Erroneous Cenvat credit attracts interest on retention, but penalty fails when reversed before show cause notice

Erroneously availed Cenvat credit attracted interest for the period it remained with the assessee, because Rule 12 required repayment of wrong credit along with interest once the excess amount was retained after intimation of the admissible credit. The interest demand was sustained. Penalty was not justified where the excess credit was reversed before issuance of the show cause notice, the credit had not been utilised, and the availment was under a bona fide belief. The penalty was therefore set aside.

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Issues: (i) Whether interest was payable on the wrongly taken credit that was reversed after intimation of the admissible amount; (ii) Whether penalty was exigible when the excess credit was reversed before issuance of the show cause notice.

Issue (i): Whether interest was payable on the wrongly taken credit that was reversed after intimation of the admissible amount.

Analysis: The appellants had taken excess credit believing it to be admissible, but the correct admissible amount was communicated later. Under Rule 12 of the Cenvat Credit Rules, 2002, credit wrongly taken has to be repaid along with interest for the period during which it remained with the assessee. As the credit was retained for some time before reversal, liability to interest followed.

Conclusion: Interest was payable and the demand of interest was sustained.

Issue (ii): Whether penalty was exigible when the excess credit was reversed before issuance of the show cause notice.

Analysis: The reversal was made immediately after receipt of clarification and before the show cause notice. The credit had not been utilized, and the taking of credit was found to be under a bona fide belief. In these circumstances, penalty was held to be unwarranted.

Conclusion: Penalty was not sustainable and was set aside.

Final Conclusion: The demand of interest was upheld, while the penalty was deleted, resulting in only partial relief to the assessee.

Ratio Decidendi: Erroneously availed credit attracts interest for the period of retention, but penalty is not justified where the excess credit is reversed before the show cause notice and the circumstances show bona fide belief without utilization of the credit.

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