Modvat credit cannot be denied for earlier depreciation claim where the assessee later reversed the mistake and cured the overlap.

Modvat credit on capital goods was treated as available where the assessee had initially claimed depreciation under income tax law by mistake but later reversed that claim, reduced the asset value, and filed a revised return. Rule 57R(5) was read as barring simultaneous dual benefit, not as making the initial choice irrevocable. On those facts, the overlap was neutralised and the lapse was considered inadvertent rather than a deliberate attempt to evade duty, so denial of credit was unjustified and the connected penalty, interest, and demand were not sustained.

---

---

Issues: Whether Modvat credit on capital goods could be denied, and penalties and interest sustained, merely because depreciation had also been claimed under the Income Tax law, when the assessee later reversed the depreciation claim and took corrective steps.

Analysis: Rule 57R(5) was understood as preventing simultaneous enjoyment of both benefits, but not as making the exercise of the choice irreversible. The assessee had initially claimed depreciation by mistake, later reduced the value of the plant and machinery, and filed a revised return, thereby neutralising the overlap. On these facts, the lapse was treated as inadvertent and not as a deliberate attempt to evade duty. In such circumstances, the denial of Modvat credit merely because depreciation had been claimed earlier was found unjustified, and the connected penalty and interest consequences were also not warranted.

Conclusion: The appeal was allowed and the assessee was held entitled to Modvat credit with consequential relief, with the penalties and demand not sustained.

---