Technical breach in Modvat credit procedure did not justify penalty where there was substantive compliance and no misuse of credit.

Penalty under Rule 173Q of the Central Excise Rules, 1944 was held unsustainable where Modvat credit was entered in RG-23A Part-I before physical receipt of goods, but the goods and duty-paying documents were received shortly thereafter and there was no misuse of credit. The record showed substantive compliance with the Modvat scheme, and the breach was treated as merely technical. Applying the principle that penalty is not warranted for a venial breach without deliberate defiance of law, the penalty was set aside.

---

---

Issues: Whether penalty under Rule 173Q of the Central Excise Rules, 1944 was sustainable when Modvat credit was taken in advance in the register but the goods and duty-paying documents were subsequently received and there was substantive compliance with the Modvat scheme.

Analysis: The credit entries in RG-23A Part-I were made on the basis of supplier challans before actual receipt of the goods, but the record showed that in most cases the goods and duty-paying documents were received shortly thereafter and there was no misutilisation of Modvat credit. The adjudicating authority itself found that the demand for recovery of credit was not sustainable and that there was substantive compliance with the Modvat provisions. In that background, any breach was treated as technical in nature. Applying the principle that penalty should not be imposed for a technical or venial breach where the conduct does not show deliberate defiance of law, the penalty could not be sustained.

Conclusion: The penalty under Rule 173Q was set aside and the assessee succeeded.

---