Modvat credit and penalty fail where no duty demand survives and the department cannot prove the disputed stock basis.

Penalty could not be sustained where the duty demand itself had been found unsustainable and the department failed to prove that the bottles sold came from stock on which Modvat credit had been taken. The Tribunal accepted that, once no duty was payable, the foundation for penalty disappeared. It also noted that if Modvat credit had not been availed on the bottles, the assessee was free to sell them in the market without prior permission from the Commissioner. A penalty based on alleged non-intimation or on a rule inapplicable to the facts was therefore not maintainable.

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Issues: Whether penalty could be sustained when the demand of duty itself had been held unsustainable and the department had failed to prove that the bottles sold were from stock on which Modvat credit had been taken.

Analysis: The Tribunal had itself found that the department failed to establish that the bottles sold during the relevant years were out of the stock on which Modvat credit was availed, and had consequently held that the duty demand was not correct and not sustainable in law. Once no duty was found payable, the basis for penalty disappeared. If Modvat credit had not been taken on the bottles, the assessee was free to sell them in the market and no prior permission from the Commissioner was required. Any penalty founded on alleged non-intimation or non-compliance with a rule inapplicable to the facts could not be maintained.

Conclusion: Penalty could not be imposed on the assessee.

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