Reversal of ineligible credit can cure excise lapse where Revenue suffers no prejudice, defeating confiscation and penalty.

Where excisable goods were allegedly not properly accounted for and ineligible MODVAT credit was taken, the Tribunal treated the later reversal of the disputed credit as curing the lapse because the remand required verification of sufficient credit and the duty liability had been neutralised. On that footing, and in the absence of prejudice to Revenue, confiscation and penalty under Rule 173Q were held not sustainable. The Tribunal also indicated that, on these facts, the default was remediable rather than one warranting penal action, so the confiscation and penalty were set aside.

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Issues: Whether confiscation of goods and imposition of penalty under Rule 173Q of the Central Excise Rules, 1944 were sustainable where the appellant had sufficient MODVAT credit and reversed the ineligible credit, and whether mens rea was necessary to invoke the penal provisions.

Analysis: Rule 173Q applies where excisable goods are not properly accounted for or ineligible credit is availed, and the record showed that the proceedings arose from alleged non-accounting and credit irregularities. The Tribunal noted, however, that the earlier remand had directed re-determination after verifying the availability of sufficient credit, and on that footing the duty liability on the manufactured goods had been erased. In that context, and in the absence of detriment to Revenue, the subsequent reversal of credit was treated as curing the default. The Tribunal further held that, on the facts of the case, the balance should tilt in favour of treating the lapse as remediable rather than warranting confiscation and penalty.

Conclusion: Confiscation and penalty were not sustainable and were set aside, in favour of the assessee.

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