Cenvat credit utilisation for prior tax dues is restricted to credit available in the relevant month; penalty relief followed for reasonable cause.

Under the proviso to rule 3(4) of the Cenvat Credit Rules, 2004, service tax for a prior month cannot be discharged using Cenvat credit earned only in later months; the credit must have been available on the last day of the relevant month or quarter, so cash payment was required and the Cenvat account had to be restored. Penalties under sections 76 and 77 of the Finance Act, 1994 could be waived where the tax was paid without any finding of intent to evade and reasonable cause was shown, so section 80 relief applied and the penalties were set aside.

---

---

Issues: (i) Whether service tax liability for a prior month could be discharged by utilising Cenvat credit earned in subsequent months under the proviso to rule 3(4) of the Cenvat Credit Rules, 2004; (ii) Whether penalties under sections 76 and 77 of the Finance Act, 1994 were liable to be waived for reasonable cause.

Issue (i): Whether service tax liability for a prior month could be discharged by utilising Cenvat credit earned in subsequent months under the proviso to rule 3(4) of the Cenvat Credit Rules, 2004.

Analysis: The proviso to rule 3(4) permits utilisation of Cenvat credit only to the extent available on the last day of the relevant month or quarter for payment of duty or tax relating to that month or quarter. The liability in question pertained to November 2008, but it was paid from credit earned during later months. The reasoning advanced from cases concerning utilisation of credit during default periods under rule 8(3A) was found inapplicable because the present dispute concerned payment of a previous period's dues.

Conclusion: The tax could not be validly discharged from credit earned after the relevant month; cash payment was required, and the appellant was directed to deposit the amount in cash with corresponding restoration of the Cenvat account.

Issue (ii): Whether penalties under sections 76 and 77 of the Finance Act, 1994 were liable to be waived for reasonable cause.

Analysis: The tax liability had been discharged, though from the Cenvat account instead of cash, and there was no finding of intent to evade tax. In these circumstances, reasonable cause was made out for invocation of section 80.

Conclusion: The penalties under sections 76 and 77 were waived.

Final Conclusion: The appeal succeeded only to the extent of penalty relief, while the tax payment was required to be regularised by cash deposit with corresponding credit restoration.

Ratio Decidendi: Under the proviso to rule 3(4) of the Cenvat Credit Rules, 2004, Cenvat credit can be used only if it was available on the last day of the relevant month or quarter for which the tax is due, and penalty may be waived where payment is made without intent to evade and reasonable cause is established.

---