Excess Modvat credit without utilisation still attracted penalty, but prior reversal justified a nominal reduction.

Taking excess Modvat credit not permitted under the notification attracted penalty under Rule 173Q(1)(bb) of the Central Excise Rules, 1944, but the lapse was treated as limited where the credit was never utilised and was reversed before the show-cause notice. The conduct was viewed as a commercial claim to entitlement rather than a wilful or contumacious act, so the penalty was considered maintainable but warranted substantial reduction. Rule 226 was also noted as indicating lower statutory exposure on these facts, and the penalty was confined to a nominal amount.

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Issues: Whether penalty was exigible for taking excess Modvat credit that was not utilised and was reversed before issuance of the show-cause notice, and if so, what quantum of penalty was warranted.

Analysis: The credit entry was taken after the departmental objection arose, but the amount was not utilised and was reversed under protest before the show-cause notice. The conduct was found to be a commercial attempt to pursue a claimed entitlement rather than a wilful or contumacious act. While the invocation of Rule 173Q(1)(bb) of the Central Excise Rules, 1944 was upheld because credit not permissible under the notification had nevertheless been taken, the nature of the lapse was held to be relatively limited when viewed with the overall facts, including the absence of utilisation. Rule 226 of the Central Excise Rules, 1944 was also noticed as indicating a much lower statutory exposure in the circumstances.

Conclusion: Penalty was maintainable, but it was reduced to Rs. 2,000/-.

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