Modvat credit penalty must follow the law in force when the wrongful act occurred, not a later statutory amendment.

Penal liability for wrongly taken Modvat credit must be assessed under the law in force when the credit was taken, not under a later-enacted provision. Because the credit was taken before Rule 57U(5) came into force, was not alleged to have been wrongly utilised, and had been reversed, the statutory penalty equivalent to the credit amount could not be applied automatically. The credit remained wrongly taken, but the penalty had to be fixed proportionately to the nature of the violation. The penalty was therefore reduced to Rs. 5,00,000, while the finding on wrongful availment was maintained.

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Issues: Whether the penalty equivalent to wrongly taken Modvat credit could be sustained for a period prior to the introduction of Rule 57U(5), and what would be the proper quantum of penalty in the facts and circumstances.

Analysis: The credit was admittedly taken during October 1995 to January 1996, whereas Rule 57U(5), prescribing a statutory penalty equivalent to the amount of credit wrongly taken, came into force only on 23-7-1996. Penal provisions are to be applied with reference to the law in force on the date of the wrongful act. The lower authority had also recorded that there was no allegation of wrongful utilisation of the credit, and the credit had been reversed. In these circumstances, although the taking of credit was not justified, the statutory penalty equivalent to the credit amount could not be imposed, and the penalty had to be fixed having regard to the nature of the violation and the absence of misuse of the credit.

Conclusion: The penalty equivalent to the amount of Modvat credit wrongly taken was not sustainable for the relevant period. The penalty was reduced to Rs. 5,00,000, and the appeal was otherwise rejected.

Final Conclusion: The order was modified only to the extent of reducing the penalty, while the finding that the credit had been wrongly taken was maintained.

Ratio Decidendi: Penal liability must be determined by the law in force on the date of the wrongful act, and where the credit was not utilised and was reversed, the penalty should be assessed on a proportionate basis rather than by automatic application of a later-enacted statutory penalty.

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