Penalty on wrong Cenvat credit reversed before notice upheld by majority; dissent found no mala fide intent.

Penalty under the Cenvat Credit Rules was examined for excess credit wrongly taken on capital goods received from a 100% EOU and reversed before the show cause notice. The majority held that penalty could still apply where the credit was taken or utilised with fraud, wilful misstatement, suppression of facts, or intent to evade duty, and found that reversal came only after departmental scrutiny had begun, so the irregularity was not voluntarily disclosed before detection. The majority therefore upheld the penalty and rejected the limitation challenge. The dissent treated the matter as a mere wrong computation of admissible credit without mala fide intent and held that prior reversal negatived penal liability.

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Issues: Whether penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 and Rule 15(2) of the Cenvat Credit Rules, 2004 was leviable for excess Cenvat credit taken on capital goods received from a 100% EOU, where the excess credit was reversed before issuance of the show cause notice.

Analysis: The majority held that the excess credit arose from wrong computation under the prescribed formula and that penalty provisions could still apply where the credit was taken or utilised with fraud, wilful misstatement, suppression of facts, or intent to evade duty. On the facts, the department had initiated verification, the assessee came to know of the scrutiny, and only thereafter reversed the credit, indicating that the irregularity was not voluntarily disclosed before detection. The majority also held that the show cause notice was within limitation and that the cited decisions did not assist the assessee on the facts.

Conclusion: Penalty was held to be rightly imposed and the challenge to penalty failed before the majority.

Dissenting Opinion: The Judicial Member held that the case was one of wrong computation of admissible credit, without mala fide intention or positive evidence of suppression, and that the reversal before the show cause notice negatived penal liability. The Member concluded that penalty was not imposable.

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