Extended limitation fails where the Department already knew the credit issue; trading-linked Cenvat credit needs proportionate reversal.

Extended limitation could not be invoked for a second show cause notice where the Department was already aware of the same alleged wrong credit availment and no suppression was established. Credit attributable to trading activity, treated as a non-taxable activity, was held inadmissible to that extent and required proportionate reversal for the normal period. Penalties could not survive in the form imposed once the demand was confined to the normal period and recalculated on that basis. The matter was therefore remanded only for quantification of the reversible credit.

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Issues: (i) Whether the extended period of limitation could be invoked for the second show cause notice when the Revenue was already aware of the same alleged irregular availment of credit from the earlier notice; (ii) Whether cenvat credit attributable to trading activity was inadmissible and required proportionate reversal for the normal period, with penalties liable to be set aside.

Issue (i): Whether the extended period of limitation could be invoked for the second show cause notice when the Revenue was already aware of the same alleged irregular availment of credit from the earlier notice.

Analysis: The Revenue had already issued an earlier show cause notice on the same broad allegation of wrong availment of credit in relation to trading activity. On that footing, the subsequent notice for the later period could not be sustained under the extended limitation period, as the necessary element of suppression for invoking the extended period was not established.

Conclusion: The extended period of limitation was not available to the Revenue.

Issue (ii): Whether cenvat credit attributable to trading activity was inadmissible and required proportionate reversal for the normal period, with penalties liable to be set aside.

Analysis: Trading activity was treated as a non-taxable activity, and credit was held inadmissible to the extent attributable to such activity. The Tribunal applied the principle of proportionate reversal for the admissible normal period and accepted that the matter required quantification on that basis. It further held that the penalties could not survive in the manner imposed once the demand was confined to the normal period and worked out afresh.

Conclusion: Proportionate credit attributable to trading activity was held reversible for the normal period, the penalties were set aside, and the matter was remanded for quantification.

Final Conclusion: The dispute was resolved by denying extended limitation, limiting the demand to the normal period, vacating the penalties, and sending the matter back only for computation of the reversible credit.

Ratio Decidendi: Credit attributable to activity outside the tax net is not admissible, but the extended period cannot be invoked absent suppression where the Department was already aware of the same issue, and the reversible credit may be worked out on a proportionate basis for the normal period.

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