Natural justice in Modvat credit recovery requires a real show cause notice before reversal and demand can be sustained.

Recovery of wrongly availed Modvat credit under the unamended Rule 57-I of the Central Excise Rules, 1944 required a proper show cause notice and an opportunity of hearing, even though the rule did not expressly refer to Section 11A or prescribe a limitation period. A peremptory communication demanding reversal of credit and repayment within a week, while stating that the earlier credit grant stood withdrawn, was treated as a demand rather than a notice. Because no notice was issued, the recovery could not be sustained; principles of natural justice governed the adverse recovery action.

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Issues: Whether recovery of wrongly availed Modvat credit under the unamended Rule 57-I of the Central Excise Rules, 1944 could be sustained without issuance of a show cause notice and whether a peremptory demand letter could be treated as such notice.

Analysis: The recovery action under Rule 57-I, though the rule did not itself expressly provide a limitation period or refer to Section 11A, was held to attract the basic requirement of a show cause notice because the action adversely affected the assessee's rights and liabilities. A communication demanding reversal of credit and repayment within a week, while simultaneously stating that the earlier grant of credit stood withdrawn, was treated as a demand and not a notice. The absence of any real notice meant that the demand could not be confirmed, and the competence of the adjudicating authority became immaterial once no notice had been issued at all. The reasoning applied the principles of natural justice to proceedings for reversal of wrongly availed credit.

Conclusion: The demand was unsustainable for want of a proper show cause notice, and the appeal was rightly rejected.

Ratio Decidendi: Even where Rule 57-I did not expressly require a show cause notice, recovery of wrongly availed credit could not be enforced without notice and opportunity of hearing because the principles of natural justice apply to adverse recovery proceedings.

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