Modvat penalty cannot survive when the underlying credit demand is barred by limitation and dropped.

Penalty for wrongful availment of Modvat credit was held unsustainable where the underlying demand for recovery of the credit had already been rejected as time-barred. The Tribunal applied an earlier decision that penalty could not survive independently once the substantive demand failed, and refused to uphold penalty merely because limitation might not bar penal action separately. On the facts, the demand had been dropped, so the same practical consequence followed and the penalty was set aside.

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Issues: Whether penalty for wrongful availment of modvat credit could be sustained when the demand for recovery of credit was held to be barred by limitation.

Analysis: The assessee had taken higher notional credit on bulk drugs received at concessional duty and the notice proposed both recovery of the credit and penalty under the Modvat regime. The recovery of duty was held time-barred in appeal. Relying on the earlier Tribunal decision where penalty was held unsustainable after the substantive demand had failed, the Tribunal held that, in the present facts, the penalty could not be independently sustained merely on the footing that limitation might not apply to penalty. The decisive consideration was that the demand itself had been dropped, leading to the same practical result as in the precedent followed by the Tribunal.

Conclusion: Penalty was not sustainable and the appeal succeeded.

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