Premature input tax credit cannot be denied in full where admissible later; interest applies, but penalty is unwarranted.

Service tax credit taken one month before payment of tax on input service was held to be premature under the timing requirement, but the lapse was only procedural because the credit was otherwise admissible in the subsequent period. On that basis, denial of the entire credit was not justified. Interest was payable for the intervening period because the credit had been taken and utilised before the permitted time. The facts did not warrant penalty, so penalty was set aside.

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Issues: Whether service tax credit taken one month before payment of tax on input service could be denied in full and whether penalty was imposable.

Analysis: Credit was taken prematurely, contrary to the timing requirement under the proviso to the governing rule. However, the credit was otherwise admissible in the subsequent period and the lapse was only procedural. In such circumstances, denial of the entire credit was not justified. Since the assessee had availed the credit earlier than permitted and utilized it, interest for the intervening period was payable in accordance with law. The circumstances did not justify imposition of penalty.

Conclusion: Denial of credit and penalty were set aside, while interest was upheld.

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