Cenvat credit interest applies only on utilised credit; demand and penalty cannot exceed the show cause notice.

A demand for further Cenvat credit and penalty under Section 78 could not be sustained where the show cause notices proposed only interest and the disputed credit had already been reversed; the adjudicating authority could not go beyond the notices. Penalty was therefore held unsustainable on the facts. Interest on inadmissible Cenvat credit was payable only to the extent the credit had actually been utilised before reversal; no interest was payable on the unutilised portion that was merely taken as an entry and later reversed. Relief was thus maintained except for interest on the utilised credit of Rs. 91,000/-.

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Issues: (i) Whether the demand of Rs. 91,000/- of Cenvat credit and the penalty under Section 78 of the Finance Act, 1994 could be confirmed when the show cause notices proposed only interest and the credit had already been reversed; (ii) whether interest was payable on wrongly taken Cenvat credit that remained unutilized and on the portion that had been utilized prior to reversal.

Issue (i): Whether the demand of Rs. 91,000/- of Cenvat credit and the penalty under Section 78 of the Finance Act, 1994 could be confirmed when the show cause notices proposed only interest and the credit had already been reversed.

Analysis: The show cause notices were issued for interest on wrongly taken Cenvat credit, while the disputed credit itself had already been reversed before issuance of the notices. The adjudicating authority could not travel beyond the scope of the notices by confirming a separate demand of credit and imposing penalty under Section 78. Penalty under Section 78 was also held not to be imposable for wrong availment of Cenvat credit in the circumstances of the case.

Conclusion: The demand of Rs. 91,000/- and the penalty under Section 78 were not sustainable.

Issue (ii): Whether interest was payable on wrongly taken Cenvat credit that remained unutilized and on the portion that had been utilized prior to reversal.

Analysis: Interest was held not payable on the unutilized portion of inadmissible Cenvat credit that had been subsequently reversed, following the principle that mere taking of credit entry without utilization does not attract interest. However, interest was payable on the portion of credit of Rs. 91,000/- that had actually been utilized before reversal.

Conclusion: Interest was not payable on the unutilized credit, but was payable on the utilized amount of Rs. 91,000/-.

Final Conclusion: The appellate order was sustained except to the extent of interest on the utilized credit of Rs. 91,000/-, for which the original adjudication was restored; the remaining relief to the assessee was maintained.

Ratio Decidendi: Interest on inadmissible Cenvat credit is payable only to the extent the credit has been actually utilized, and a demand or penalty cannot be sustained beyond the scope of the show cause notice.

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