Cenvat credit reversal must be actual, not implied by non-use, when exemption depends on non-availment of credit.

Where an exemption notification makes non-availment of Cenvat credit a condition for the concessional rate, credit taken on capital goods used in manufacturing the exempted product must be actually reversed to satisfy that condition. Mere non-utilisation of the balance credit in the account does not amount to reversal. On the facts recorded, part of the credit had already been repaid with interest, so the demand survived only for the unreversed balance. Interest and penalty were not sustainable because the remaining credit continued to lie unutilised and the authorities had accepted the partial reversal.

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Issues: Whether Cenvat credit availed on capital goods used for manufacture of exempted goods could be retained when the assessee later claimed benefit of exemption notification; whether mere non-utilisation of the balance credit amounted to reversal; and whether interest and penalty were leviable on the balance amount.

Analysis: The exemption notifications made non-availment of Cenvat credit a condition for availing the concessional/exempted rate. Since the assessee had admittedly availed credit on capital goods used for manufacture of the exempted product, the credit could not be retained and had to be reversed. However, the record showed that part of the credit had already been paid back with interest, while the remaining balance continued to lie unutilised in the credit account and had not been actually reversed by any book entry or return. The balance demand could therefore survive only to the extent of the credit not yet reversed. In view of the balance lying unutilised and the authorities' acceptance of part reversal, interest and penalty were held not sustainable.

Conclusion: The demand was upheld only for the unreversed balance amount, while the assessee was held not liable to pay interest or penalty.

Final Conclusion: The order was modified to sustain the demand only to the extent of the balance Cenvat credit remaining unreversed, with consequential relief from interest and penalty.

Ratio Decidendi: Where exemption is conditional upon non-availment of Cenvat credit, the credit must be actually reversed to satisfy the condition, and mere non-utilisation of the credit balance does not amount to reversal.

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