Modvat credit reversal on clearance of sub-standard inputs: delayed reversal did not justify penalty where duty was paid under Rule 57F(1).

Where sub-standard inputs are cleared as such without being used in manufacture, payment of duty on clearance by reversing the Modvat credit satisfies Rule 57F(1). The fact that the credit was not reversed immediately on discovery of the defect was held immaterial because the statutory condition was met at the time of clearance. On that basis, the demand for penalty could not be sustained merely for delay in reversal, and the issue was decided in favour of the assessee.

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Issues: Whether Modvat credit was liable to be reversed immediately when the inputs were found to be sub-standard, and whether penalty could be sustained when the sub-standard inputs were cleared as such on payment of duty under Rule 57F(1) of the Central Excise Rules.

Analysis: The duty demand was not based on any dispute that the sub-standard picture tubes were cleared as such without being used in the manufacture of final products. The assessee had paid duty at the time of clearance by reversing the amount in the Modvat account, which satisfied the requirement of Rule 57F(1). The mere fact that the credit was not reversed immediately on discovering the defect was held to be immaterial, since the essential statutory condition was met. In these circumstances, penalty was not justified.

Conclusion: The issue was decided in favour of the assessee. Penalty was not sustainable.

Ratio Decidendi: Where sub-standard inputs are cleared as such without being used in manufacture and duty is paid on such clearance in accordance with Rule 57F(1), immediate reversal of Modvat credit is not ative of compliance and penalty cannot be imposed merely for delay in reversal.

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