Recovery under self-credit refund schemes must follow statutory procedure before refund denial or appropriation is made

A refund scheme permitting self-credit also required verification by the proper officer and recovery of any excess credit through the prescribed statutory mechanism. Where the revenue alleged irregular self-credit, it could not reject the refund or ignore the earlier credit without following the recovery procedure, including lawful action under the Central Excise Act. An appropriation from a sanctioned refund was likewise invalid because there was no confirmed demand or notice establishing recoverability. The refund entitlement, however, remained limited to the extent allowed under the amended notification's percentage cap.

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Issues: (i) Whether the Department could reject the assessee's self-credit and consequential refund without following the recovery procedure prescribed under the notification and the Central Excise Act, and (ii) whether appropriation of refund towards alleged excess credit and interest was valid in the absence of a confirmed demand and notice.

Issue (i): Whether the Department could reject the assessee's self-credit and consequential refund without following the recovery procedure prescribed under the notification and the Central Excise Act.

Analysis: The refund scheme under Notification No. 19/2008-CE permitted self-credit of the eligible refund amount, but also required verification by the proper officer and recovery of any excess or irregular credit in the manner provided by the notification. Where excess self-credit is alleged, the prescribed mechanism contemplates intimation, reversal, and, if necessary, recovery as duty erroneously refunded. The record did not show that the statutory procedure for recovery was followed, including action under Section 11A of the Central Excise Act, 1944. The assessee's earlier self-credit therefore could not be ignored by simply rejecting the refund claim, though the refund remained subject to the 34% cap under the amended notification.

Conclusion: The rejection of the refund on the footing that the self-credit itself was inadmissible was not sustainable, but the refund was confined to the extent admissible under Notification No. 19/2008-CE.

Issue (ii): Whether appropriation of refund towards alleged excess credit and interest was valid in the absence of a confirmed demand and notice.

Analysis: The amount appropriated was taken from a sanctioned refund without a confirmed demand and without following the recovery route prescribed for irregular credit. In the absence of notice and lawful determination of recoverability, the adjustment lacked legal foundation. The appropriated amount could not be retained merely on the assumption that the earlier self-credit was irregular.

Conclusion: The appropriation of the refund towards the alleged excess credit and interest was invalid.

Final Conclusion: The assessee succeeded on the legality of the recovery and appropriation action, but the refund entitlement remained restricted by the operative notification to the prescribed percentage.

Ratio Decidendi: When a refund scheme prescribes a specific verification and recovery mechanism for excess self-credit, the revenue must proceed only in that manner and cannot deny or appropriate refund amounts without following the statutory procedure.

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