be imposed.

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