Modvat credit recovery notice struck down for delay, arbitrariness, and misuse of enabling provisions

The Madras HC held that a show cause notice demanding reversal of Modvat credit taken during 1994-95 was unsustainable because the credit had been availed under protest and the Department had raised no contemporaneous objection. Section 5-B of the Central Excise Act was only an enabling provision for notification, so the absence of a notification could not be used against the assessee. Rule 57-I was treated as a recovery mechanism for wrongly availed credit, but a 2010 demand for 1994-95 credit was beyond time and arbitrary on the facts. The writ petition was maintainable despite alternate remedy, and the notice was quashed.

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Issues: Whether the impugned show cause notice demanding reversal of Modvat credit availed during May 1994 to March 1995 was sustainable in law, particularly on the grounds of limitation, arbitrariness, and the effect of Section 5-B of the Central Excise Act, 1944.

Analysis: The dispute arose after the petitioner's challenge to the excisability of the final product succeeded, and the Department had accepted the availment of Modvat credit during the relevant period. The Court held that the credit had been availed when the assessment was under protest and the Department had not objected at the material time. It further held that Section 5-B was only an enabling provision for issuance of a notification and that non-issuance of such notification could not be used against the petitioner. Rule 57-I was treated as a recovery provision for wrongly availed credit and, on the facts, the demand issued in 2010 for credit taken in 1994-95 was held to be beyond time and an arbitrary exercise of power. The plea of alternate remedy was rejected in view of the illegality found in the notice.

Conclusion: The show cause notice was unsustainable and liable to be quashed; the writ petition was maintainable and succeeded in favour of the petitioner.

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