Proportionate CENVAT reversal survives procedural lapse; extended limitation fails without wilful suppression, with normal-period liability remanded.

Failure to file the Rule 6(3A) option letter did not extinguish the substantive right to reverse CENVAT credit proportionately for input services used in both taxable and exempted trading activity; the attributable credit could still be worked out and reversed on a proportionate basis. The extended period of limitation could not be invoked where the transactions were reflected in books and returns and there was no wilful suppression with intent to evade, so the related penalty also could not survive. The matter was remanded for fresh determination of any normal-period liability after examining whether the reversal already made was in accordance with law.

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Issues: Whether the assessee could be permitted to reverse CENVAT credit attributable to exempted trading activity on a proportionate basis despite not having exercised the option in the prescribed manner; whether the demand and penalty could be sustained by invoking the extended period of limitation; and whether the matter required remand for determination of the normal-period demand.

Issue (i): Whether the assessee could be permitted to reverse CENVAT credit attributable to exempted trading activity on a proportionate basis despite not having exercised the option in the prescribed manner.

Analysis: The relevant input services were used for both taxable and exempted trading activity. Although the assessee had not complied with the procedural requirement for opting under Rule 6(3A), it later identified and reversed the attributable credit. The governing scheme permits reversal of proportionate credit, and the procedural lapse in not filing the option letter does not, by itself, destroy the substantive entitlement to reverse only the credit relatable to exempted activity.

Conclusion: The assessee was entitled to have the attributable credit worked out and reversed on a proportionate basis, and the adjudicating authority had to consider that exercise under Rule 6.

Issue (ii): Whether the demand and penalty could be sustained by invoking the extended period of limitation.

Analysis: The transactions were recorded in the assessee's books and returns, and the material for the notice was drawn from those records. In the absence of wilful suppression of facts with intent to evade payment, the precondition for invoking the extended period was not satisfied. Since the extended period failed, the connected penalty could not survive.

Conclusion: The demand for the extended period and the penalty were not sustainable.

Issue (iii): Whether the matter required remand for determination of the normal-period demand.

Analysis: The adjudicating authority had not independently examined whether the credit reversal already made was in accordance with law or whether any further amount remained payable for the normal period. That exercise required fresh consideration after hearing the assessee.

Conclusion: The matter was remanded to the adjudicating authority for fresh determination of the normal-period demand in accordance with law.

Final Conclusion: The assessee obtained relief against the extended-period demand and penalty, while the normal-period liability was sent back for fresh adjudication on the basis of proportionate reversal.

Ratio Decidendi: Failure to comply with the procedural requirement for exercising the Rule 6 option does not extinguish the substantive right to proportionate reversal of CENVAT credit, and extended limitation cannot be invoked in the absence of wilful suppression based on duly recorded transactions.

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