Double benefit under Cenvat credit and depreciation is barred; reversed entries before notice defeated penalty and interest.

Depreciation under section 32 on the unutilised value of capital goods and later availment of the same balance as Cenvat credit is impermissible, because the credit scheme does not allow a double fiscal benefit on the same amount. The Karnataka HC found the Tribunal had misconstrued Rule 4(4) of the Cenvat Credit Rules and held the assessee could not claim the balance credit in the subsequent year after taking depreciation. Penalty and interest were not sustained on the stated facts where the credit entries had already been reversed before the show-cause notice.

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Issues: (i) whether an assessee who had taken 50% Cenvat credit on capital goods in the first year and claimed depreciation under section 32 of the Income-tax Act on the unutilised balance could again avail the balance credit in the subsequent year; (ii) whether penalty and interest could be sustained where the credit entries had been reversed before issuance of the show-cause notice.

Issue (i): whether an assessee who had taken 50% Cenvat credit on capital goods in the first year and claimed depreciation under section 32 of the Income-tax Act on the unutilised balance could again avail the balance credit in the subsequent year.

Analysis: Rule 4 of the Cenvat Credit Rules governed availment of credit on capital goods. The Court held that once depreciation had been claimed under section 32 on the unutilised portion of the value of the capital goods, the assessee could not, in the same statutory setting, seek to derive the benefit of Cenvat credit again on that balance in the subsequent year. The Tribunal's view was found to be based on an incorrect understanding of rule 4(4) and the prohibition against claiming the same fiscal benefit twice.

Conclusion: The issue was decided against the assessee and in favour of Revenue.

Issue (ii): whether penalty and interest could be sustained where the credit entries had been reversed before issuance of the show-cause notice.

Analysis: The Court accepted the factual position that, if the relevant credit entries had already been reversed before the notice, the foundation for penalty and interest would not survive on those facts. This aspect was treated as factual and distinct from the substantial question of law on entitlement to Cenvat credit and depreciation.

Conclusion: Penalty and interest were not sustainable on the stated facts.

Final Conclusion: The appeal succeeded on the principal legal issue concerning simultaneous or successive benefit of depreciation and Cenvat credit, while the ancillary consequence regarding penalty and interest was not sustained on the facts noted by the Court.

Ratio Decidendi: An assessee cannot claim depreciation under the Income-tax Act on the unutilised portion of capital goods and also avail Cenvat credit on that same balance in a subsequent year, as that would amount to an impermissible double benefit under the credit scheme.

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