Cenvat credit reversal on inventory provisions applies only to actual write-off, not a mere slow-moving stock provision.

Rule 3(5B) of the Cenvat Credit Rules, 2004 applies only where inputs or capital goods are actually written off, fully or partly, or where a specific provision to write off is made in the books. A mere accounting provision for slow-moving or non-moving inventory, while the goods remain in stock, usable, and eventually consumed in manufacture, does not meet that condition. On that basis, credit reversal was not warranted, the demand failed, and the penalty could not survive once the underlying reversal itself was unsustainable.

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Issues: Whether Rule 3(5B) of the Cenvat Credit Rules, 2004 applies to a mere provision or write-down made in respect of slow-moving or non-moving inventory, and whether the resulting demand and penalty could be sustained.

Analysis: The appellant had made only a provision for partial reduction in the value of inventory in the books of account, while the goods remained in stock, continued to be usable, and were eventually consumed in manufacture. The applicable rule operates only when the value of inputs or capital goods is written off fully or partially, or when a specific provision to write off is made. A mere accounting provision for slow-moving inventory, without an actual write-off of the inventory from the books or proof that the goods had ceased to remain usable or had been removed from the factory, does not satisfy the statutory condition. The demand was therefore based on an incorrect invocation of the rule, and the penalty could not survive once the credit reversal itself was unsustainable.

Conclusion: Rule 3(5B) was held inapplicable to the facts, the demand was held unsustainable, and the penalty was also set aside.

Ratio Decidendi: A provision for slow-moving or non-moving inventory is not equivalent to a write-off of inputs or capital goods, and Cenvat credit reversal under Rule 3(5B) arises only upon an actual or specifically provided write-off in the books of account.

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