Modvat credit limitation and penalty notice requirements defeated the demand where prior departmental knowledge negated suppression.

CEGAT held that the extended period for reversal of Modvat credit on inputs not covered by the Rule 57G declaration was unavailable because the department already knew, from its own correspondence and RT-12 returns, that credit had been taken on MS plates, pipes, channels and similar items; without suppression, the limitation plea failed and the demand was unsustainable. It also held that penalty could not be imposed where the show cause notice did not propose any penal action, since a notice must specifically alert the assessee to the proposed consequence. The demand and penalty were therefore set aside, giving complete relief to the assessee.

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Issues: (i) whether the demand for reversal of Modvat credit taken on inputs not declared in the Rule 57G declaration was barred by limitation for want of suppression; (ii) whether the penalty could be sustained when the show cause notice did not propose any penalty.

Issue (i): whether the demand for reversal of Modvat credit taken on inputs not declared in the Rule 57G declaration was barred by limitation for want of suppression.

Analysis: The record showed that the department had already noted, through its letters and RT-12 returns, that credit had been taken on MS plates, pipes, channels and similar items not covered by the declaration. Once the department was aware of the availment of credit on such inputs, the element of suppression was absent. In the absence of suppression, the extended period of limitation could not be invoked. The credit demand was therefore unsustainable on limitation.

Conclusion: The issue is decided in favour of the assessee and against the Revenue; the extended period was not available and the duty demand was set aside.

Issue (ii): whether the penalty could be sustained when the show cause notice did not propose any penalty.

Analysis: Penalty cannot be imposed without a proposal in the show cause notice, because the notice must put the noticee to specific notice of the proposed penal consequence. Since no penalty was proposed in the notice, the penalty order lacked legal foundation.

Conclusion: The issue is decided in favour of the assessee and against the Revenue; the penalty was set aside.

Final Conclusion: The demand and penalty were both annulled, resulting in complete relief to the assessee.

Ratio Decidendi: Where the department had prior knowledge of the alleged irregular availment of credit through its own correspondence and returns, suppression is not established and the extended limitation period cannot be invoked; penalty also cannot be sustained unless specifically proposed in the show cause notice.

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