Modvat credit on capital goods requires truthful depreciation declarations; continued incorrect claims weakened bona fide error and stay relief.

Admissibility of Modvat credit on capital goods turned on whether depreciation under the Income-tax Act had already been claimed and whether the excise declarations were accurate. The record indicated that depreciation had in fact been availed, and later revised income-tax returns did not show that the tax consequence had been neutralised. Continued availment of credit over several years undermined the plea of bona fide error, and the claim that penalty under Section 11AC was inapplicable was not accepted at this stage. Partial stay was granted subject to deposit of specified sums toward the credit and penalty.

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Issues: Whether waiver of pre-deposit and stay of recovery should be granted in a matter concerning alleged wrongful availment of Modvat credit on capital goods and imposition of penalty.

Analysis: The credit was taken on the basis of declarations that depreciation under the Income-tax Act had not been claimed, but the record indicated that such benefit had in fact been availed. The subsequent filing of revised income-tax returns did not establish that the resultant liability under the income-tax law had been effectively neutralised. The declarations required under the excise rules were clear, and the continued taking of credit over several years negatived the plea of bona fide error. The claim that penalty under Section 11AC could not apply was not accepted at this stage, and the applicants were also found to be financially capable of making a substantial pre-deposit.

Conclusion: Partial stay was granted, subject to deposit of Rs. 13,07,707 towards penalty and Rs. 25,00,000 towards the inadmissible Modvat credit within the stipulated time.

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