Full reversal of common-input Cenvat credit bars demand under Rule 6(3)(b) where separate accounts were not maintained.

Where Cenvat credit taken on a common input used in both dutiable and exempted final products is fully reversed, that reversal is treated as equivalent to non-availment of credit, and the amount prescribed under Rule 6(3)(b) for common-input use cannot be demanded. The demand arose because separate accounts were not maintained for Furnace Oil used in both streams, but the full reversal of the relatable credit neutralised the statutory consequence. On that basis, the impugned demand and penalty were set aside and the assessee succeeded.

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Issues: Whether reversal of the entire Cenvat credit taken on a common input used for both dutiable and exempted final products would obviate liability to pay the amount prescribed under Rule 6(3)(b) of the Cenvat Credit Rules.

Analysis: The amount demanded under Rule 6(3)(b) arose only because the assessee had used Furnace Oil as a common input in the manufacture of both dutiable and exempted final products and had not maintained separate accounts. The credit relatable to the common input was reversed in full, and the decision turned on whether such reversal amounted to non-availment of credit for the purpose of denying the statutory levy. The Court applied the principle that once the entire credit is reversed, the object of neutralising inadmissible credit is achieved and the demand under the rule cannot be sustained. The reasoning was supported by the principle laid down in the decisions relied upon concerning later reversal of credit and its effect as equivalent to non-availment.

Conclusion: The demand under Rule 6(3)(b) was not sustainable after reversal of the entire credit on the common input, and the issue was decided in favour of the assessee.

Final Conclusion: The impugned demand and penalty were set aside and the appeal was allowed on the ground that full reversal of the credit on the common input neutralised the consequence contemplated by the rule.

Ratio Decidendi: Where credit taken on a common input used for both dutiable and exempted final products is wholly reversed, the reversal is treated as equivalent to non-availment of credit and the amount prescribed for common-input use cannot be demanded.

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