CENVAT credit on short inputs remains reversible, with extended limitation sustained and reduced penalty option available.

CENVAT credit was held reversible where inputs were found short in the factory and not physically available, even for periods before 11.05.2007, because the written-off input line of cases applied only to inputs still lying in the premises. The Tribunal treated shortages detected in departmental audit and cost-audit scrutiny as sufficient to sustain the extended limitation period. It also recognised the assessee's entitlement to the statutory option of 25% reduced penalty under Section 11AC, subject to timely compliance. The demand and penalty were otherwise sustained.

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Issues: (i) Whether CENVAT credit was required to be reversed in respect of inputs found short in the factory and written off in the accounts for a period prior to 11.05.2007; (ii) Whether the demand was barred by limitation and whether the benefit of reduced penalty was available.

Issue (i): Whether CENVAT credit was required to be reversed in respect of inputs found short in the factory and written off in the accounts for a period prior to 11.05.2007.

Analysis: The Tribunal noted that the amendment introducing reversal in cases of written off inputs came through Notification No. 26/2007-CE(NT) dated 11.05.2007 and that the cases relied upon by the appellant involved inputs still available in the factory but written off as unusable. In the present matter, the short inputs were not found available in the factory premises. The Tribunal therefore held that the earlier line of decisions did not apply, and relied on the contrary view that shortages attract reversal of credit.

Conclusion: The issue was decided against the appellant and in favour of the Revenue.

Issue (ii): Whether the demand was barred by limitation and whether the benefit of reduced penalty was available.

Analysis: The Tribunal observed that the shortages and write-off were detected during departmental audit and scrutiny of the cost audit records, and on that basis the extended period was held applicable. The Tribunal further recorded that the appellant was entitled to the option of paying 25% reduced penalty under Section 11AC of the Central Excise Act, 1944, subject to compliance with the stipulated time condition.

Conclusion: The limitation objection was rejected, and the option of reduced penalty was extended to the appellant.

Final Conclusion: The appeal failed on merits and on limitation, and the order confirming duty demand and penalty was sustained, with only the statutory option of reduced penalty being made available.

Ratio Decidendi: Where inputs are found short and are not available in the factory, the pre-11.05.2007 regime did not exempt reversal of CENVAT credit merely because the shortages were written off; the extended period may also apply where such shortages are detected in departmental audit.

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