Cenvat credit on used capital goods was denied, but penalties fell after pre-notice reversal of credit and interest.

Full Cenvat credit on old and used capital goods received from a sister unit was not available where the prescribed scheme required compliance with the capital goods credit conditions, and Rule 10 of the Cenvat Credit Rules, 2004 did not apply to such an arrangement; the wrongful availment of credit was therefore sustained. However, where the assessee reversed the credit with interest before issuance of the show cause notice, Section 11A(2B) barred the notice for the duty so paid, and the separate penalties on the assessee and its officer could not survive; the penal portion was set aside.

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Issues: (i) whether the assessee was entitled to avail full Cenvat credit on old and used capital goods received from its sister unit in the same financial year, and whether Rule 10 of the Cenvat Credit Rules, 2004 applied; (ii) whether penalty imposed on the assessee and the separate penalty on the officer of the company were sustainable when the credit and interest had been reversed before issuance of the show cause notice.

Issue (i): whether the assessee was entitled to avail full Cenvat credit on old and used capital goods received from its sister unit in the same financial year, and whether Rule 10 of the Cenvat Credit Rules, 2004 applied.

Analysis: The credit mechanism for capital goods required adherence to the prescribed conditions, including partial availment in the relevant financial year. On the facts, the capital goods were cleared to the sister unit and the assessee took 100% credit in the same year, which did not satisfy the applicable scheme. Rule 10 dealt with transfer of unutilized credit on shifting of factory or similar contingencies and did not cover the present arrangement. The assessee therefore failed to justify the full availment of credit under the governing rules.

Conclusion: The wrongful availment of credit was upheld and no interference was called for on that aspect.

Issue (ii): whether penalty imposed on the assessee and the separate penalty on the officer of the company were sustainable when the credit and interest had been reversed before issuance of the show cause notice.

Analysis: The assessee had reversed the credit with interest before the show cause notice was issued. In that situation, Section 11A(2B) barred notice for the duty so paid, and the basis for sustaining the penal consequences did not survive. The separate penalty on the officer, being consequential to the same alleged suppression, also could not stand once the substantive penal foundation was removed.

Conclusion: The penalties on the assessee and on the officer were set aside.

Final Conclusion: The denial of credit was maintained, but the penal portion of the order was annulled, resulting in a partial allowance of the appeals in favour of the assessee.

Ratio Decidendi: Rule-based ineligibility of Cenvat credit can be sustained on merits, but penalties cannot be upheld where the credit and interest are reversed before issuance of the notice and the statutory bar under Section 11A(2B) applies.

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